How Square Recruits Plaid to Support Its New Gambit to Recruit Larger Sellers

A payments trend that has gained some momentum during the pandemic is open banking, the idea that funds can validated and moved from an account to another one at a different bank inexpensively and by means other than cards or checks.

On Thursday, that concept took a big step forward with Plaid Inc.’s announcement that it is supplying the pipelines for a service Square Inc. unveiled three weeks ago to allow businesses to receive payment on invoices via the automated clearing house network.

The new capability, which works with a 7-year-old service called Square Invoices, allows the San Francisco-based payments company to penetrate larger enterprises than the small merchants that have long characterized its base of sellers. Square revealed earlier this month that merchants doing at least $125,000 in annual volume accounted for 61% of its payment volume in the first quarter, up from 54% a year earlier.

One big selling point for Square businesses is that, with Plaid’s network, they can receive ACH payments at a cost well below the toll on card acceptance. “Through the partnership, Square uses a tokenized check system that uses Plaid to allow customers to securely connect their bank accounts for bank payments,” says a notice on Plaid’s Web site posted Thursday. “This verification option allows customers to quickly enter their bank login credentials to connect an account to enable payments.”

Plaid’s service can verify account balances as well as provide a conduit for funds movement, a capability that contributed to Visa Inc.’s effort to acquire the company. Visa in January withdrew its $5.3-billion offer for Plaid following a lawsuit by the U.S. Department of Justice to stop the deal on antitrust grounds.

The new service with Square “shows Plaid is beginning to move into creating a payments platform now,” says Patricia Hewitt, principal at PG Research and Advisory Services, a Savannah, Ga.-based consultancy. At the same time, she adds, it shows how Square “is building out the ecosystem so [businesses] can just live inside Square.”

The kind of validation service San Francisco-based Plaid and other data aggregators offer can be especially critical now with the growth of same-day ACH settlement and the introduction in March of a validation rule for the ACH network. The rule, set by Nacha, the governing body for the ACH, requires that transactions initiated online or via a mobile device must be checked to make sure the originating account is authentic and active.

For the ACH network as a whole, transactions processed the same day they were initiated totaled 141.1 million in the first quarter, up 88% from 75 million in last year’s March quarter, the last period before the onset of the coronavirus pandemic in the United States. Dollar value for same-day ACH shot up fully 133% to $187.6 billion, according to Nacha.