3 Ways to Become an ACH PayFac
An ACH Payment Facilitator, or ACH PayFac allows a SaaS platform to act as a master merchant for its client base. The SaaS provider onboards clients quickly and easily — making it simple for the user base to quickly begin accepting customer payments.
Contrast this with having to traditionally apply for a merchant account: gather supporting documents [eg bank statements, voided check and business formations documents], wait 3-5 days for approval and likely a few more to get credentials into the SaaS platform and you can see why instant onboarding is so attractive. Removing friction points in the enrollment process unequivocally results in higher adoption rates.
Until fairly recently the PayFac or Payment Facilitator model has not been an option for the ACH Payment rail.
Compare this with credit card processors. There are multiple acquirers that now offer the PayFac model. PayPal, Stripe and Square have proven this model can be very profitable and that risk can be mitigated. PayPal was the pioneer and while their credit card processing partner may have been initially wary of the risks involved the massive volume PayPal began processing in turn led to massive fee income for the processor. Rather than turn the business away the card processing networks made changes as to what business types they would look at and allow.
There are a number of reasons why the ACH system has lagged credit cards but the two primary are:
1-The ACH world typically requires a partner bank to act as the transaction originator [ ODFI ]. Banks and Credit Unions have access to the FedLine. The FedLine acts as the secure conduit to process ACH debits and credits.
Banks tend to be VERY risk averse and the idea of allowing a PayFac to board clients they don’t get to thoroughly vet is a scary thought. Think of the last time you applied for a mortgage or business loan-the sheer volume of documentation requires is at best daunting and most time onerous.
From the partner bank’s perspective there are security and data concerns. One example: Hackers buy a list of 2,000 bank accounts. They sign up 50 bogus sub accounts on an facilitation provider platform and debit $100,000 via ACH. Monies are funded and they disappear. The ACH facilitator is first in line to recover the monetary loss. If they can’t recover, then the bank is at risk. To mitigate this risk either the ACH PayFac provider or the SaaS platform will likely post a reserve. The reserve would be a tied to potential processing $ volume. An example might be a reserve equal to 3 time the per day ACH processing limit. This protects the bank from potential $ loss.
Reputational risk is also a concern. In today’s climate of heightened visibility and negative press around data breaches and sophisticated financial fraud, banks are wary. If the bank is identified as being involved in fraud, its reputation suffers. No bank wants its name associated with fraud or money laundering.