ACH Processing for StartUps
We regularly field inquiries from start-ups as well as established businesses that believe they have an app that can become the next Venmo.
Venmo allows person to person or P2P payments. The startup wants to replicate the easy moving of money using an ACH Processing Solution. Many times we listen to the idea and say “That is a great idea”.
The issue is what comes next and that 95%+ of these ideas are looking to move money between personal bank accounts.
It’s easy to assume that there is an existing payment technology that can directly move money from person 1 to person 2. As an example debit Sue Jones $25 and credit Bob Smith the $25.
For many reasons including payment risk and money laundering concerns this direct P2P payment functionality does not exist.
There is a 3rd party entity [Third Party Processor nor TPP] that must debit Sue and then fund Bob. The debit to Sue is credited to the TPP’s bank account and then the TPP issues a credit to Bob’s bank account.
So importantly the TPP takes possession of funds that are in turn meant for another entity. The possession of those funds, no matter for how long, is the MASSIVE problem.
Why?
It has to with being classified as a Money Transmitter or Money Service Business. This type of business classification means governmental organization scrutiny and of course tremendous expense as well as time.
We are talking potential years of time and millions of dollars. Most of these requirements center around money laundering (Info at FINCEN and FINRA )
Almost all of the businesses we speak with have not considered the implications of possessing the dollars or they are hoping a financial partner will step in and do the dirty work.
There are however platforms that have the payment solution idea and have some idea about the surrounding complexities.
So is there a way to actually solve this problem? The answer is a complicated maybe.
Solutions range from partnering with a cooperative bank and layering ACH API technology over the bank’s processing engine to leveraging an existing organization MTL or MSB licence to working with new technology platforms that cater to this need.
ALL of these involve time and of course money. If your startup can’t afford multiple thousands of dollars per month or added processing costs [markup] it is highly unlikely your P2P app can get off the ground. ACH Processing is a an economical, reliable rail for moving money but there are rules around usage.
If you did actually get to market is would be hard to compete directly with Venmo. You would need to have a niche with a BIG problem or create a wallet with some kind of unique rewards systems to encourage adoption.
