It happens on a regular basis; prospective clients contact us because they have a SaaS application in development, usually nearing launch, and they need a solution to pay-out to people or companies that serve a role within the application's ecosystem, but who are not the primary beneficiary of the funds received from a credit card payment.
The developing organization is obviously focused most on their idea and model and how the development will be supporting what are their goals. They understand the need to for a payment solution to be integrated, and because the most common payment rail is credit cards, that's the typical focus on the payment integration.
It's when an application has the need to payout a third party a portion of the collected funds prompts them to contact us - and when they become aware of the MSB Factor.
They arrive at us because of our 22+ years supporting software applications with ACH solutions. Their thinking is that because they have a credit card solution in place, they simply need an ACH integration solution for the purpose of sending ACH credits out to those secondary beneficiaries. That's when the blinders have to be removed from their eyes.
In today's electronic payments world, a primary merchant party - think a software application - can't receive funds in their bank account and subsequently send funds out to a third party because of something called Money Service Business and the rules and requirements surrounding it; most commonly that they would be falling into the Money Transmitter category.
If the developing application falls into the Money Transmitter category, they only have a few remedies if they want to use the credit card solution they originally planned on, with ACH supporting the third party payouts:
- They can obtain Money Transmitter licenses for the states they will be operating in. Each state has their own process and associated costs. This is not a cheap proposition! Moreover, the SaaS ownership team better be prepared to deal with all the requirements that becoming an MSB entails.
- Assuming the application's ownership group is strongly funded and has a long-standing banking relationship, it is possible to obtain a For Benefit Of (FBO) bank account. An FBO account is an umbrella fiduciary account, which in this scenario can allow the SaaS platform to leverage the sponsoring bank's compliance umbrella, eliminating the MTL licensing requirement.
The problem with the first option we have already covered. The problem with option two is on the the integration technical side and the merchant account demands. If a bank is going to "sponsor" your project and team, they are going to want you to use their credit card solution - and they have a captive group now. Then there's the integration API that must be examined. You will find delinquencies there, no doubt. How many and what they are will vary, but on the ACH side you likely won't have an API option.
Moreover, let there be no illusion - a bank wants nothing to do with a bootstrap SaaS startup. Well funded stakeholders with a proven track record only need apply for an FBO account for purposes of leveraging the bank's compliance umbrella.
There is a third option - potentially. In some cases we could provide the required technologies for integration purposes by integrating to the sponsor bank who is providing the FBO account, but that's not a cheap proposition either - and like I said, potentially. It's less than a 50/50 proposition.
Turn Back the Clock!
When the prospect contacts us, we first have to educate the application's stakeholders and developers of the MSB issue. Once we assess all the application's requirements we can provide what we think the best solution is. In many cases such as these, the best solution is to forgo the credit card integration work that they have already decided on (assuming a contract hasn't been signed) and provide them with a Managed Payment Facilitation solution.
Such a solution provides the following:
- Eliminates the MTL requirements
- Manages the payments risks
- Provides frictionless boarding
- Provides advanced API capabilities
- Provides for split payments (no need for a separate ACH solution)
- Provides a strong revenue share
Don't get caught with an MSB Payment Integration mistake. Contact Agile Payments and allow us to assist you and your team.