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Finance

ACH Payment

Payments have come a long way over several decades. All the way back in 1974, people had to carry dimes with them to make calls from payphones, and copies were made on a mimeograph. Over time, payments have changed and so has ACH payment. The ACH payment method has improved with the help of technologies and the network keeps on providing better services to consumers and businesses. There’s a lot of rich history behind ACH transfers and what makes them one of the most preferred payment methods. 

ACH is a financial tool that millions of users rely on and only a few of them understand the payment method. ACH payment network supports tens of billions of transactions within the US every year and many consumers know ACH payments by other names. Several businesses still don’t know how to boost consumer adoption of ACH payments and how to make sure all involved leverage the benefits of ACH transfer. 

While the ACH payment network is a widely known and used method, millions of customers don’t know how to set up ACH payments, or how to make an ACH payment.

What is ACH Payment? Brief History

ACH (Automated Clearing House) is a network for electronically moving money between bank accounts throughout the USA. ACH is the electronic evolution of the paper check and with time and technological improvement, it became a digital process. The digital process was adopted to improve efficiency and reduce the need for human input. 

As consumer needs and preferences changed in the early 1970s, banks in the US had to find new ways to keep up. The astounding growth in volume and geographic spread of checks required banks to devise new methods of handling and sharing information. The best solution that banks could think of was to turn to newly commercialized computer technology to build a payment network. Then this newly formed payment network was named “Clearing House”. If you don’t know about clearing house, it was a place where banks went at specific times to exchange checks and settle transactions.

Clearing Houses came into existence to help banks to settle checks between each other with relative ease. They facilitated the exchange of checks and calculated the net settlement amount per bank. The use of Clearing Houses makes the use of checks an open-loop payment system. Open Loop payment systems leverage intermediaries (banks, credit card providers, etc) to facilitate payments between two entities (individual accounts). 

Till the end of the 1950s, magnetic ink character recognition (MICR) became a standard practice. This technology utilizes a check number, account number, and bank routing number at the bottom of a check. Ach became a natural extension of MICR technology, it was created as a way to exchange MICR directly and not extracting MICR data from checks. 

ACH transactions in the beginning included:

  • High-volume
  • Low-risk
  • Repetitive

With time, ACH payments became a norm around the entire US financial industry, becoming so standard that it’s not connected to every US demand deposit account. The popularity of ACH transactions is understandable as ACH was designed to be a low-cost service, providing banks with a profitable alternative to processing and storing paper checks. 

The ACH Payments system was designed to allow corporations and consumers to reduce the use of paper-based checks and use digital methods to make payments. Users can use ACH transfers to process huge volumes of payments electronically, and with time it has become the biggest payment system in the country. In 2000, the ACH payment network processed over 4.8 billion payments, their value totaling over $12 trillion in the same period. To date, most of the payments transferred over the ACH include recurring credit card payments, interests and dividends, and other programs endorsed by the US Government. 

However, the ACH payment method isn’t perfect. Compared to swift and seamless payment methods offered by FinTechs of today. Regardless of the slow processing, it is still used to process billions of payments every month.

How does ACH work?

In both Push and Pull transactions, ACH works in a similar way:

1. A bank originates the transaction. This bank is denoted with the term “ODFI” Originating Depository Financial Institution. Banks then send ACH entries in batches, working on a fixed schedule. 

2. An ACH operator (The Federal Reserve or The Clearing House) puts the entries into deposits and payments. 

3. Once the entries sent by banks are sorted, the ACH operator sends legit entries to RFDI (Receiving Depository Financial Institution).

4. RDFI receives the transactions and debits or credits the amount according to the payment. 

5. Money is settled among banks at the end of the day. 

Since 2001, ACH payments have been available for customers online. In 2015, NACHA (the organization regulating the ACH network) created single-day ACH transactions. Before that, ACH transactions used to take 2 days – to 1 week depending on the banks. While single-day ACH transactions have improved the transactions by a lot, they don’t offer real-time payments. 

What is NACHA?

