Becoming an ACH Payment Facilitator (ACH PayFac) allows a SaaS platform to act as a master merchant for its client base. Traditional methods for applying for a merchant account entails gathering supporting documents, and waiting 3-5 days for approval, while becoming an ACH PayFac means instant onboarding for a business. PayPal, Stripe and Square have proven that the ACH PayFac model can be both profitable and relatively safe. PayPal was a first arriver in the PayFac realm, and their massive fee income convinced credit card processing networks to allow such models.

The two primary reasons why the ACH system has lagged credit cards are that firstly the ACH world  requires a partner bank to act as the transaction originator [ODFI ]. Banks and Credit Unions have access to the FedLine, which securely processes ACH debits and credits. Banks are obviously averse to risk and are hesitant to allow a PayFac to onboard clients that the bank themselves haven’t thoroughly vetted. Beyond financial risk, reputational risk is also a concern. Banks are wary in today’s climate of heightened visibility and negative press surrounding data breaches and sophisticated financial fraud. No bank wants to be associated with fraud or money laundering.

Secondly, the ACH world has been a batch environment. That means that a payment via ACH processed today does not debit the customer until next business morning, and has no authorization component to validate the bank account being debited has requisite funds.

It should be noted that there are checking account authentication products that can validate that the account has a positive funds balance (and in some cases validate bank balance). These are services that are typically based on per transaction fees. Same Day ACH transactions are becoming an option. Typically there is a premium to typical ACH per transactions fees.

We must ask ourselves: Why become an ACH PayFac if you can’t authorize the dollar amount and consequently know at the point of sale if you are getting the money you expect?  In the ACH world it may take 24-72 hours to find out that a client did not have the money in their checking account that was expected [ACH transaction can decline for multiple reasons]. ACH is becoming more popular is due to the increase in credit card decline rates. A 10-15% decline rate on recurring transactions can be common with higher risk industries.

Over 30% of all credit cards are reissued each year due to data breaches, legacy replacements or lost, expired or stolen cards, and  EMV chip cards. The decline rate has been steadily increasing in the last 3-5 years and is expected to continue.

When a business misses 15% of expected revenues, it will understandably consider alternative options. The significant amount of effort and expense associated with collections only makes matters worse. To add insult to injury there will be clients you are never able to update billing info. Now you have a lost customer to replace and customer acquisition tends to be very expensive.

ACH processing may drive decline rates sub 2% — a meaningful and material difference. Think about the last time you changed banks or account numbers. You can quickly see why ACH return rates are so much lower.

An ACH option is mandatory for recurring transactions in low-risk business environments.

For instance, take property management- rent and mortgage payments are low risk as the alternatives are not pleasant. There are many similar industries where the business provides a much needed service that if lost would make their lives more difficult.

But there are also businesses that provide services that people want but may not need. Think gym memberships or home security monitoring. In these example having to reach out to the customer and obtain new billing info makes that customer ask “Do I want to continue to pay for this? This definitely has caused businesses customers.

How to become an ACH PayFac:

1- Partner with a PayFac platform that offers an ACH option. Vantiv would be one option. They are a pioneer in payment aggregation.

Pros:

  • Established platform. Tons of experience.

Cons:

  • Significant undertaking involving due diligence, compliance and costs
  • Must be a full blown credit card and ACH Payfac
  • There will be an ongoing need for staffing and compliance.
  • You can easily spend over $100k to get started and will have annual costs around staffing plus compliance. Level1 PCI compliance likely a requirement as well.
  • Many of these providers have legacy tools for managing payouts as well as chargebacks. In cases this can create additional work burdens.

Likely a best fit if you have a mature product with an existing base that can offer ROI. You need payment revenue to exceed costs [substantial]. Typically you would go this route when you have hundreds of users that will generate transaction volume. Having one thousand users that do 2 transactions per month COSTS you money.

If you ONLY want ACH you will need to have SIGNIFICANT payment volume to offset initial and ongoing costs.

2-Partner with an ACH platform that offers slick API’s and the ability to onboard easily. An example would be Dwolla.

Pros:

  • Powerful API that allows instant onboarding, risk mitigation and payment velocity risk controls-removes enrollment frictions.
  • Low per transaction fees.

Cons:

  • Hefty monthly fees often price out platforms in startup mode or having smaller user base. You can expect to pay anywhere from $2500 to $10000 or more per month. Even at $6000 per month if you charge .50 per transaction you need 12,000 transactions to break even on costs alone [not including admin].
  • You may go through significant onboarding process evaluation for compliance and risk mitigation. In addition there is typically a significant dollar reserve required to mitigate bank risk exposure.
  • Recently we have seen a reluctance from these providers to work with any kind of start-up or non money backed venture.

Best fit with ACH only needs and the potential for enough users to offset large monthly fees. Compliance staff and ongoing risk mitigation needed.

3-Layer an ACH management platform over your bank’s ACH processing capabilities.

If you have a good relationship and can explain your model your bank may cooperate.

An integration would be done that connects the ACH platform to your bank-depending on the bank it may have been previously done and you can save time and money. Testing would be done and once validated you are able to enroll and fund.

Once connected you leverage the ACH platforms API’s to debit and credit as needed.

Pros:

  • Lower costs
  • More freedom and flexibility

Cons:

  • Your bank has to allow this so they will want to know a LOT about you and potential risk.
  • You will likely need to move fairly high up their admin food chain.
  • Typically not an option if you have sub merchants to enroll as your ability to control the descriptor [what is printed on end customer bank statement] will be your business name. This is in contrast to the options above that allow you to control descriptor name. So in the above examples if you bring on ABC Fitness as a sub merchant you can offer them billing capabilities that will show “ABC Fitness” on customer bank statement. There may be enhancements coming that would allow more sub merchant control that would in turn make this option competitive in terms of capabilities with the previous two.

The best fit occurs when you have strong relationship with bank, and your application serves as a marketplace. An example might be Etsy where they can provide processing capabilities to Etsy users but the end customer is OK seeing “Etsy” on bank statements.

In some cases it makes better sense to partner with a third-party ACH processor that understands the ACH network. While it certainly does not provide the instant onboarding as becoming a true facilitator would, working with a third-party processor can offer long term benefits around:

  • Cost reduction
  • Compliance management
  • Risk exposure
  • Revenue potential.

Essentially if you want to leverage the benefits of payment integration and create new revenue stream but aren’t keen on the ancillary costs and responsibilities the a payment partnership may be the ideal alternative.

These may make a payment partnership an ideal fit. In almost every case it’s best to start with a conversation around your goals. We can help provide guidance and insight. In some cases we are a good fit and in others we would recommend an alternative.