Processing tax and child support payments is a heavy lift, even for large banks. The sheer volume of tax authorities, each with unique requirements, creates a dense ecosystem that banks and corporates must navigate carefully to avoid costly errors and penalties.
Similarly, child support payments are a labyrinth of rules that differ between states and even counties. It’s been mandated since 1996 at the federal, state, and municipal levels under the Financial Institution Data Match program (FIDM).
FIDM is serious enough, but the U.S. tax system presents an even more daunting task for banks and FIs. Its fragmented nature is slow and unforgiving. With more than 3,300 different U.S. tax authorities at federal, state, and municipal levels, each maintaining individual operations and requirements, commercial banks and their clients struggle to keep up.
The NACHA CCD+ TXP format is the main mechanism for tax payments via ACH. It’s a vital step in a complicated process involving oceans of data and thousands of shifting rules.
"Each tax authority operates independently, with unique requirements for electronic payments,” said Eric Campbell, Bottomline Global Solutions Architect. “Some use standard EDI addenda formats, while others use unique formats that apply only to them.”
Banks have three choices:
- Stay out of the complexity and force their clients to manage their tax payments by contacting all the places where they need to pay, and then make sure they enter correct ACH payments with the correct syntax, formats, account numbers, and required fields.
- Partner with a provider who can provide this service for them and their clients to make sure payments made are compliant with the Tax Authority’s rules and specified account numbers to pay.
- Manage the Tax Authority and Child Support Rules themselves.
The risks of relying on choice 1 are that clients could make a series of bad payments decisions incurring penalties, so they move their business to a bank that can protect them against bad payments.
For Option 3, lack of uniformity means banks must support relationships with thousands of tax authorities and ensure that data is formatted correctly for each one. Campbell also noted that the complexity extends beyond formatting into areas like change management.
"Tax authorities frequently change their requirements, sometimes with little notice,” he said. “Banks need to stay current with these changes or risk payments being rejected, which can result in penalties for their commercial clients."
With banks and FIs having to maintain these relationships and provide accurate information, errors are bound to occur. When they do, tax authorities typically impose penalties on the taxpayer, not the bank. This creates a precarious situation where banks are caught between providing a service and being responsible for potential errors.
At a time when B2B customers are shopping for better services at other commercial banks, tax and child support payment mistakes simply can’t happen. For that reason, more banks are turning to Payment Service Providers (PSPs) with tax and child support data expertise.
The Value of Specialized Partnerships
Rather than trying to build and maintain tax and child support payment systems, more banks are turning to partners that know the terrain. "Many large banks have already integrated this product into their system," Campbell said. "They don't want to take on the burden of maintaining tax rules themselves, but they do want to own the client experience."
This approach allows banks to focus on their core competencies while leveraging the expertise of vendor-partners. These relationships provide a layer of protection for banks, as Campbell pointed out: "If something goes wrong, the bank can blame the vendor rather than taking responsibility themselves." However, this is a very rare occurrence for those vendors supporting millions of Tax ACH Payments a year.
The ideal partnership also delivers value through comprehensive data management and rule updates. "We provide an XML file that banks can use to build their applications," Campbell said. "This allows them to own the user experience while leveraging updated data and rules."
These partnerships become particularly valuable when considering the alternative. Building and maintaining an in-house system for tax payments (to say nothing of child support payments) requires significant resources and proficiencies that even most of the largest U.S. banks don’t care to staff and manage.
Data Power, Reliable Payments
Creating a reliable data solution for tax and child support payments requires extensive experience and a large client base. The more clients a vendor serves, the more comprehensive their data becomes, creating a network effect that benefits all.
"Having a large client base means that we can dynamically expand our covered Tax Authorities to the benefit of all our subscribers,” Campbell said. "If one client encounters a new tax authority, especially at the municipal level, we can update our rules to prevent that issue for all clients."
This collective intelligence approach gives banks and their commercial customers confidence that tax payment systems will remain current and accurate. Using Bottomline as an example, Campbell said, "We update our tax rules automatically, ensuring banks always have the latest information without having to monitor changes themselves."
The solution must also be flexible enough to accommodate different bank systems and client needs. Some banks prefer to build front-end applications in-house, while others want to acquire a complete solution.
"It’s best to provide options that allow banks to choose how they want to implement our service," Campbell said. "For example, they can use our data to build an application themselves, or they can simply integrate our complete solution," and skip a costly build.
For banks, the decision often comes down to risk management. The complexity and potential penalties associated with tax and child support payments make partnerships an attractive option.
Play to Strengths and Know Your Limits
The future of tax and child support payment processing lies in external partnerships. As tax authorities continue to change requirements and electronic payment systems become more prevalent, banks will increasingly rely on specialization to manage this function.
"Banks recognize that these types of payments are not their core capability," Campbell said. "They prefer to partner with specialists who can manage this complexity for them."
By partnering with experienced vendors, banks can provide their clients with reliable tax and/or child support payment services without taking on unnecessary risk or diverting resources from their core business activities.
This collaborative method benefits all parties involved: banks reduce risk, clients avoid penalties, tax authorities receive properly formatted payments, and people get paid.