Commercial ACH payments rely on a set of rules and regulations set forth by the National Automated Clearing House Association (NACHA). While the Treasury payments are governed by Federal regulations that are built upon the NACHA regulations. 

NACHA’s membership is composed of representatives of the 40 regional ACH Associations in the USA. All the institutions in the ACH associations have to be depository institutions, commercial banks, savings banks, savings and loan associations, U.S. branches of foreign banks, Edge Act corporations, and credit unions. Today, over 25,000 depository institutions are participating in the ACH system.

Role of Federal Reserve and Private Sector AC Operators

The Federal Reserve Banks have been authorized by the regional ACH associations to operate automated clearinghouse facilities to settle for items they process. The Federal Reserve handles almost 75% of all the items in the ACH payment network in the United States. 

Some ACH businesses have designated private sector operators to process the item exchanges between their members.

Social Security Tests Direct Deposit

The Social Security Administration began testing DD (Direct Deposits) in 1975. While that was just an initial choice, no one expected that 99% of SSA payments will use Direct Deposits. 

While government payments gave ACH a big starting boost, the uses of ACH payments have grown over the years. Ever write a check and wonder why you never saw it getting canceled? All thanks to the ACH payment network, your check was converted electronically. The ACH payment method was considered innovative at the time, and it definitely transformed the financial industry. Due to ACH, no one gets back a canceled check, regardless of how the check was processed.

Uses of ACH Payment Network?

An ACH transaction informs member institutions (Financial institutions) to debit/credit accounts as they’re present on a physical check. Common information around check include:

  • Account number
  • Routing number

It’s also why businesses ask for a canceled check for setting up the payroll for a newly hired employee. Voided/canceled checks provide banks with necessary information. 

What makes the ACH payment process confusing is that they’re also called by several other names. ACH transfers are commonly called “eChecks”, “direct debit”, “automatic withdrawal”, “ACH credit & debit”, and others. While their names may be different, they’re all the same process. Here’s everything you can do with an ACH payment process:

  • Consumers can send funds between banks 
  • Employers can use ACH transfers to pay their employees
  • Customers pay service providers such as Internet providers, utility bills, and so on. 
  • Taxpayers pay taxes using IRS
  • Businesses pay suppliers

The ACH payment method isn’t the only method to move money around, and it may not be the most efficient process, but it’s still the biggest process. In 2020, over $62 trillion worth of payments were facilitated via the ACH payment network.

Types of ACH Payments

All ACH transactions fall into one of the two categories debit (pull) or credit (push). In the ACH payment debit process, an organization could be “pulling” money from a customer account for an automatic bill payment. In an ACH credit transaction, an organization could be “pushing” money to your employees “pushing” money to an employee’s account to pay wages. 

As one person’s credit is another person’s debit, the naming helps a business identity which process to set in an ACH transfer. An employer usually asks the ACH network to push money out of their accounts to send money to an employee’s accounts. If the employee has initiated the request, it would be an ACH debit transaction even though it will be the one who received the funds.

Who Runs the ACH Network?

NACHA, which stands for National Automated Clearing House Association, is the primary rule-making entity for ACH-using financial institutions in America. However, the complete ACH Network is an amalgamation of two systems run by different operators:

  • The Electronic Payment Network (EPN), is run by the “Clearing House” (an association made up of 24 banks)
  • FedACH, is run by the Federal Reserve banks to handle ACH transactions on behalf of the federal government. 

To understand this better, you can think of it as a partnership between two delivery companies that had their own zones and routes. Government financial institutions are serviced by FedACH, and private banks are supported by EPN. 

So NACHA, working with several government entities, makes up the rules, and then both the operators work together to route and deliver all ACH messages accordingly.

How Long Does an ACH Payment Take to Process?

As we mentioned above, ACH transfers are the most used method of sending and receiving money in the USA. But the time taken for finishing the payments vary, it can take anything from a few hours to a few business days. The time is based on:

  • When the day the transaction was initiated
  • Whether the transaction returns an error message before the target settlement date because of incorrect information or insufficient funds.
  • Whether the payment originator paid for the “same-day ACH Payment” service. 

