What is NACHA API Standardization and Why Does It Matter?

Technology and the mode in which transactions are made have changed drastically over the years, and in recent times, most transactions on the internet are done by cards or mobile e-wallets. The continuous innovations in the payment industry are assisting the payment business and APIs have become a notable feature of this landscape. 

API is a set of programming instructions and standards which helps in the assessment of Web-based software applications or tools. Thanks to changes in the financial sector, APIs are needed now more than ever because most financial transactions are carried out by software or web-based communication channels.

Where does NACHA come into all of this?

NACHA, formerly known as the National Automated Clearing House Association, is a body that aims to develop a standardized API ecosystem for the financial services industry. The organization has collaborated with a group of industry thought leaders to examine how to standardize API use for faster and more secure payments.

What is NACHA API Standardization?

NACHA API standardization is a way in which financial payments are carried out quickly and with utmost security. The group aims to collaborate with different banks and financial institutions to keep payments fast and prevent data breaches to drastically reduce payment fraud. 

Imagine a financial world with simple software interaction and payment processing, and in addition to this simplicity, there is protection from cybercriminals and financial fraud. With the integration of APIs in the payment industry, all this is possible. 

In today’s business world, achieving set goals such as enhanced communication efficiency calls for unified control, novel modernization, and global cooperation. This is where NACHA falls into place. 

Industry stakeholders in financial institutions, FinTechs, and the developing world would need to have one voice when pointing out what the standards should be. One industry can not work on its own but as a group of industries. There must be due diligence in ensuring all stakeholders get equal value.  

In order to achieve its objectives, NACHA enables Afinis Interoperability Standards – an organization under NACHA that unifies different stakeholders to create financial service standards across operating environments and platforms.  It is dependent mainly on collaboration, discovering what works and what doesn’t, and creating standards that industries can adopt. 

In a meeting held on the 5th of October, there was a list of 16 APIs curated by the NACHA API Standardization Industry Group to kickstart their efforts on standardization. 

Nacha’s API standardization, in essence, is a group that aims to improve the payment space for businesses via improvements to the prepayment and post-payment processes. 

Why Does NACHA API Standardization Matter?

NACHA API Standardization is very pivotal for the financial service industry, because as the world is changing and becoming more fast-paced, so is the need to enable digital offerings and customer experiences in the most efficient way possible.

 In addition to this, NACHA asserts that standardization is “transformational” for financial payments and services, which enhances transactional safety and automates communication and processes.

 The proposed API playbook would create a standardization system beneficial to all parties by addressing the needs of businesses and improving payment support.

In the future API, standardization aims to address portability for consumers and businesses to open accounts, along with directories that would enable payments by virtue of an email address.

The API standardization also ensures that “unbanked” individuals and smaller business entities benefit from API standardization. For the former, there is a possibility of it providing services for people regardless of whether they have a bank account or not, just as easily as those with demand deposit accounts. While on the order hand, standardized APIs would make the distance in payment functionally between start-ups and already existing businesses shorter. 

As soon as this standardization occurs, it would be much simpler to gain access to financial institutions with the coordination of all API standards.

Using a practical example, to determine if the funds on the opposite end of a transaction are good in the ACH world, there would be a need to create a file, input the data, and submit this file to the federal reserve. This has been how communication has been carried out between industries, and there is no way to know if this payment was carried out until the file is received. 

 With API all this would be limited because there is an opportunity to detect the fraud should it be invalid. What APIs do in layman’s terms is communicate. Sporadic payments simply mean this communication is carried out faster, and while this acceleration is aided by APIs,  it has also demanded that the industries reevaluate the methods in which they solve issues about fraud. 

Final Thoughts

In a meeting held in May 2017 at the NACHA’s Herndon, Virginia offices by the members of ASIG, it was stated that API adoption with financial service industries has been slow and not forthcoming in the U.S financial service industry despite its glaring benefits. 

Given that there are other reasons why API has not been completely adopted, such as inadequate cost/benefit analysis information and insufficient leadership commitment, the lack of API standardization appears the most compelling argument.

Looking at the bigger picture, there are a lot of pain points which standardized API could resolve, and in line with the meeting, the ASIG is focusing on three primary areas to start:

  1. Security and extortion – There is a need to ensure that payments and payee validity confirmation are kept safe and away from a third party.
  1. Payment access – It aims to support the interconnectivity of several immediate payment systems
  1. Data sharing – this contains relevant details about individual payor/payees and single sign-ins for multiple platforms

Furthermore, the ASIG aims to synchronize all API standardization efforts to avoid duplication by other parties, so that there are indeed standard and not duplicate versions of the same intention.

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