What Is an ACH API and How Does It Work?
If you take a lot of ACH payments, then leveraging an ACH API can streamline your processes and ensure you’re able to take payments in an efficient and secure manner.
In this article, we will look at the role of ACH API, how it works, and how you can implement it for your company.Learn More
What Is an ACH API?
To best understand what an ACH API is, you first need to grasp the basics of how ACH payments work.
ACH (Automated Clearing House) transactions are electronic money transfers from one bank to another processed through the ACH network. The customer must give the originating bank or financial institution authorization to debit or credit their savings or checking account.
The way a typical ACH transfer works is as follows:
- You will initiate the transaction as the originator by sending a Nacha formatted data file containing information about the desired payment to your bank which is called the ODFI (Originating Depository Financial Institution).
- Your bank (the ODFI) will collect all the transaction files you sent and forward them to an ACH operator. The files include information about the transaction type (credit or debit), routing numbers, and bank account details.
- The operator will send the files to the recipient’s bank, which is called the RDFI (Receiving Depository Financial Institution).
- The transaction is completed when the bank pulls the funds from your customer’s bank account.
- You will know if the RDFI has pulled the funds when you receive your payment.
You will need to repeat the process outlined above for each transaction.
This manual process of initiating transfers and handling each return code is further complicated by the need to comply with applicable rules and procedures. Utilizing the network requires adhering to strict security and data requirements.
Where ACH APIs come into play
The role of ACH API is to automate your transactions through the ACH network. According to Stax’s Lead Software Engineer Austin Kelsch, an ACH API is a “subset of the broader payment API category” and is used mainly to facilitate ACH transfers.
Your developers will use the ACH API to write software that will connect your business to the network and eliminate the need for manual payment requests. Initiating, receiving, and tracking payments at scale will become a breeze—freeing up time for sales and client management.
API integration will also save you money on credit and debit card transactions. By integrating your payment portals with banks, you will keep transaction fees lower and ensure money is quickly deposited into accounts after verification.
How Does an ACH API work?
ACH APIs make transactions smoother and more cost-effective by integrating your business and payment processing systems.
In the same way that a credit card API connects the merchant’s eCommerce site with its payment processor, an ACH API can connect a company’s system to the ACH network to facilitate transactions and eliminate manual work.
Let’s say you manage 50 residential properties and you need to collect rent from tenants each month using ACH. Each month, you would need to log into your bank portal and initiate 50 debit payments to your tenant’s bank accounts. You will also need to manually handle ACH returns or rejections due to issues like incorrect account information, closed accounts, or insufficient funds. Doing all these manually at such a scale is not a feasible long-term solution.
With API integration, your bank and platform can talk to each other and transfer data without you being involved. Think of the ACH API as a list of commands you can use to order a program to accomplish a certain task at certain intervals.
You can use the API to write code to initiate 500 debit payments on the 1st of every month with a given set of accounts.
In a nutshell, the ACH API includes all the protocols and routines you need to automate all kinds of online payments. Your developers can integrate the ACH API code into your business app and website. You can also add layers of security to meet the specific needs of your business.
The features of the API integration include:
- Bank account verification
- Processing of transaction fees
- Accepting ACH payments
- Multiple payment options
- Fraud monitoring
- Identity authorization
- Consumer credit checks
- Recurring payments
- Automated receipts
What Are Some of the Use Cases of ACH?
The ACH platform is versatile enough to be used to facilitate a wide variety of transactions. Its most common use cases in business include:
You can use the ACH network to facilitate customer payments for various goods and services. To accept ACH payments from your customers, they must authorize the transaction to your payment gateway, business bank, and the vendor that processes your payments.
A good example are pro service providers that allow their clients to pay via ACH for large amounts.
These are payments that must be made on a set day of every month. If you collect recurring payments from customers, you need to get them to authorize ACH direct debits before automating the process with API. This will ensure payments are hassle-free for as long as they remain a customer.
Payment churn is one thing you need to consider when setting up recurring payments. Payment churn can be due to inconsistent payments, cancellation of your service, or a canceled credit card. Luckily, ACH has a much lower rate of payment churn than other payment types because it is linked to the customer’s bank account.
Businesses that need to pay recurring bills can also use ACH API to set up automatic payments that are made from a bank account or credit card on a regular billing circle. This is beneficial for both the person paying the bills and the party receiving the funds. The party being billed will be less likely to miss payments or make errors when authorizing payments, while the other party will be sure of a reliable source of payment.
In general, scenarios where you may need to set up recurring payments, include:
- Bill payments
- SaaS products
As a US-based employer, you can use ACH direct deposit to push money to your employees’ bank accounts at designated pay periods. Your employees will need to give their authorization and provide their account information and routing number.
Using ACH to settle employee payroll reduces administrative overhead because payments are made in large batches as opposed to writing individual checks for each employee.
This payment option allows you to either use tax preparation software or file through a tax preparer to pay taxes using an ACH debit. The IRS will pull the money from your business account and you will see an “IRS USA Tax Payment” line on your bank statement as proof of payment.
Using the IRS electronic funds withdrawal option is free and it is way more convenient than mailing a check.
Paying a supplier
Using ACH to pay your suppliers will help reduce the potential for fraud and waiting time for checks to arrive by mail. Sending payments electronically is simply way more secure and convenient than making payments by paper check.
Implementing ACH APIs in Your Business
Before you integrate an ACH API into your platform, you need to be aware of the fact that ACH APIs are best suited for businesses that process large volumes of transactions.
API integration might not be necessary for smaller businesses. This is because custom code requires extensive management. Your team will need to manage error handling, reconciliation, access control, and transaction logging. Your connection is also highly dependent on you keeping abreast of any changes your bank may make to their API.
Essentially, connecting with a bank API is an ambitious undertaking that is only worthwhile when you need to automate manual mass payment processes as payment volumes grow.
That being said, if you’re ready to implement ACH payments through an API, the first step is to find the right solution provider. Here are the top factors to consider at this stage.
ACH API features
Be sure to look into the features that a payment provider offers, Stax’s Lead Software Engineer Austin Kelsch. For obvious reasons, if you’re looking to implement ACH payments, then your providers must have ACH capabilities.
Beyond that, it’s worth looking at a solution’s broader capabilities. Austin recommends asking questions like:
- Do the features line up with the product you’re trying to build?
- Does the provider offer different types of payment methods you may need?
Ease of integration
Looking at a solution’s documentation is another essential step when selecting an API provider, says Austin.
“It’s a critical piece of the vetting process of an API. If a solution doesn’t have documentation, that’s a red flag. And then if it does, it should be thorough, and ideally, it includes examples and clear instructions.”
Be sure to evaluate the costs of the solution. Providers often have different fee structures. Some may take a cut out of each transaction, while others may charge a flat fee. Run the numbers in your business and ensure you understand your average payment volumes and transaction values. In doing so, you can figure out the most cost-effective solution for your business.
This article has shown you all you need to know about the role and benefits of ACH APIs and how you can integrate them into your payment processing platform.
If you’re ready to implement ACH payments through our API, get in touch with the Stax Connect team to kickstart the process of automating your ACH transactions. Contact us to learn more.