Now that ACH messages are being delivered up to 5 times per business day, the default results are a bit faster. And the ACH payment network can easily accommodate same-day payment processing. The use of same-day ACH payments has been pretty low compared to general payments, which is the opposite of what everyone expected. In 2020, only $460 billion worth of payments were same-day transactions. That’s roughly 0.7% of all ACH transfers.

This slow adoption of same-day ACH payment can be credited to the additional cost, and also the fact that faster processing doesn’t mean faster payment settlement. Unlike a wire transfer, ACH transactions are recallable but the timelines regarding the payment returns are extremely complicated. So, if you didn’t get any notification, you can assume that the payment process is going just fine. Consumers have up to 60 days from when the statement containing the unauthorized transaction was transmitted to consumers. 

Depending on a given institution’s standard payment practices, and their risk level assessment, the payment process may be delayed until the maximum deadline. It doesn’t matter if the receiving institutions already have the details in hand.

ACH Payment vs Wire Transfer

ACH transfers and wire transfers both help in moving funds from one bank account to another one. They’re almost identical at first glance, but once you dive in deeper there are several differences. If you’re researching ACH payment vs wire transfer, then understanding the difference can help you out a lot.

During ACH transfers, information such as account numbers and routing numbers are sent in a batch to the automated clearinghouse, which then clears the payments and sends them to the bank. The ACH payment network acts as a middleman when it comes to payment clearing. 

Wire transfer on the other hand transfers funds from one account to another, but instead of the ACH, banks act as a middleman.

1. Speed Comparison: ACH Payment vs Wire Transfer

Depending on different details, an ACH transfer can take two to three business days to complete. They take more time because several payments are processed by the banks at the same time. 

Wire transfers send funds almost instantly. The funds aren’t left on hold and the receiving entity can access the funds right away. 

2. Cost: ACH Payment vs Wire Transfer

Some ACH payment providers have a fixed flat fee ranging from $0.20 to $1.50 per transaction. Businesses may also have to pay a separate fee ranging from $5 – $30 per month just for using the ACH service. There are some other charges such as ($2 – $5 per return), reversal/chargeback fees ($5 – $25 per incident), and batch fees of less than $1.00.

The good news is that ACH fees are still lower than other payment methods. Typically, ACH transactions often cost a business under one dollar per transaction based on transaction volume and potential risks. This is what makes ACH transactions an attractive choice for most users. Plus, the more ACH transactions you do, the less you have to pay per transaction. 

Wire transfer, on the other hand, can cost both the sender and the receiver. Many financial institutions charge $10 to $35 to send, and smaller institutions may also charge a fee to receive a wire transfer. For high-end payments, these costs can add up to $55 when combining all the fees, and sending money internationally can cost even more. 

3. Payment Security: ACH Payment vs Wire Transfer

Businesses and individuals need to send and receive money securely. ACH transfers are safer for the senders. Unlike most wire transfers, funds can be reversed if any fraud or payment error is detected. 

Wire transfers have a few disadvantages for the recipient. They’re a full step above cashier’s checks, which are pretty easy to fake. When you receive a wire transfer, you can access and use the money instantly. 

For senders, there’s a lot more risk involved. It’s important to know or confirm the person or account you’re sending money to, if you make a mistake and send money to the wrong party, they can withdraw those funds. Wire transfers are only insecure if you make a mistake in the sender’s information, or if someone has scammed you into sending money.

Benefits of ACH Transactions

The reason why the ACH payment method is so famous in the USA is that it offers 3 main benefits:

1. Cost-Effective

For an organization that uses ACH payments, ACH payment fees can range from a few cents to a few dollars, based on transaction size and volume. Compared to domestic wire transfers, ACH payments cost almost next to nothing. 

2. Easily Repeatable Payments

ACH payments are repeatable. Credit cards and debit cards expire or get stolen. On average the US checking account is 14 years old, so you need to link your account just once to the ACH payment network. This makes ACH a great solution that reduces the transaction risk with each wire transfer involving the same accounts. 

