There’s a war on in payments — the card networks (and their fees) vs. everyone else.
In the U.S., payments innovation tends to center around cards. Uber, Square Cash, even, lately, PayPal are card-first. But Dwolla, and now Plaid, are teaming up to improve the ACH experience for builders, merchants and consumers, which could save money and time across the value chain.
Dwolla is a digital payments company that launched back in 2010 and made inroads into banks with its own payment rail, FiSync. Plaid began two years later, providing software to securely connect applications to bank accounts. The two developer-friendly companies announced this week they had joined forces to tokenize bank account and routing numbers (the things at the bottom of your check) to make ACH payments easier and more secure. Plaid handles the account authentication, while Dwolla manages the ACH API.
Plaid offers a set of APIs used by such fintech standouts as Robinhood, Wealthfront, Zenefits, and Venmo, and, in 2016, released an ACH authentication API for Stripe. Dwolla specializes in ACH payments, was known for its low and transparent pricing in its early days, and has become one of the key players in faster payments in the U.S., releasing the first realtime payments system for banks in 2012. Both companies are developer-facing, and largely invisible to consumers; but each power solutions used by millions daily.
Tokenization could help ACH catch up with cards in ease of use and security, but the networks have a powerful interest in pushing customers to card use. Merchants and those paying interchange fees have equally powerful reasons for not wanting to pay network fees, but so far cards are winning the day. (Exhibit A: MCX.) But ACH benefits from ubiquity — every bank, and therefore bank customer, connects to ACH. It is inexpensive, but slow (though speeding up, thanks in part to Dwolla), and moves more than 90% of digital payments in the U.S.– some $41 trillion a year, versus Visa’s approximately $3.25 trillion. Payroll and vendor payments are some of the most prevalent uses of ACH.
ACH may not be foremost in the minds of consumers, and was built for business-to-business transfers rather than consumer use, but with the democratization of payments, its low cost and ubiquity has become increasingly attractive to merchants, who operate on razor-thin margins — Walmart, which gets the most beneficial rates in everything, operates on a 3% margin — and feel the pain of network fees acutely. Interchange fees in Europe are approximately 10% of U.S. rates. Third party processors also extract value from what ultimately reaches merchant bank accounts, and regulation in this area is vague and weak.
Tokenizing ACH and not forcing customers to remember their account or routing numbers to access the ACH network and make a purchase, could make waves in the payments space. But as with anything in payments, many stakeholders are involved, and moving the needle is slow and painful — witness mobile payments in general, which received a fist in the face from Mastercard earlier this month, when the payment giant announced it was rolling out cards with fingerprints readers (a move planned since 2014, in concert with Zwipe).
Fintech companies and banks alike are now in a position to bring consumer-friendly ACH payments to the masses and disrupt some of the most profitable companies in financial services. “Your margin is my opportunity,” Amazon’s Jeff Bezos famously said. Visa and Mastercard’s margins are 50%.1 - Reader Likes This Post