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.
2-The ACH world has been a batch environment. That means that a payment via ACH processed today a-does not debit the customer until next business morning and b-has no authorization component to validate the bank account being debited has requisite funds.
Note: There are checking account authentication products that can validate 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.
The example above begs the question: why use an ACH Payment Integration if you can’t authorize the dollar amount and consequently know at the point of sale if you are definitively getting the money you expect? In the ACH world it may take 24-72 hours to find out that Suzy Jones did not have the $99 in her checking account that you expected [ACH transaction can decline for multiple reasons].
One huge reason is the cost of processing. That $99 may cost the cable company $2.50 or more to process via a credit card transaction, whereas with ACH the costs would likely not exceed $0.25. In this case, the cost of credit card transactions is 10x that of ACH. Multiply those costs by thousands of customers and a compelling case for ACH forms. Additionally, for companies with a subscription model or that transact on a recurring basis, hard goods aren’t generally being provided. So, for example, if a cable TV provider has a customer on ACH autopay and an ACH transaction is returned for non sufficient funds (NSF), it is a simple matter of interrupting their service until payment is made. In addition sophisticated recollect options are usually available. These can mitigate the added work burden of payment recollection.
Another massive reason ACH is becoming more popular is due to the increase in credit card decline rates. In the card world, a 10-15% decline rate on recurring transactions can be common with higher risk industries eg dating seeing 25%+.
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You can see why over 30% of all cards are reissued each year. Cards are being reissued 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 three to five 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.
For recurring transactions in low-risk business environments and ACH option is mandatory.
Think 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 about gym membership 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. This scenario certainly creates frustration for many businesses.
So the question is how do you become an ACH PayFac?
Let’s look at 3 options and examine a 4th as well:
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. You 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.
This option is certainly the most economical but your bank must agree. 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.
BIG Con-this is typically not an option if you have 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 competeive in terms of capabilities with the previous two.
Best fit 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.
So there you have the 3 options above when considering becoming an ACH PayFac.
In some cases it makes better sense to partner with a third-party ACH processor that understands the ACH network. You can also leverage ACH merchant application APIs, which provide fast onboarding for new clients and can also be white labeled for your organization.
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 and 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.
Contact us to discuss what your best fit is.