Facing Tighter Bank Rules, ACH Processors Turn to Another Processor for Relief

Tougher restrictions by banks are creating a business opportunity for Global eTelecom, a Fort Walton Beach, Fla.-based processor of automated clearing house transactions. While the 14-year-old company has traditionally relied on reseller agreements with independent sales organizations for new business, it’s now also pursuing deals to handle volume for other, smaller processors that face closer scrutiny from their originating depository financial institutions (ODFIs), which is ACH parlance for the banks that enter transactions into the ACH network on behalf of businesses.

Global recruited six clients after quietly deciding about 18 months ago to open its platform to other processors, and has begun negotiations with another eight since it began promoting the program a month ago, according to Chris Brundage, chief operating officer at Global. For the most part, these client processors can’t board new merchants because of ODFI restrictions on business types or merchant volume, Brundage tells Digital Transactions News. “They have their own banking relationships, but for a variety of reasons they want to put some [of their volume] through us,” he says.

The new business helped to almost double Global’s total volume last year, and Brundage projects it will contribute to a more than doubling in 2012, without giving specific numbers. Global is processing $2.5 billion in transactions annually for some 55,000 merchants, according to its Web site. All of its volume stems from ACH or Check 21 activity.

Requests from other processors have been arriving steadily. “Demand has increased for this type of partnership over the last two years due to banks trying to mitigate their [fraud] risk,” Brundage says. A number of regulations have come into play in recent years to clamp down on ACH fraud. One of the strictest was a move by NACHA, the rules-setting body for the network, to dramatically jack up financial penalties. In December 2007, NACHA increased by 50-fold—from $10,000 a month to $500,000 monthly—the network fine on ODFIs found to have fraud rates exceeding 1% of volume.

Brundage will not name the six processors currently on its platform or identify the two ODFIs that Global works with, other than to say they are “nationally recognized, name banks.” He says Global is in talks to sign on with a third ODFI. Global runs its own underwriting routines on merchant business brought to it by its client processors, and has rejected merchants that don’t pass muster while retaining the client. While not citing numbers, Brundage says Global has been able to cut its fraud losses as a percentage of its business in recent years, though it has seen a rise in attempted fraud. Global maintains agreements with its clients allowing it to collect any fines from them that might result from fraud.

Brundage won’t discuss pricing in detail but says Global levies a flat fee per transaction, leaving it up to the client processor to reprice the service to its merchants. Global then pays its ODFIs and pockets the difference. Transactions are mostly recurring debits of consumer accounts. These fall under an ACH application known as PPD, or prearranged payment deposit. Such payments can generally stem from such businesses as health clubs, homeowners’ associations, and charities, says Amy Smith, president and chief executive of The Payments Authority, a Troy, Mich.-based regional ACH association that covers all of Michigan except the Upper Peninsula. The national network saw 2.93 billion PPD debits in 2011, up 3.5% over the 2010 traffic, according to NACHA statistics.

An ACH veteran, Smith says she has not seen other back-end processing arrangements like the ones Global is establishing. “It’s not our favorite scenario,” she notes. “You’ve got to be sure you’re dotting the I’s and crossing the T’s” in legal documents, she says, to make sure liability for losses ultimately fall on the originating merchant. “That’s what’s scary for me,” she says. Such liability is especially tricky for the ACH because the network typically doesn’t have visibility into payors’ accounts and doesn’t settle transactions until the next day.

Still, Smith adds, such arrangements might prove to be a ready alternative for processors looking to board merchants quickly but also dealing with the sharper pencils banks are wielding. “If you’re in a big, bad hurry, are there other options out there? There sure are,” she notes.