The ACH Aggregator Debate: Why You Should Consider a Partnership
An ACH Aggregator, or Payfac, allows one master merchant the ability to set up and board sub merchants for the purpose of easily accepting payments from the end customer. Credit card transactions have been more common in aggregation, but now ACH transactions have entered the aggregation space.
There are two primary types of payment aggregation: First, the “Super Aggregator:” PayPal and Stripe are examples. Both of these providers can very quickly enable a business (e.g., company selling jewelry online) to accept credit cards for payments. In the case of the jewelry store, the company creates an account with Stripe and receives credentials that it can, in turn, integrate into its shopping-cart solution. Once a store applies, it can begin processing payments the same day.
The second type of aggregator is the SaaS platform that has a payments component. Freshbooks provides an accounting platform that also offers the ability to collect invoice payments. The Freshbooks user can simply elect to use this service and Freshbooks is able to provision their payment account almost instantly.
Pros and cons
There are pros and cons to both models. Until recently, credit cards have been the overwhelmingly popular payment option for electronic transactions. There are various reasons why, and chief among them 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 available to businesses looking to electronically collect or disburse funds. There are two fundamental differences between these payment rails. 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 the $99 and reserve those funds (using that portion of her credit card balance) and subsequently capturing that money. If she pays via ACH, the transaction proceeds, assuming that she has that $99 in her account and her account and bank routing number were correctly entered.
So why does anyone use ACH if you can’t authorize the dollar amount? One big reason is the cost to process the transaction. That $99 might cost the cable company $2.50 or more to process via a credit card transaction, whereas with ACH it would likely cost no more than 25 cents. Multiply those costs by thousands of customers and you have a compelling reason for choosing ACH. Additionally, for companies with a subscription model or many recurring customers making monthly payments, it’s usually the case that hard goods aren’t being provided or shipped. For example, if a cable TV provider has a customer on ACH autopay and an ACH transaction is returned for nonsufficient funds (NSF), it’s a simple matter of interrupting their service until payment has been made good.
Credit card decline rates are the second reason ACH is becoming a more popular option. In the credit card world, a 15% decline rate on recurring transactions is normal. This decline rate has been steadily increasing in the past 3-5 years. There are many reasons, including expired, lost, stolen cards, data breaches and EMV chip cards replacing legacy cards.
When a business starts missing 15% of expected revenues, it will understandably expect options and solutions. The significant amount of effort and expense associated with collections only makes matters worse. ACH processing may see decline rates sub 2%. That’s a massive difference.
Recognizing this, payment aggregators like Stripe now offer the ability to use ACH. Some backend aggregation providers also offer ACH.
The problem with this? First, it is expensive, typically costing businesses 1% or more of a sale. If your application offers recurring transactions, this can be a deal breaker. Giving up 1% plus 30 cents or more cuts into margins significantly. Secondly, these platforms have “bolted on” an ACH option. ACH processing operates entirely differently from credit card processing. The nuances can necessitate reconciliation challenges.
So, why the 1% fee? There are two reasons: The first is simply because they can. An ACH option is an alternative to credit cards and it offers the benefits outlined above.
Super Aggregators have a massive client base and they’ve certainly done great things to acquire those clients. Quite simply, they’re leveraging their popularity, and in return they’re getting rewarded with profit; higher ACH fees that would be much lower from a Third Party ACH Processor. Before these Super Aggregators entered the ACH space, it was rare to see a percentage (discount fee) added to an ACH transaction except for high risk merchants.
The second reason centers around the aggregator’s bank ODFI partner. ACH aggregation is relatively new. Banks tend to be very risk averse. ACH processing, and specifically ACH aggregation, can present significant risk (chargebacks and fraud, to name a couple). Here is an example: Hackers buy a list of 1,000 bank accounts. They sign up 10 bogus sub accounts on an aggregation provider platform and debit $50,000 via ACH. Monies are funded to them and they close up shop. The ACH aggregator 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. If the bank is identified as being involved in fraud, its reputation suffers. Banks don’t like that — and in addition, the bank can decide it doesn’t want to do aggregation anymore as a result. In that case you may simply get an email one day that reads something like this: “We won’t be processing any more ACH transactions as of one week from today.” This happens all the time. 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 aggregator.
Although there are ACH aggregation options currently available, it often makes better sense on many levels to partner with a third-party ACH processor that has a significant understanding of 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’s certainly not as quick as becoming a true aggregator, working with a third-party aggregator can offer long term options — such as costs, compliance, and revenue potential — that make a payment partnership a better fit.