Complete Guide to ACH API

The ACH (Automated Clearing House) is a networked banking system for the exchange of money. An API (application programming interface) into ACH is how developers might connect to a bank programmatically to execute ACH transactions (also known as “direct deposit”). That requires the bank to provide API access to their ACH system and draw from the client’s account. An ACH API may also require custom proxy connections to that individual bank.

Why Most Businesses Don’t Use an ACH API

Smaller and medium-size businesses generally do not and probably should not try to connect with bank funds with a bank API. For one thing, homegrown code into a bank requires extensive management of that code. Another reason is that if the business ever decides to change banks, the legacy code almost certainly won’t work, so any application will be locked in. Custom connection to the ACH is also highly dependent on the bank communicating any changes to their API.

Another more important consideration when beginning ACH API projects is that they must be architected and designed like any software project. There are rules and conditions related to the success and failure of transactions that must be in place. Error handling, reconciliation, access control, and transaction logging all have to be considered. Developing a custom bank API to transfer ACH and wire payments to suppliers is a tricky proposition. It’s an ambitious undertaking that only superficially helps streamline US domestic payments while not instituting proper financial controls and almost always adding another layer of work and maintenance.

But many organizations consider this path because they know they need to automate manual mass payment processes as their supplier payment volumes grow and to help rid themselves of fraud-prone check processes and they simply do not know of a better option. Creating an ACH API integration with your bank to transfer payment instructions can help shift US bank payments to electronic methods and save some time, but there are many key steps along the supplier payment process that will still require significant manual effort and leave your AP department exposed to fraud and compliance risk.

Managing supplier bank payment information

The most basic requirement is creating a mechanism to manage their supplier company information. Many companies simply assume that the bank payment data they already have (contact information, addresses, names, etc.) is accurate and that information is then used to execute payments. This data is almost never perfectly accurate, however. Industry benchmarks indicate that, in most companies, only about 80% of record data is accurate. And that’s the accepted benchmark. Poor supplier payments data leads to payment errors, which cost the AP department bank fees and time while leading to frustrated suppliers.

The status quo is to dedicate an employee to request, enter supplier contact information, and hopefully, validate it…and then to only change this data when payment issues arise.

AP departments need to put the onus and responsibility on the payee. After all, it is the supplier who has the most to lose if they don’t provide accurate payment information. The best way to accomplish this is to develop a payee portal where they can supply their payment method and contact information in a methodological way at the point in which they’re entering your supply chain. Then the portal should apply intelligent algorithmic rules to review the ACH, wire, and bank payment method provided to proactively look for errors and require the supplier to correct their data before their vendor bank payment information can be processed.

ACH Payment API—Maintaining Global Banking Rules

When you evaluate API options, you need to build or buy a system that can grow with your business. If 100% of your suppliers are US-based today, a domestic ACH API or bank transfer API may be sufficient for the short term. However, one of the biggest trends in business today is extending your supplier base overseas so you should implement a solution that not only expedites US payments but also streamline future cross-border payments. Cross-border payments come with a cascade set of complicated requirements to an AP department but think broader than just remittance when instituting such a system.

International or Global ACH (also known as eCheck) is available in many countries, however, banks in different countries have different routing requirements. Even in the United Kingdom, there are different banking identifiers for Ireland and Great Britain. Similar issues come up when using a wire transfer API. Someone in your organization will need to know the variations and banking rules for each country you serve suppliers and partners in… and they will need to deal with the payment issues and related fees when they get it wrong.

Add any other payment method options to suppliers (wire transfer, PayPal, debit cards, cash, check, etc.) and each brings with it an additional set of rules to maintain and limitations on scope. Each country has its own payment method requirements and preferences.

The global payment complexity is so profound that, at Tipalti, we’ve compiled over 26,000 different payment rules to check against when supporting different payment methods across the world.

Tax Data Management

If you’re in the US, you’re required to submit tax information on your suppliers to the Internal Revenue Service. Domestic suppliers need to provide their W-9 tax identification. International suppliers need to provide tax information in the form of W-8 declarations. And if you’re in other countries, particularly in Europe, VAT ID information may be required.

