What is an online banking payment API?

Offering a variety of payment methods used to be difficult for merchants. Each payment scheme — be it credit or debit card, manual bank transfer, Pay by bank, digital wallet, buy now pay later (BNPL) or crypto — has its own infrastructure. What’s more, each provider may also have its own unique payment rails.

Adopting just one method can take significant work for a merchant, from integrating the payment system with the rest of their tech stack to designing the customer experience and managing contractual obligations. Add more payment methods into the mix and that burden becomes even greater.

Making things even harder for merchants is that payment preference is far from uniform. Consumer preferences vary between countries, generations and even the type of purchase being made.

But increasingly, merchants are realising they can’t afford not to offer a variety of payment methods. After all, customers have specific preferences for how they want to pay. For example, almost half of UK and Ireland shoppers (48%) said availability of different payment options increases their chances of buying from a retailer. So how can businesses give their customers their choices they desire without overcomplicating their payment processes?

Enter application programming interfaces (APIs) — a way for merchants to easily scale the payment methods they offer, and switch them on and off for different markets.

What is a payments API?

A payments API is a set of protocols that build connections between two different types of payment software. They let programmes communicate with one another for the purposes of exchanging information, initiating payments and more.

To manage their payments, businesses often plug into lots of APIs from lots of different providers, resulting in complex, sophisticated systems. However, they can also rely on payment services providers (PSPs), third parties that provide easier connections to the native infrastructure of each payment method.

By using online payment APIs, merchants can offer new payment methods at a fraction of the speed and cost of working with each payment scheme on separate custom integrations.

Payment API use cases

Capture new markets

Merchants should never underestimate the administration and resources required to expand into a new country.

We’ve already mentioned the importance of catering to the payment preferences of consumers in new locales. But first, a business will need to navigate the target market’s regulations. This can often require opening up a bank account in the jurisdiction, which will mean registering as a legal entity there.

By using a payments API, a merchant essentially hands over this responsibility to a third party. With many of the legal and compliance obligations taken care of as part of the API integration, merchants can move into new markets much faster and scale their global footprint.

Optimise the checkout experience

Offering many different payment methods can result in an overcrowded checkout experience. Faced with a long list of payment options, customers may become overwhelmed and disengaged.

But that’s not the only way to optimise your checkout. Localising the language, currency and data formats for your desired region will all go a long way in providing a positive experience for your shoppers.

Again, this is a lot for merchants to consider, especially if they intend to create segmented checkout experiences for different markets. A payment API can help you create localised checkouts, allowing you to tailor the experience to customers in each region.

Collect and analyse real-time data

Segmentation and optimisation requires data. The more you have, the better informed you’ll be.

Everything from the payment success rate to payment preference, cost-per-transaction to settlement times can affect your checkout experience. But harvesting these insights directly from a payment scheme can be arduous.

With a payments API, you can collect this data and use it to analyse your checkout processes. This can give you insight into the effectiveness of your payment methods and help you determine which ones to prioritise.

Simplify compliance

No matter where you do business, you’ll need to follow a few ground rules. Compliance standards ensure companies adhere to best practices, obey the law and keep their customers safe. For example, merchants must abide by anti-money laundering (AML) and know your customer (KYC) requirements in order to accept payments.

Unfortunately, achieving compliance is easier said than done. Companies have to keep track of shifting regulations that govern each of their payment offerings. And things only get more complicated if a merchant operates in many different territories.

Payment APIs can help streamline this process. They facilitate connections with PSPs that can help manage your compliance obligations, saving you time, resources and money.

Improve security

Fraud is a major concern for both businesses and customers alike, with remote fraud losses totalling more than $708 billion in 2023. Merchants that fail to take the problem seriously could face reputational damage, financial penalties and a loss of customers.

Luckily, payment APIs can help protect businesses. They allow businesses to leverage security measures such as strong customer authentication (SCA) without overcomplicating the integration for the merchant. Some even tokenise payment data to add a further layer of protection.

Create new business models

A payments API also gives a merchant more control over ‘how’ they take payments. For businesses looking to move to a subscription model, their existing payment methods may not be effective for processing recurring transactions. By integrating an API from a payment gateway designed for a specific business model, the merchant can add this capability without rewiring their current systems.

In certain cases, APIs can even give businesses a competitive advantage. For example, withdrawals and refunds can take more than five days to process, leaving recipients worried and frustrated.

But open banking APIs like Pay by bank make payouts and withdrawals immediate, delighting customers and winning over business from their rivals. In fact, surveys show that 85% of shoppers said they’d be more willing to return to a merchant that offers instant refunds.

Alternatives to APIs

APIs vs a custom integration

Instead of using an API, software developers can integrate two payment systems manually. In theory, this gives the merchant slightly more control over how they access the payment method, how it is secured, and what can be achieved with the end-user experience.

But any technical exercise done manually will struggle to scale. Custom integrations take time to configure and execute.

What’s more, it’s not a one-off job. Updates and security patching are ongoing requirements, so the sustainability of the integration depends on retaining knowledge in-house. And all that draws technical resources away from innovation in other areas.

APIs vs SDK

A software development kit (SDK) is a set of tools developers use to create applications. An SDK incorporates an API, rather than being something entirely different.

Think of an API as a shared language of two different software applications. An SDK provides all the guides a developer needs to make the most of that language, such as documentation, libraries, editing software, test environments, analysis tools and drives.

Choosing between an API and an SDK really comes down to how much freedom you want. An SDK is more prescriptive, with the express goal of saving a developer time and effort. This may benefit merchants with limited development resources. However, it may be too restrictive for those that want to create a fully bespoke payments solution.

How to choose the right payments API for your business

Not all payments APIs are created equal. Two things matter: the services the API accesses, and how easy the API is to work with.

For the former, prioritise an API that allows them to scale. Look for options with greater geographical coverage, more payment methods and enhanced services. The more that a single API can achieve, the fewer APIs you’ll need, saving time and money.

But that won’t matter if the API is difficult to work with. So consider an API’s back-end experience along with its end-user services. Is it easy to integrate? Does it come with extensive, well-structured documentation? These are fundamental criteria in selecting the right APIs for your needs.

Beyond breadth of services and ease of use, your payments API should offer a few other advantages. It should feature a testing environment to encourage innovation and avoid errors being pushed out ‘live’. It should handle the technical burden of compliance obligations like AML, KYC and general data protection regulation (GDPR) requirements. And it should provide data — in real time and in a readable format — that makes it easy to turn insights into improvements.

Finally, consider the company providing the API. The payments industry moves fast. If a provider isn’t constantly improving their API, it will quickly lose its competitive advantage. Look for a one with a track record of innovation, a well-resourced and technically sound development team with a strong support function, and a leadership team with a firm grounding in payments. Together, these factors indicate an API won’t just do the job today, but in the future, too.

Explore how the TrueLayer Payments API can help your business create a high-performing payment experience with a single integration.