What are Push Payments?
Push Payments -- Removing risk from the payments paradigm: How businesses can benefit from consumer permissioned payments | PushPayments to eliminate chargebacks and payment declines.
- What are PushPayments?
- What are Real-Time Payments (RTP) and how are they different from conventional payment schemes, eg ACH?
- What are the drawbacks of RTP?
- What is the UX?
- Push Payment FAQ’s
- Why are Push Payments THE solution for certain high-risk businesses?
What are Push Payments?
Think about how you currently pay when checking out online at Home Depot. In every checkout scenario Home Depot is charging your credit or debit card and “pulling” (debiting) money from your account.
It is very important to understand the money flow. Most people assume that money travels directy from their credit card to Home Depot’s bank account. What really happens is that the payment processor Home Depot has partnered with receives the sale proceeds and then in turn funds Home Depot’s bank account. So there is always a bank or payment processor “in the middle.''.
Every transaction Home Depot processes could potentially result in a chargeback. An example would be the item arrived damaged and you could not get a refund. You might call your card company, explain the situation and see if they will credit your money back.
Someone could have used your credit card fraudulently. When this happens your credit card company or the issuing bank (as they “issued” your card) pulls the money you paid back from Home Depot’s merchant account provider (called the acquiring bank). The acquiring bank in turn, pulls money from Home Depot.
Home Depot is especially good at managing chargebacks and fraud. But think about a merchant selling adult products. You can see the chargeback risk (and fraud) become elevated. Merchants and processors can and have lost major money from chargebacks due to poor products and fraud.
Let’s look at the case of a merchant/entity that intended on committing fraud. So they form a shell company, establish a bank account and a merchant account (a merchant account is the means to accept credit card payments) and then use stolen credit card info to fraudulently charge end customers. When the fraudsters see the $ from the bogus $ deposited in their bank account they immediately withdraw that money--all of that money.
When the acquiring bank or payment processor (that provided the merchant account) catches on to the fraud and tries to pull the money back from the fraudsters, it’s too late. They have closed or drained that account. So Home Depot (or the acquiring bank) are on the hook for the financial loss. This is why obtaining a merchant account can be burdensome. The financial loss, e.g. a merchant is not around for the processor to collect chargeback $, must be mitigated.
Fundamentally the chargeback risk occurs because someone is reaching into your account and pulling money out. The consumer has recourse for unauthorized debits as well as disputing fulfillment or the merchant’s right to debit. 60 days is a common dispute window time frame although fraud can extend this time frame much longer.
Another significant challenge for online retailers is that credit card decline rates are frequently over 10% with some industries exceeding 20%. If you accept credit cards for online purchases, this is a reality. The dual challenge to the retailer is 1-you are only collecting on 90% of your potential sales and 2-that might be your last chance with that customer. False declines (not approving a valid credit card charge) costs businesses hundreds of millions of dollars per year.
So how do you completely remove this risk of chargebacks and declines?
The answer is to reverse the payment originator and eliminate the need for a merchant account. Essentially the consumer initiates a push payment from their bank account. There is no Merchant Account whereby a payment processor receives the sale proceeds from the consumer and in turn (24-48 hours later) funds the business.
In the example above, Home Depot is the payment originator. To completely remove chargeback and payment decline risk you allow the consumer to originate the payment. Hence the phrase “Push Payment”. The consumer is pushing the money out of their bank account.
And you are asking, HOW?
There are many Fintech providers that allow for “bank data aggregation”. Essentially that means they provide technology that enables merchants to connect a consumer’s bank account to their application. An example would be a property management application that enables rent collection. Using Yodlee/Plaid/Finicity etc, the platform enrolls the tenant by having them “connect” their bank account. This is done via a “lightbox” that pops up and asks the consumer to log in their online bank account.
Once done the property management application can check balance, payment history etc. They can also future check bank account balance before a debit, thereby reducing NSF risk.
New technology takes this one-step further and once the consumer connects their bank account they are then presented with an option to push or send the payment from their bank account. These PushPayments run on the same network as Zelle or PopMoney network rails and uses Real-Time Payments (RTP).
***Note: The PushPayment Solution we are discussing is geared to non-face to face transactions. PushPayments do have a use case for Point of Sale transactions.
What are Real-time Payments (RTP) and how do they differ from traditional payments schemes?
First, in contrast to ACH processing, RTP supports credit or push payments only. There is no ability to debit another bank account using RTP. The core RTP functionality is that it enables instant funds transfer.
Payments are final when completed and cannot be reversed.
This instant settlement eliminates payment failures due to insufficient funds, which is relatively common in the ACH world. When a business uses ACH processing to debit a customer's bank account for a regular payment and that bank account doesn't have the requisite funds, their bank sends the ACH network notice that the debit was returned NSF. This NSF notice can come back 72 hours after the payment is processed. Because RTP's are creditor push payments, there is no risk of payments failing due to insufficient funds.
Do you see how both chargebacks and payment failures can’t happen? You can’t go to your bank and say “I sent them money. Uhh--it was an accident”. So the risk of a chargeback is zero. There is current scrutiny especially around Zelle regarding fraudsters tricking people into sending $ via Zelle. As of now, there is still no recourse for “pulling back” any missing $.
Your bank won’t let you send money you don’t have in your account so payment declines are eliminated as well, meaning no possible NSF.
The technology also eliminates the need for a merchant account. As long as a business has a bank account they can receive push payments from their customers.
