Understanding ACH APIs: What is an ACH Payment API?

The ACH (Automated Clearing House) is a networked banking system for the exchange of money between bank accounts in the United States. ACH is also a type of payment method that can be used for one-time or recurring payments. An ACH API is a connection between software programs to enable functionality and automate ACH transactions.

What is an ACH API? 

An ACH API is the computer code for the connection of application software to originator banks or credit unions to automatically request and efficiently complete a large volume of electronic ACH domestic payment transactions for processing through the ACH network in the United States. 

How Do ACH APIs Work? 

ACH APIs work by enabling payment solutions software to connect to financial institutions to make electronic ACH debit or credit payments between bank accounts through the US-based Automated Clearing House Network. The code for the ACH API includes security measures for sending ACH payment information, automates steps, and uses protocols like REST API. 

An API (application programming interface) in ACH is how developers might connect to a bank programmatically to execute ACH transactions (also known as “direct deposit” and “direct payments”). That requires the bank to provide API access to their ACH system (as open banking) and draw from the client’s account. An ACH API may also require custom proxy connections to that individual bank.

The Automated Clearing House network is regulated by Nacha. Financial institutions, including banks and credit unions that are Nacha/Automated Clearing House members, use the ACH network system for their customers to make this type of electronic fund transfer (EFT) which is called an ACH transfer. 

Merchants use an API gateway at checkout to enable real-time ACH transaction processing from the customer through a payment processor charging a transaction fee, with business day batch deposits into their merchant account. Read about payment gateway vs. payment processor, which also applies to credit card processing.

Example of an ACH API

Airbnb, as a high-growth ‘unicorn’ startup, struggled to find a solution that allowed them to automate their partner payouts. Co-founder and Chief Strategy Officer, Nathan Blecharczyk, wrote an interesting article about leveraging a bank API for ACH direct deposits as ACH transfers API to automate payouts.

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 became cumbersome and unrealistic. Blecharczyk discusses issues with this process, including payment detail validation and payment status notifications.

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 processing 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 a complex 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.

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. Creating 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 like bank account information, including bank routing number and bank account number. 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 streamlines future cross-border payments with a global payment API. 

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. 

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 and payment options across the world. Tipalti automation software helps you automate global regulatory compliance. 

Tax Data Management

If you’re in the US, you’re required to submit tax information on your suppliers to the Internal Revenue Service (IRS), including W-9s or W-8s to prepare 1099 and 1042-S tax reports. In European or other countries, VAT IDs may be required. 

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. Going back to your previous vendors to get their tax documentation is a negative hit on productivity. 

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 has 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). Consider PayPal’s $7.7 million fine. Rule enforcement by governments 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. 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. 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.

Using a Bank API/ACH API: Solving 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. 

Applying ACH API to Online Marketplace Payouts and Supplier Payments

Online marketplaces serve as a platform to connect buyers and sellers of goods and services. Some online marketplaces are product-focused and allow sellers 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. 

Simplifying ACH Transfer API

Trying to use a standard bank API as an ACH transfer API for online marketplace payments has complexities. 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. 

The Tipalti Developer Hub includes a link to Documentation for the Tipalti REST API connecting its AP automation and global mass payment software for an ACH transfer. Using Tipalti as your ACH API provider simplifies creating an ACH transfer API. 

Questions to Ask When Choosing the Right ACH API

Does the ACH API let you test before going live?

With Tipalti’s ACH API, you can log in, create, and use an API for your app in Sandbox (for testing) and Production (live) environments. 

Are banks included in connecting the payment system to the ACH network to make ACH direct payments and direct deposits?

Yes. Banks and credit unions are financial institution members of the Automated Clearing House network system needed to initiate and receive ACH transfers. The ACH API includes financial institutions in the ACH API transfer process to connect to the ACH network. 

What is the difference between an API and a webhook?

With an API connecting software, permission must be granted to complete a request (API call), whereas a webhook sends information between software programs upon event occurrence. 

Conclusion

To create an automated ACH payment processing API for making electronic ACH transfers between bank accounts, find an easy-to-use (and test) developer tool for your API connection from AP automation for supplier payments and global mass payments for payouts software. 

By using these types of finance automation software with your ACH API, you will gain the benefits of efficiency, enterprise-grade security, automatic status notifications, fraud and error controls, and tax and global regulatory compliance when you make ACH payments. To find the right ACH payment API, continue reading.