Payment Aggregation, or Payment Facilitation (Payfac) offers SaaS companies the ability to provide another layer of service to their users by acting as a Master Merchant for ACH payment processing. For tech-savvy SaaS platforms that have the resources to deal with compliance and risk mitigation issues on behalf of their users, Payfac is an attractive option.
Let’s look at a SaaS-based accounting service, called HERO, as an example. HERO wants to give its end users the option of paying for its services via debit and credit card, or directly from their bank account. Because HERO typically has a lot of information about its users, it understands that adding payment processing for those users’ own end customers would be a natural and beneficial addition to its service offering.
This would allow HERO’s users to debit their own customers for subscription payments or one-time payments, along with direct deposit options for businesses using the software to manage their payroll.
Master Merchant Provisions
As a Master Merchant itself, HERO provisions its users’ merchant accounts, essentially allowing them to use its account, so they can bypass the sometimes burdensome process of applying for traditional merchant accounts.
By doing this, HERO has simplified the payment collection process for its users, who can now begin processing customer payments quickly and easily.
Becoming a Payment Aggregator or Payfac is attractive for a number of reasons:
- Instant onboarding: Offering simple setup with no friction dramatically increases adoption.
- Revenue potential: The SaaS platform can mark up its cost to process payments and increase its own recurring revenue.
- More control: Becoming a Payfac gives the SaaS platform provider more control of their users’ payment experience.
What About the Risks?
Still, ACH processing aggregation has historically presented implementation challenges, including risk mitigation and reputational risk.
Back-end credit card processors have greater risk tolerance than the average bank, but few credit card processors exist. On the other hand, hundreds of banks — which are not technically back-end processors — offer ACH processing. Many of these keep tight reins on use of the ACH network. When Third-Party Processors partner with these banks, they must still answer for themselves when it comes to their risk and reputation standards.
Until fairly recently there were very few options for payment aggregation and most of these flew under the radar, so the Originating Depository Financial Institution (ODFI) — the bank holding the funds to be transferred — had no way to monitor what they were doing.
There are two issues to be aware of with these services, however:
- ACH aggregation is brand new to both Stripe and WePay, and ACH processing is very different from credit card processing. There is no authorization component that guarantees payment. With ACH, payments are batched, meaning payment confirmation can take 3-4 days. This can create reconciliation and support issues.
- They’re expensive. The likely minimal fees with these aggregators are 1% and 30 cents per transaction. In comparison, typical flat fees range between 25-30 cents, so these providers’ higher fees cut directly into profit margins.
If you are not doing recurring payment processing, ACH aggregation options deserve your attention. If, however, your SaaS platform focuses on recurring payments, there are two additional options that are also worth exploring:
- Adding an ACH platform: If you have a good relationship with your banking institution, you could layer an ACH platform over the bank’s ACH processing capabilities. You can also connect a technology that offers complete ACH processing and a reporting engine to your bank’s ODFI pipeline. This offers you the advantage of easy onboarding and potentially very low processing fees.
- Hybrid aggregation: Work with a Third-Party Processor that offers an application API to make onboarding simple. While it won’t be as fast as aggregating, the delay isn’t typically significant enough to dissuade users. The biggest advantage of this option is that it enables you to offload risk exposure and support.
Although ACH aggregation is relatively new, you can leverage it to provide more value to your user base. With credit card decline rates averaging 15% for recurring payment businesses an ACH option is tremendously attractive.
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