3. They’re Convenient

Older methods of sending and receiving money aren’t ideal and they offer a poor customer experience. Handling paper checks can be labor-intensive for everyone, wire fees aren’t ideal for the receiver, and credit cards require a lot of data inputs. And we can all agree that cash is a security risk that also requires trips to banks and standing in queues. ACH transfers are convenient and reduce the level of risk and hassle for users.

Limitations of ACH Payments

ACH payment network isn’t perfect, and here are the limitations of using ACH payments:

1. Speed

Default ACH transfers can take multiple business days to process, and even same-day ACH isn’t exactly same-day. This can leave parties with difficult decisions regarding withdrawals, shipping products, or honoring service contracts during the interviewing time. With slow processing, you can also have confusing balances, where consumers can forget about pending debit and end up with overdrafts and end up paying other charges.

2. Risk

As receiving entities won’t know for hours or days after a transaction has cleared, scammers and fraudsters can take advantage of this delay. This particular risk has eliminated ACH’s adoption for single-transaction uses and has also forced banks to place limits on how much money consumers can transfer.

How to Set Up ACH Payment?

Here’s how to set up ACH payment for your money transfer needs:

1. Set Up Your Account

Regardless of the industry, you’re in, ACH payments can increase revenue. ACH payments come with lower transaction fees compared to wire. Before you can set up an ACH payment account, you’ll need to choose a payment processor which is the next step.

2. Choose an ACH Payment Processor

You should contact your bank to figure out the ACH payment processing fees. It may be more efficient for you to connect with an ACH operator or payables automation solution. Comparing the details of features and the workflow from 3-4 different providers can help you choose the ideal ACH payment processor according to your needs. 

3. Finish the Paperwork

You’ll learn a lot about ACH payment processing when you fill out the necessary paperwork. ACH payments work by sending money from one account to another electronically. If you’re using wire transfer up until now, you can save a lot of money by switching to the ACH payment method. 

Visit your bank and complete the paperwork as directed by them.

4. Understand the Types of ACH Payments

To learn how to set up ACH payments, you’ll need to learn about the types of ACH payments. There are 4 basic types of ACH transactions:

  • PDD: this means there has been written permission from the payer to have funds debited from their accounts. Writing a check won’t qualify as permission when conducting a PDD transaction.
  • WEB: When the payer permits the internet to have the funds debited electronically, it’s known as a WEB ACH transfer. Specific authorization language is used in the permission process, and this language should be understood by the payer. 
  • TEL: With TEL ACH transactions, the payer provides information over the phone for money to be debited from their account. When a TEL ACH payment is processed, the phone call is recorded for verification. 
  • ARC and BOC: In ARC and BOC ACH transactions, a written check acts as permission however, the payer has to be notified that the paper check can be converted for conducting an ACH transaction.

5. Choose the Right Entry Class

Businesses have to familiarize themselves with several entry classes before processing ACH Payments. Most of the time it’s ideal to choose a service provider who will help you in processing the payment correctly. 

There are more than a dozen entry classes and you need to make sure to choose the one that suits your spending habits. 

6. Carefully Go Through ACH Payment Terms and Conditions

It’s essential that you go through the terms and conditions carefully. If you choose to sign up with an ACH payment provider, then you’ll get a detailed terms and conditions document that will help you understand almost everything. It will also detail the steps you can take to learn more and it will answer all the questions.

How to Make An ACH Payment?

Contrary to popular belief, it is pretty easy to learn how to make an ACH payment. Here are all the steps you need to follow for an ACH transfer. 

1. Gather Crucial Information for ACH Transfer

To make a transfer, you’ll need to provide your name, your routing/ABA number, account number, account type, and transaction amount. If your account has check-writing privileges, you should be able to get the account and routing number on the check. Besides bank accounts, credit unions can also be used for ACH payments.

2. Choose Between ACH Debit and ACH Credit

To execute the correct payment, you’ll need to differentiate between ACH debit and ACH credit.