It’s often a forgotten step for many companies until their accounting departments have to wrap up the year and file their 1099 and 1042-S tax reports. Likewise, the tax form collection process can also be a very paperwork-intensive task involving emails, faxes, or even traditional postal mail. People are often busy and going back to your previous vendors to get their tax documentation is a negative hit on productivity. You may never be able to collect all the required tax forms, given the vendor has been paid months ago. And of course, by not capturing the tax documentation upfront before payments are made, you run of risk of realizing that you paid vendors that were never registered as tax-paying entities. Because poor tax form collection and validation processes can lead to tax fraud, the IRS has instituted new FATCA tax compliance rules that put the burden of responsibility on the payer and have hired 3,000 agents to audit and render stiff tax penalties on payors who do not comply.

At Tipalti, we find that the best time to ask for tax ID information is not when you’re in the midst of compiling information for 1099 and 1042-S reporting, but when your supplier first signs on. In fact, we make it a requirement that if you don’t supply tax data, you cannot be paid.

AML and OFAC Payee screening

If you deal with suppliers and vendors, you are required in accordance with the Patriot Act to screen payees against the US Treasury’s SDN (Specially Designated Nationals) list maintained by the Office of Foreign Assets Control (OFAC). If you don’t think it’s a big deal, we’ll refer you to PayPal’s $7.7-million fine. Enforcement by governments of these rules is only increasing due to the rise of terrorism, money laundering, and drug trafficking.

What’s crucial is that screening happens for every single transaction, not just when onboarding a supplier but also prior to payment. That’s because a payee’s status on these AML databases can change at any time and it only takes one violation for the government to levy a serious penalty upon your company.

If you are going to build a system that addresses payments to suppliers, you must be sure that you have systems and processes in place to verify that those suppliers are not blacklisted and that bad actors cannot use your AP infrastructure to conduct illegal and highly undesirable activities.

Supplier Payee Communications

When you send a paper check to someone, that can often be construed as the end of the communication chain. When a supplier sees a deposit record in their bank account, it’s also verification they’ve been paid. However, good communication with suppliers includes courtesy messages:

“We’ve sent your payment to the such-and-such account. Expect it in 2 working days.”
“There’s a piece of information missing preventing us from paying you. Please submit it here.”

Especially today, when payment issues might arise because someone typed in the wrong address or email or bank account, payments going missing can cause stress in your supplier relationships. Bad operational processes could lead to a negative perception of your company’s ability to execute in the future. A supplier could very well “fire” its customer for that kind of incompetence. As importantly, your finance staff should not be spending their valuable time corresponding with suppliers about payment status. Payment status communications should be automated so that finance can focus on what they do best.

Therefore, automating communications so they’re triggered when key activities happen is an expectation of doing business together.

Using a Bank API: Issues with Scalability

Businesses with a large number of payees need to make mass payments to their partners and suppliers. Historically this often involved the manual process of using a bank API, or application programming interface, to help scale and streamline the payout process. A bank API allows a third-party software application to communicate with the bank and execute mass payouts; the API is used to pull data from a payee file and make payouts via ACH or wire transfers. Using a bank API to make ACH payments is also sometimes referred to as an ACH API.New online marketplaces seem to pop up every day. Online marketplaces serve as a platform to connect buyers and sellers of goods and services. Some online marketplaces are product-focused and allow to list their products for sale alongside other similar products. Other types of online marketplaces are service-based and allow independent contractors to earn money by offering labor or services. Before Tipalti, online marketplace payments to payees were a difficult task. An end-to-end partner payout platform did not exist and companies had to create manual processes and workarounds. Airbnb, a high-growth ‘unicorn’ startup, struggled to find a solution that allowed them to automate their partner payouts. After being asked by numerous startups how Airbnb automated payouts, co-founder and Chief Strategy Officer, Nathan Blecharczyk, wrote an interesting article about using a bank API.

ACH Transfer API

Blecharczyk ‘s article explains how Airbnb leveraged a bank API for what he calls ‘do it yourself direct deposit’, in other words, ACH transfer API. He used an internal system to generate a CSV file with payment details and then upload that file to a portal using the bank API. As Airbnb scaled internationally and grew in size, managing the bank API process become cumbersome and unrealistic. Blecharczyk discusses issues with this process including payment detail validation and payment status notifications; These just scratch the surface of the complexities involved with trying to use a bank API for online marketplace payments. Rapid growth coupled with global expansion can create even more issues when it comes to onboarding, tax  & regulatory compliance, and payment reconciliation.Fortunately, online marketplaces no longer need to suffer through an error-prone and manual process just to make mass payments. Tipalti’s end-to-end accounts payable software automates the entire AP workflow.