RTP also allows more transactional data to be revealed with each payment. For example, a marketplace like Etsy could include details about the item sold like the seller and purchase ID. An accounts payable or bill pays solution could include the invoice number on payments sent.
Unlike ACH and Wire Transfers which don't operate on weekends, bank holidays and outside business hours the RTP network is always ON.
All RTP payments are processed by The Clearing House. If you pay your monthly electric bill using RTP, your bank messages the RTP network and includes the details of the payment. The Clearing House processes the payment message and routes it to the electric company's bank, thus irrevocably completing the payment. RTP uses the ISO-20022 standard for the messaging used to initiate payments and retrieve transaction status.
Fundamentally a PushPayment solution or Consumer Permissioned Payment Solution connects the consumer’s payment directly to the business bank account. Again we compare to a traditional payment processor where the processor is ALWAYS in the middle of the payment $ flow.
Traditional: Consumer is debited $100----->Processor receives $100--->Processor pays out end merchant $100
Push Payment Solution: Business “requests” payment from the consumer (typically via QR code)-->consumer “pushes” payment to the business via online bank interface→Business receives $ in seconds
Drawbacks of RTP
On the evidence of what you have read so far you have to conclude that RTP solves a LOT of problems for businesses, both low and high risk.
So what are the problems?
1-Not every bank participates in RTP. Smaller bank and CU’s are typically slower to roll out technical changes. Every bank is eligible but only around 60% currently leverage RTP. If your bank does not offer the ability to connect your bank account to an application via a Plaid/Yodlee/MX etc then they are definitely not using RTP. There will certainly be wider adoption. For a list of RTP participants click here
2-Recurring AutoPay payments can not currently be “set and forget”. In the ACH world you can debit the customer on the 1st and every month their bank account is debited like clockwork. RTP is more suited to one-time payments though you can certainly message the customer via email or text prompting them to pay via RTP. This process is built into RTP and uses RfP technology. RfP means “Request for Payment” and essentially texts the customer asking them to click here to make your payment
3-Relative to ACH processing RTP payments are likely more expensive than ACH. Pricing will depend on many variables. In the ACH world you might pay 30 cents a transaction or less. Using RTP you are more likely to be 50 cents up to $1.00 or more. Depending on your customer base and risk level you have to decide if the speed and payment finality of RTP offers your business ROI
4-Finality of payment. Yes, the thing that makes RTP so attractive does present challenges. Your refund policy must be looked at and possibly modified. There is no chargeback recourse like both ACH and credit card world offer. This makes having clearly defined policies paramount.
What is the consumer experience (UX) using RTP?
Consumers use a pay-by-bank option by scanning a QR code at checkout. The option could also appear to consumers as a button within their mobile banking apps. For security, the technology “tokenizes” user account information. Through their online banking portal the consumer securely authorizes the payment to be pushed to the business they wish to pay.
PushPayment | Consumer Permissioned Payments Use Cases
- Payment Gateways
- Bill Pay
Why are PushPayment | Consumer Permissioned Payments the answer for high-risk business payment needs?
High-risk businesses can almost always obtain a business bank account. What is problematic and challenging is obtaining a merchant account. Traditionally a high-risk business would apply (usually multiple times) to obtain a conventional merchant account. By conventional, we are referring to accepting credit card payments via debiting the consumer’s card.
Oftentimes a $ reserved is collected up front to mitigate chargeback risk. Other measures to mitigate risk might be weekly or bi-weekly payouts. By paying out less frequently the payment processor reduces chargeback exposure. Chargeback ratios are typically capped at 1% and overage can mean your account is terminated. This often creates a hamster wheel of trying to obtain another merchant account.
PushPayment | Consumer Permissioned Payments solve this problem in a singularly unique way.
THERE IS NO MERCHANT ACCOUNT
No merchant account means you can’t be cut off or terminated (assuming you are a legitimate business). This can seem hard to wrap your head around because it is so different from traditional payment solutions..
Does it really eliminate chargebacks? Yes-the consumer is providing express permission to pay for an item or service
Can anyone pay via PushPayments? Anyone can, provided they use a bank that participates in the RTP network and the entity being paid also has a bank in network
Are there prohibited businesses? There are high-risk business types that are ineligible. This includes adult, credit repair, basically the usual suspects that typically must rely on high-risk merchant accounts. Crypto and legal betting ARE eligible. All businesses must be US domiciled.
What does it cost? Typically 50 cents to a $1+.
How do I sign up? To start we would have a conversation about your business. If everyone agrees you complete an application (similar to a merchant account). Because the risk involved is mitigated by finality of payment and certainty of good funds the primary risk concern is reputational. Eg “Could your business damage the reputation of either the banks involved or your Push payment tech partner”?
PushPayment Security Measures
As with all payment processing models, security and privacy are paramount. PushPayment providers must maintain the following standards when handling sensitive information during the payment process:
1-Encryption of consumer data at every point in the transaction process.
2-Online banking credentials are encrypted using
3-Your PushPayment partner NEVER stores consumer data. This means no data is exposed at any time.
4-Your PushPayment partner performs an internal audit after each transaction and generates a token (a token is a string of alpha-numeric characters that replace a full credit #).
5-This token is a digital attestation of consumer permission, the transaction receipt, and security audit.
6-Your PushPayment partner empowers consumers, regulators, and lawmakers to see exactly how data is being handled.
If you feel your business can benefit from Push Payments let’s have a conversation. Contact us now|