ACH Credit is used to pay bills, with these transactions you provide your financial institutions with the authorization to pay a utility company or a loan provider. 

With ACH debit, you establish the transaction with the payee. In this transaction type, you’ll submit your payment details such as account and routing numbers to the payee. Compared to ACH credit, ACH debit poses a higher level of risk. 

Regardless of the type of payment you choose, you get the same level of convenience and cost-effectiveness. 

3. Finish the ACH Transfer

Before you go through the final process and transfer funds using ACH, you have to complete some paperwork. Now, most of that paperwork has gone digital and it provides a greater level of convenience. Some institutions may still ask you to fill out the physical paperwork, either way, these are the steps you need to follow:

  • Link account. This is an essential step and it can be completed fairly easily. To complete this step, you’ll need to fulfill the ACH instructions mentioned to the financial institutions who’ll be handling the transaction. 
  • Clarify if the transaction will be a credit or debit to the account where the transaction will initiate. 
  • Enter the payment amount. 
  • Specify the payment date. Most financial institutions will allow you to post-date a payment. 

Final Take: Understand ACH Payment

If you’re looking for a solution to move funds from one bank account to another one electronically, then the Automated Clearing House is an ideal option. This is also the case if you’re on a tight budget and want to keep costs as low as possible. And with the introduction of same-day transfers, the speed, and convenience of payments have been improved.

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Finance

Understanding NFC Payments: The Complete Guide

Near-field communication (NFC) uses radio waves that are similar to radio frequency identification (RFDI), to read and send information between two NFC devices. NFC technologies are mostly used in warehousing labeling and they’re incredibly helpful in tracking applications for simple inventory scanning of shipments, products, and customer orders. NFC is even used in automated toll booths to collect information from crossing vehicles. 

In the FinTech environment, NFC payments lead to contactless, encrypted, and streamlined payment methods. This payment method removes complexity from the process by eliminating the need of carrying cash, credit, and debit cards. Customers can use their smartphones to make purchases. NFC payments are relevant today with growing health and safety concerns.

While NFC technologies are pretty similar to RFID and Bluetooth technology. However, there are some major differences between how the technology is used in the FinTech environment. NFC payments in the FinTech landscape to ensure a streamlined and highly secure checkout process.

What’s an NFC Payment?

Not a lot of consumers know about NFC payments, chances are that you’ve seen these payments working in real-time. It could be advertisements, in person or for some person waiting in line in a store. With contactless payments becoming more and more famous, NFC payments are becoming a common method among consumers. 

NFC payments are contactless and secure payments that use NFC technologies to exchange data between an NFC reader and an NFC payment device. Some common examples of these NFC payment devices are Apple Pay, Google Pay, eWallets, and EMV cars. NFC readers are the payment processors that you can use to make contactless payments anywhere. For an NFC payment to work, both the devices should be equipped with NFC chips.

Apple introduced Apple Pay with the launch of the iPhone 6 in 2014, and it quickly became a sensation. Some consider Apply Pay to be the birth of NFC payments. Since then, most smartphones come equipped with an NFC chip.  When two devices with NFC chips are in close proximity with each other, radio waves transmit data to and from each other to complete a payment instantly. You have to hold your device close to process the payments because the NFC chips inside each device only work when they’re in close proximity to each other.

RFID can transmit data from up to 100 meters away, but the frequency used for NFC payments ensures you must be close by to communicate between devices. This makes sure that NFC chips nearby are unable to transmit data for secure payment processing.

Are NFC Mobile Payments Secure?

If you compare NFC payments to debit and credit card payments, they’re equally as secure. Here are some factors that will help you understand how secure NFC payments are?

  1. Device Proximity

NFC payments rely on a radio frequency of 13.56 MHz, and NFC payments happen only when two devices are incredibly close to each other. Consumers don’t need to worry about someone intercepting the signal to interrupt payments or steal data. 

