ACH by design

ISOs and merchant level salespeople (MLSs) have traditionally relied on the boarding of new merchants and the residuals generated from existing accounts to sustain and grow margins. But economic turmoil has upset that business model. To survive and thrive, ISOs and MLSs would be wise to investigate other ways to entice new merchants and retain the ones they already have. One avenue to pursue is payments made over the automated clearing house (ACH) network.

Donna Ayers, Director of Marketing and Sales Administration for ACH Payment Solutions, has recognized a significant trend in consumer behavior: Cardholders are putting away their credit cards and paying with debit more often. One consequence of that trend is that payments are increasingly being processed and settled over the interchange-free ACH. Because transaction fees are lower when using the ACH, Ayers believes ACH processing makes sense for merchants.

Statistics back up Ayers' claim. The ACH network, which began over 35 years ago as a low-volume network transmitting large, recurring transactions, has risen in popularity over the years. In 2007, it was reported that more than 18 billion payments were made over the ACH.

According to Ayers, the third-quarter 2008 statistics from NACHA - The Electronic Payments Association, which oversees the ACH network, show a 7.7 percent increase in ACH transactions over the same period in 2007. Furthermore, much of the growth in ACH volume has been attributed to the rise in Internet-based and alternative payments.

Good timing

ACHPS has exploited that explosion in e-commerce by carving out a niche in ACH processing for small to large and regional e-commerce merchants and businesses that take telephone orders - merchants often overlooked by other ACH providers, Ayers said.

"With the state of the economy in our nation today, more and more ISOs and merchants really have been moving toward the ACH or alternative payment methods to lower their cost in comparison to the discount they pay on the credit card side, thus making ACH a very attractive service for ISOs to sell," Ayers said. "This is one more thing that they can add to their list of offerings as they go out to the merchant."

Ayers added that providing ACH services can increase merchant stickiness because the more products merchants have with ISOs, the less likely they are to switch processors. "Also, the margins are still there for the ISOs," she said. "So, it's a win-win for everyone."

In addition to the lower processing costs for ACH payments compared to standard credit card processing, merchants save trips to banks with the ACH's electronic check service, which sometimes results in merchants receiving faster deposits.

For small merchants with tight margins, ACH's benefits often make it an easy sell.

"Our biggest reward was seeing our ISO partners embrace ACH, with many of them now promoting ACH as their lead when prospecting a new customer," Ayers said.

Bill Smither, Vice President of Business Development at ACHPS, said ISOs and MLSs are using the ACH proposition to successfully target professional service businesses, such as multi-unit property owners and dental and medical offices.

Strong roots

According to Smither, ACHPS' President Rick Edelen and Chief Executive Officer James L. Plappert "have a solid footing in the ISO industry." The two executives - founding partners of ACHPS - saw the ISO channel as an ideal way to market ACH to merchants and increase ISO revenue, Smither said. Edelen brings his experience as former owner of Commonwealth Payment Systems Inc. and The Merchant's Friend Inc. to ACHPS. Plappert's payments industry career has spanned 25 years, including a stint as President of the Electronic Transactions Association where he was a 15-year board member.

ACHPS was founded in 2002 to develop a national sales distribution channel for ACH payments.

"The challenge, just like any new business, was to build market share, convert the product to an offering that would interest an ISO and then educate ISOs on the benefits of the product," Smither said. The Louisville, Ky.-based company now works with over 65 ISOs nationwide. "Some of those ISOs in turn have multiple locations across the country," Smither said. "So, as far as sales reps that are actually selling our products and services, you're probably in to three or four hundred people."

Tight focus

ACHPS targets e-commerce and telephone order businesses because the two sectors create the largest margins for ISOs, according to Ayers. Smither added ACHPS excels in these areas partly because it underwrites and guarantees the ACH service. For an additional fee, ACHPS also handles administrative returns for its clients.

"When a merchant gets an ACH item returned for account not found, invalid account number, insufficient funds, et cetera, ACHPS can provide administrative management services where we'll actually call the consumers on behalf of our merchants and try and get the corrected information," Smither said. "We're about 73 to 75 percent successful in that endeavor. It's something that really differentiates us from a lot of our competitors."

Ayers said the return service is a primary reason for the company's account retention success. Additional value-adds include back office conversion. ACHPS also aggregates total payments for its partners to negotiate cheaper processing rates based on volumes customers could not achieve individually.

Although specializing in Internet and telephone-based transactions has worked for ACHPS, the company has seen an increase in its business-to-business market. ACHPS also intends to branch out into the brick-and-mortar retail world with a suite of POS services and a remote deposit capture product; both offerings will be made available to ISOs for resale.

ISO friendly

ACHPS knows the value of its ISO partners and treats them accordingly. "We understand the ISOs," Ayers said. "We understand the industry. We understand the challenges that [ISOs] face, the types of tools, products, services that would entice them.

"First and foremost, we take pride in the fact that residuals are paid timely each month, which has earned us loyalty from our ISO partners. We also do not sell against our ISOs. There's no chance that they're going to run across us [competing against them] out in the marketplace. This also builds trust and loyalty from our ISOs."

The Director of Payment Operations for one of ACHPS' customers was overwhelmed with the service his company received and attributed its 2008 year over year decrease in returned ACH payments to ACHPS. "With previous vendors, NACHA changes were always a challenge that ultimately cost us customers," he said. "We simply do not have that issue any longer."

With regard to customer care, Smither said ACHPS partners with customers "to figure out the best solution for them. That may require pulling services from several partner companies that are the best in their specific product offering. It's not just, 'Hey, here's a check scanner or an ACH virtual terminal, plug it in, and let's start processing.' We really do offer our clients a customized solution."

A Mercator Advisory Group report projected that within the next five years, 35 percent of payments made online will come in the form of alternative payments, including programs that leverage the ACH.

As alternative payment schemes continue to proliferate, Mercator predicted ACH will continue to show solid growth and transaction volume.

ACHPS expects to process over 1 billion dollars in transactions in 2009; the time may be ripe for ISOs and MLSs to revamp their business models and reap the benefits of offering ACH payment solutions.

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