The Role of APIs In Modernizing Payment Gateways

Customer demands and expectations have outpaced traditional payment systems.

With the advent of new payment options, customers are ditching outdated infrastructure and inflexible payment solutions. They demand instant, seamless payment processes and businesses failing to adapt will have a hard time.

APIs (Application Programming Interfaces) in payment gateways can help businesses get there, plus scale up. They help businesses add the latest payment options such as digital wallets, credit cards, and more to their ecosystem, offering flexibility and customization.

This blog explains how APIs have a hand in modernizing payment gateways.

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Understanding APIs and Payment Gateways

APIs facilitate communication between software systems that share no infrastructure or codebase, streamlining the exchange of data, functions, and commands. They assist with integrations between applications, systems, and services. For example, APIs make it possible for companies to accept payments on their website, without having to build the feature themselves.

That’s where payment gateways came into being. It is the technology that made online payments on merchant websites possible.

Payment gateways leverage APIs to facilitate the exchange of data between banks and customers, aka payments, by ensuring safety, security, and ease of transactions. Over time, payment gateways have evolved by minimizing friction through simple processes, enhancing security via encryption, and authorizing payments.

Every online store sits at the intersection of APIs and payment gateways. Be it an eCommerce platform, financial institution, or a third-party service, payment gateways can integrate into all of them via APIs. APIs have changed the manual and laggy processes with real-time payment processing, changing the face of payments in the modern day.

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What are payment gateways?

Simply put, payment gateways are the enablers of online payments using digital methods like debit cards, credit cards, digital wallets, and more. But it was not always as seamless as it is today. Walking back to the history of payment gateways, they were traditionally built on three critical functions:

• Authorization - they checked the methods of payment to verify the availability of sufficient funds, i.e. the concerned bank account. Digital wallets are the latter invention.
• Encryption - they masked sensitive card details to ensure any exchange of data between the customers and banks is not visible, readable, or accessible to third parties.
• Security - they ensured compliance with standards such as PCI-DSS, that were put in place to prevent fraud and online theft.

Limitations of traditional payment gateways

While the three critical functions enabled online transactions, they were not sustainable to the increasing needs and demands of customers.

• Lack of flexibility - merchants only had limited options to accept payments, confining them to limited business opportunities, integrations, customizations, and more.
• Limited scalability - merchants had a hard time expanding their business to new markets and geographies.
• Rigid payment methods - debit card/credit card was the only accepted payment method initially, making it difficult to integrate the latest options like mobile payments, buy-now-pay-later schemes, digital wallets, cryptocurrencies, and more.
• Slow processing - payment gateways were initially very slow, taking a lot of time to process payments, resulting in delay and dissatisfaction.

That’s where APIs have proved to be the game changers. API-driven payments have filled all these gaps created by traditional payment gateways.

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How do APIs differ from traditional payment integration methods?

Connections in payment gateways were traditionally custom-coded. With APIs in Payment Gateways, integrations are easier. Here are other reasons why APIs are game changers:

Shift in modularity for flexibility 

When payment gateways were first introduced, they used one-off coding to link one system to another. Data exchange was limited to systems and methods.

APIs on the other hand introduced integration with not just systems but websites, mobile apps, CRM systems, and more via modular and reusable components.

Increased processing time

Payments back in the day were very slow because they were processed in batches. Delays in payment processing as well as payment data sync were a common sight.

APIs swapped this process with real-time data exchange, facilitating transactions and confirmations in seconds. Not just payments, with APIs fraud detection and reporting are as well done in real-time.

Seamless integration at scale

Because integration was traditionally done with complex coding, businesses had a hard time scaling. Not to forget about the downtime needed to upgrade or move connections across systems during a scale-up event.

All that hassle is a thing of the past with APIs. APIs come with massive integration possibilities for merchants looking to level up their business. It has become easier to add new features and payment methods without massive upgrades.

Heightened security with compliance

Complying with security standards such as PCI DSS has been in the books, but the process to attain compliance was manual. Any changes required manual configurations making it hard to stay compliant because of the possibility of human error.

APIs leverage modern security protocols like OAuth, tokenization, and encryption leaving no space for manual process-borne errors. Because these protocols are streamlined for auto-upgradation as per the latest complaint requirements, manual efforts are put on hold.

Tailored to customers preference

Making payments work was the sole objective of traditional payment methods. Customization and customer experience were not possible because the integration frameworks were limited.

Fast forward to today, payment solutions are built around user experience, offering tailored solutions that fit the needs and wants of businesses and customers. Businesses are able to innovate and build their processes around their customer needs, increasing satisfaction. That’s APIs for you.

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Challenges of API-Driven Payment Solutions

APIs facilitate modern payment solutions yet face a bunch of challenges businesses must keep an eye on. Being aware of them and taking action helps steer clear of them. Here are some possible challenges you can face and how to fight them:

• APIs are the game changers for modern systems. Traditional rigid systems cannot integrate with these more API-based solutions. If you haven’t done it already, it's time to upgrade your systems.
• Breaches and API abuse can still happen with weak security protocols. API-driven payment gateways with strong authentication, encryption, and monitoring are critical for data security. Choose the right option.
• Security standards change with regions, markets, and geographies. Find yourself a payment solution that caters to your domestic and international compliance requirements.
• These modern payment solutions come with extra costs for management, in the form of financial and manpower investments. Do your due diligence always.

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Future Trends in API-Driven Payment Gateways

We have witnessed a groundbreaking world of payment solutions, keeping us curious about the future of payments gateways. Here’s what the future trends of payment gateways look like:

• Open banking - open banking has made it possible for FinTechs and third-party providers to exist. Data that was previously secured within legacy financial institutions is now open to the builders. APIs will continue to enhance the safety and efficiency of this exchange of data.
• AI and ML - APIs powered by AI and ML will offer predictive analytics, risk assessment, and personalized customer experiences. Payment gateways will keep finding new ways to better serve customers through new features and less friction.
• Blockchain - APIs have already paved the way towards integration between blockchain networks and decentralized finance platforms. This will open a sea of opportunities for the payments industry with access to blockchain features like smart contracts and encrypted transactions. We can expect better security, transparency, ease, and costs in the payments industry.
• New partnerships - previously gated, financial institutions have not just opened up data access to FinTechs, but also new partnership possibilities. Legacy systems like banks are partnering with young tech-savvy companies via API ecosystem to modernize their offerings and it will continue to evolve. We will see new business models emerge, and they will make payment solutions robust and versatile.

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Conclusion

APIs are the reason for today’s modernized payment solutions. They have introduced flexibility, scalability, and integration capabilities for businesses and payment gateways, making it easy to serve customers with customized services/products and a great user experience.

To make the most of what APIs offer, businesses must keep up with the latest advancements made in this area. Payment gateways like Payby handle this for you, so you and your team can focus on core business initiatives.

Payby supercharges your business with cashless payment transactions offering seamless integration, onboarding, and setup. We offer multiple payment modes, in-app payments, paylink generation, a powerful dashboard, robust security, and so much more. Our solutions are tailored to offer you the best of the latest payment advancements.

Get started with Payby today to experience it.