  1. User Initiation

A user needs to activate NFC in their device before making a payment. Users can secure this NFC activation process with a passcode, fingerprint, or facial unlock. This makes the NFC payments process extremely secure. 

  1. Secure Element Authentication

This is what makes NFC payments incredibly secure. Once a user approves that they’re making an NFC payment, the data is transmitted and validated via a separate physical chip or cloud element known as the secure element. Secure elements are protected by a unique digital signature that relies on an OTP to move requested data.

  1. Encrypted Information

Any transmitted NFC payment information is encrypted and secured, this means a specific account or amount details can’t be hacked or cloned.

Why Should You Use NFC Payments?

There are several reasons to use NFC payments, the first being convenience. Businesses that use NFC payments are promoting themselves as NFC payments being their primary checkout process. Not just that, they allow customers to make payments without limiting them to cash, and card payments.

  1. Security

As with any electronic payment process, consumer security is the first and foremost concern. NFC payments are highly secure for both consumers and businesses. They leverage an identity verification required to even initiate payments.

  1. Payment Speed

Speeds of NFC payments are almost instantaneous similar to credit or debit cards. It takes just a few seconds for the information to be transmitted. This information is read by a secure element for authorization to process the payment. 

  1. Convenience for Consumers

Consumers can now use smartphones to send and receive money. Most smartphones launched today come equipped with NFC chips, so they can make contactless payments. With NFC payments, consumers can make purchases even if they don’t have cash or cards with them. 

Future of NFC Payments

Once NFC payments became a common practice, several services that revolve around NFC payments popped up in markets. The preference of NFC payments are at an all-time high. It only makes sense for mobile payment options to be available to consumers. There’s no need to carry debit or credit cards when you already have cash with you.

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Finance

UK Payments Changes after Brexit

For businesses operating globally, UK payments are some of the most challenging types of payments after the implementation of Brexit. While the vote that decided the UK’s departure from Europe took place in 2016, the changes brought forth by Brexit only came into existence in January 2021. Not just customers, but the impact of Brexit is going to be a challenge for international eCommerce businesses that also operate in the UK.

Online shopping was incredibly popular in the UK even before the Covid-19 pandemic. After the pandemic, the online shopping industry has become supercharged, and compared to their European counterparts, UK shoppers spend on average per capita (€3,344 compared to €2,184.24 spent by the average European).

As a matter of fact, the UK is the third-largest global eCommerce market, right behind the USA and China. eCommerce businesses selling to the UK have to make sure that they’re keeping up with the potential impact of Brexit on payments and shipping procedures.

How does Brexit Impact eCommerce Merchants?

If you sell products to the UK from Europe or any other country, you need to know about all the ways Brexit can impact your eCommerce business. Brexit can impact a business’s ability to accept payments from UK customers. 

  • Currency Fluctuations: The volatility in pound sterling exchange could impact the profits you make from your sales. If you charge in your native currency, while the pound is performing low, the UK customers will feel the prices are expensive and they’ll search somewhere else. Another option is to charge customers in Pound sterling, after looking at whether you need to adjust prices to consider the price fluctuations. Generally, charging in native currencies is a great practice for cross-border eCommerce that can improve sales and profit margins while reducing the sale abandonment process.
  • EU Passporting: Financial services businesses operating in the UK will no longer be entitled to provide in the EU without additional authority. The UK leaving the EU makes it a “third country” and thus businesses there lose the “EU Passport”, in turn limiting the international payments between the two countries. 
  • Changes in Local Payments: As the definition of European countries can differ between card schemes and other payment methods, local online payment methods are sure to be affected. Using a payment method that provides you access to local payment methods can help with local currency settlements and cross-border fees acceptance makes the process much better for merchants. 
  • No Freedom of Movement: Now that the UK has removed itself from the EU, there are stricter customs regulations, and goods from global merchants are taking longer to arrive. To mitigate this challenge, if your business has lots of customers from the UK, it’s worth keeping a percentage of it at a local warehouse to reduce shipping time to customers. Using a third-party fulfillment service in the UK for storage to avoid future issues.
  • Volatile Trade Rules: With the relationships between the EU and UK in jeopardy, merchants will stay up to date on new changes and all the situations surrounding them. The UK government website is a good start in terms of staying informed. 

