The ACH Facilitator : What you must know
An ACH Payment Facilitator, or ACH PayFac allows a SaaS company to act as a master merchant for its client base. The SaaS provider onboards clients via a non-intrusive application process -- making it simple for the user base to quickly begin accepting customer payments. While these generally are credit card transactions, a new approach via ACH is growing in popularity.
There are two primary types of payment facilitators. On one end of the spectrum there exists a “super facilitator” dynamic a la Stripe, PayPal and Square. These are industry juggernauts providing convenient payment acceptance to any business that needs to take payments. This facilitation approach is attractive for the essentially same day processing capability it allows. A secondary payment facilitation model is one aimed at the SaaS provider with a web-based payments component: consider Freshbooks, Xero or Quickbooks Online as examples. Each provides a suite of accounting features with embedded payment processing and reconciliation as critical components. By acting as the facilitation layer, these SaaS providers’ clients can quickly submit basic business information and be processing payments within minutes.
Pros and cons
There are pros and cons with both models. Until recently, credit cards have been the overwhelmingly popular payment option for electronic transactions. A primary reason is the ability to authorize a transaction at the point of sale so the merchant knows they will be funded for the transaction amount. ACH Processing is the second dominant payment rail for businesses looking to electronically collect or disburse funds. The fundamental difference between credit card payment and ACH processing? ACH processing does not offer the authorization component that credit cards do. So if Suzy Jones is paying $99 for her monthly cable bill via credit card, her card can be electronically tapped to verify she has $99. Those funds are then reserved, using a portion of her credit card balance, and subsequently captured. If she pays via ACH, the transaction proceeds under the assumption that she has $99 in her account and that her account and bank routing numbers were correctly entered.
The example above begs the question: why use ACH if you can’t authorize the dollar amount? The big 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 nonsufficient funds (NSF), it is a simple matter of interrupting their service until payment is made. Another reason ACH is becoming more popular is due to steady increases in credit card decline rates. In the card world, a 15% decline rate on recurring transactions is standard. Whether due to data breaches, legacy replacements or lost, expired or stolen cards, the decline rate has been steadily increasing in the last three to five years as well.
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. ACH processing may drive decline rates sub 2% -- a meaningful and material difference.
As recognition of the advantages of ACH grows, mainstream payment facilitators are offering the ability to use ACH. Some backend facilitation providers are also offering ACH.
The problem with this?
ACH is unduly expensive when delivered via Stripe or another large facilitator. Typical terms begin at 1% of the transaction amount, plus a per transaction fixed fee. If recurring business is the basis of your SaaS application, the margin compression may be a deal breaker.
So, why the 1% fee?
There are two reasons: the first is simply because they can. Super facilitators have a massive client base, sticky product and have provided service levels that keep customers in their ecosystem. Quite simply, they’re leveraging their popularity and the convenience of a “one-stop-shop” dynamic. The same ACH transaction is much cheaper when delivered with a third party processor. Second-with credit card fees 2-3% or more a 1% fee still saves the end user money [and makes platform $]. t
These platforms offer a “bolted on” ACH option and as ACH processing operates distinct from credit card processing, the two systems can introduce reconciliation challenges.
This potential issues center around the facilitator’s bank ODFI partner. ACH facilitation is relatively new and banks tend to be generally risk averse in the early stages of a transaction model. ACH processing, and specifically ACH facilitation, can present significant risk (chargebacks and fraud, as examples) that banks will mitigate with fees.
One example: Hackers buy a list of 1,000 bank accounts. They sign up 10 bogus sub accounts on an facilitation provider platform and debit $50,000 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.
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. Banks also reserve the right to quickly decide on discontinuing facilitation. In that case you may simply get an email one day that reads: “We won’t be processing any more ACH transactions as of one week from today.” This is unfortunately common. So often, in fact, that it’s referred to as “The Monday Morning Memo” in the ACH industry. For all of these reasons, the bank partner may impose a higher cost structure upon the ACH facilitator.
There are also options that offer lower transaction fees in return for a substantial monthly fee [typically > $2k/month]. This can be attractive if you have a large enough base to ROI this expense and especially in the property management space can offer a client acquisition tool. A property management SaaS may offer "No cost ACH transactions". They make their money on the monthly subscription fee or they may charge $1-3 per ACH and make revenue in margin. In this scenario is VERY important to understand that ALL payment risk is born by the SaaS platform. Unfortunately there have been platforms forced out of business by not mitigating this risk.
Although there are ACH integration facilitation options available, it often 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 be white labeled for your organization. While it’s certainly not as quick as becoming a true facilitator, working with a third-party facilitator can offer long term benefits around cost reduction, compliance management and revenue potential. These may make a payment partnership an ideal fit.
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