What to Consider While Accepting Payments in the UK?

  • Keeping up-to-date on current situations and regulations around accepting payments from the UK.
  • Make sure that the price you offer to consumers considers potential changes – or do you need to adjust prices for UK consumers?
  • Offer preferred local payment methods to encourage UK consumers to stay loyal.
  • Check new VAT rules for the EU and other countries selling products and services to the UK.
  • If you already sell to both the UK and EU, you’ll now need a UK EORI (Economic Operator Registration and Identification Number) as well as EU EORI.

Brexit and New Payments: Keeping Your Business Ready

The complete impact of Brexit on accepting UK payments may not be clear, but it’s also worth being ready in advance to avoid making crucial mistakes. Many UK consumers will be experiencing a variety of challenges because of the changes, and if you can make their eCommerce experience as smooth as possible, they won’t leave your business for other customers.

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Finance

Financial API Integration

Over the last decade, a new financial landscape has come into existence using APIs. This ecosystem is interconnected, and open, and leads to building an array of new financial services that offer people more freedom to handle their finances. In this guide, we’ll walk you through what financial API integrations are and how they work. Also, how financial API integrations help both businesses and consumers.

Understanding Financial API Integrations

Application programming interfaces (APIs) are a set of tools and protocols that allow software programs to communicate with each other. API integration helps in connecting two or more applications together and allows for seamless exchange of data. 

Financial APIs are most often made to integrate a bank’s and financial institution’s core banking platform with third-party data networks and applications. This allows for safe and secure consumer-consented third-party access to essential account information such as account and routing numbers, balances, and transactional history. These financial API integrations allow these trusted third parties, be it FinTechs, mortgage, and auto lenders, or any other financial institutions, to build data-driven financial solutions.

How does Financial API Integration Work?

Based on how they’re used, financial API integrations can serve several roles, such as:

1. Partner API (One-to-One)

When financial API integrations are built directly to work between a financial institution and a financial app or service they’re known as partner APIs. These types of APIs are built when a financial institution uses a third-party vendor that builds a FinTech solution for them. These solutions are perfect for customers of a single institution, instead of being available to the general public.

2. Open API (Many-to-Many)

Open banking APIs are usually built by data networks, rather than by financial institutions or by a third-party vendor. By building API integrations with several financial institutions, the data network creates an open API that can connect several financial institutions for many FinTechs and services. 

In this situation, a FinTech app wants to allow customers from several financial institutions to connect their accounts to the app. The work of building API connections to each financial institution is carried out by a data network.

The term Open Finance comes from open banking APIs. In the open finance ecosystem, consumers have complete control over their financial data, and by letting third-party access consumer data, consumers can gain access to personalized services.

Types of API Integrations

There’s no limit on the type of APIs and the role they serve for businesses and consumers. Below, we have mentioned some of the most useful APIs that have been changing the financial landscape:

1. Account Verification

Account takeover fraud has become a common instance in recent times. Financial institutions have no way to verify if a consumer who’s trying to access a new FinTech app or service is legit or not. The new account that’s being created needs to be verified. This is the first step toward funding a new account on a trading app or connecting a bank account to a P2P payments platform.

The account verification process then verifies if the person using the account actually owns the account. This is crucial for preventing account takeover fraud. DIRO’s bank account verification fraud helps banks and FinTechs in verifying if an account is being used by the legit owner or not.

2. Balance

Once consumers authenticate their accounts, they can grant permission to different types of account data to digital financial tools that they want to use. One of these data is the account balance, by verifying a user has enough funds in their account, FinTechs can prevent users from going into a loss by making a transaction over their account balance. 

Balance-checking APIs also offer pre-funding, and if a new customer wants to add money to the FinTech app, the API will check if the person has enough balance in your account to handle the cost. Thus saving the consumer from the risk of non-sufficient fees. 

3. Transactions

A transaction API allows a bank, financial institution, or FinTechs to access a customer’s transaction data going from the past couple of months and years. This crucial data is vital for making personalized financial services possible. 

4. Account Aggregation

Most consumers have several accounts for checking, savings, loans, investments, credit cards, and more. It can get hard for users to manage all this data, so account aggregation APIs create a dashboard for users to manage their data in one place. 

Let’s say someone wants to access their entire investment portfolio in one place and show changes made in real-time. API integration between their investment accounts and a FinTech app could offer a solution.

An API integration that can automatically connect all the information and share it with the lender during the application process can greatly reduce manual efforts.

Benefits of API Integrations

Financial API integrations make it possible to fill the gaps left by basic banking services. This leaves room for private companies to create personalized financial services with ease. These services help in making several processes faster, more efficient, and more secure for consumers. 

The benefits of financial APIs can be broken down into 4 groups such as:

  • Financial institutions
  • FinTech companies
  • Consumers
  • Non-financial businesses

Need for a Connected Ecosystem

Financial APIs are becoming more and more essential for financial institutions, FinTechs, and consumers. Financial APIs allow for new possibilities that financial institutions and FinTech apps alone couldn’t provide. 

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Finance

Online Payments: Reinventing Customer Experiences

The idea of the digital economy has been around for a long time, but the Covid-19 pandemic finally pushed the idea into a reality. Several businesses have made the idea possible by launching digital financial products and services. Before the pandemic, online payments were becoming highly famous among customers. Cash payments have been steadily declining since the year 2000, falling by around 10% every year, and the pandemic completely changed the process. According to industry experts, cash transactions will be eliminated in the next decade. 

However, traditional banking alternatives to cash still contain huge fees and inefficient practices. However, businesses are finding that traditional banking alternatives to cash aren’t equipped to deal with the modern instant economy and digitally demanding customers. 

Customers want a financial system that will allow them to send and receive money instantly and without much hassle. Leading more businesses to place more value on the online payment model. 

Open banking APIs allow businesses of all kinds to set up their own payment methods outside of traditional banking services. Open banking APIs leverage customer data, so they allow businesses to tailor build digital financial products and services for customers.

What are APIs and Their Value?

An API is software that allows two different applications to communicate with each other. One of the biggest and most common examples of APIs are food delivery apps or ride apps like Lyft, which offer customers an option for making payments inside the app. In the long run, it helps in improving customer experience. 

For the customers, the online payment process becomes fairly simple and it’s all possible due to APIs.

As the banks themselves aren’t equipped enough to handle online payments, this leads to slow payments, expensive transfer fees, and a completely inefficient process. After all, banks don’t have the technical prowess to handle growing customer demands. 

This is where open banking APIs come in. An API (Application Programming Interface) acts as a third party between accounts. APIs are specifically designed to offer a better online payment experience for customers.

Benefits of APIs

As customers are becoming more digital-friendly, they want more options for online payments. For banks and other financial institutions to keep up with customers’ demands, they need a seamless and secure payment method.

As traditional banking methods are expensive and inefficient, non-banks and FinTechs can struggle to find a payment infrastructure that can meet their customers’ expectations. Fortunately, open banking API can in fixing this problem by offering benefits such as:

1. Faster Payments

API software can support regulatory and operational tasks of plugging into payment schemes meaning that they can make online payments faster compared to banking methods. 

Businesses will be able to receive and make payments instantly, instead of waiting for days for a payment to be confirmed.

2. Faster Settlement & Reconciliation

APIs can make for better payment settlement, so accounts and debts are settled quickly. This means users are aware of their account activities at all times. This is coupled with faster reconciliation, so accounts show all the activities in real-time, ensuring better financial management.

3. Enhanced End-to-End Payment Experiences

The embedded payment feature reduces the need for customers to enter their financial details over and over again. APIs allow businesses to provide seamless online payment which can support customer needs. And, as the user’s accounts are never in direct contact with the bank’s servers, APIs offer an extra level of financial security compared to traditional payment methods.