If you are a startup…don’t leave yourself stranded without a processing bank. On a regular basis we are contacted by entrepreneurs with game changing ideas.
They are creative, driven individuals focused on an opportunity. Their “app” will change the world. They contact us because their app relies on low costs payments. Their vision requires customers download and use their app instantaneously and to make payments with little or no friction. Sounds cool and simple.
However, one of the biggest obstacles to launching any new app that includes payments is the silent partner – the processing bank. Some assume that since they have opened a bank account and in some cases deposited millions of dollars of capital that they have a “processing” bank. That is not true and it’s a potentially costly mistake. A mistake that stops momentum and in some cases derails the best of ideas. Their fall back is a Third Party Sender but the required underwriting process becomes another often overlooked consideration.
If you are an individual with a mind-blowing idea for an App that will change the world and it requires low cost payments, start early talking to banks or a Third Party Sender. You will need to understand the banks motivation and limitations.
As you would assume, banks are driven by profits and they want your business. However, they are also regulated.
Here is the problem, regulatory oversight is a harsh master. Regulators not only enforce sound banking rules but they also enforce public policy, create public policy and champion consumer advocacy. Missteps on the part of a bank can be “deadly”. Banks can be taken over or closed. It has happened. So any bank that’s been in business for any length of time becomes like a child that fears height. They will only view the edge of a precipice from a distance. They don’t want to be even in the vicinity of the edge for fear they will fall off.
Don’t despair. You have choices and some banks are more competent at knowing exactly where the edge is and how close they can get. If you want to “own” the payment side of your app you will need to have a processing bank. Start early. Talk to as many banks as you can. You will also need to have a payment platform that communicates with the banking rails. You can license such a platform from ACHeck21.com for a very reasonable price.
The other choice is to use a third party sender. Again, ACHeck21 provides third party sender services but so do other firms such as OpenEdge, Payment Processing Alliance and National Check and Currency.
Here are the tradeoffs:
•Using a processing bank: To find your own processing bank you will be expected to have internal people qualified to underwrite and monitor for risks associated with payments. Not just financial risk but also compliance and reputational risks. You may also be asked to put up reserves or to move all banking to the processing bank. The upside is you will be able to work directly with your customers (no third party) and you and your bank can jointly agree on the minimum requirements for on boarding new customers thereby reducing friction to a minimum.
•Using a Third Party Sender: The Third Party Sender already has a bank. Because of bank regulations they will expect to work direct with your customers in order to “Know the Customer” (KYC) and evaluate risks. They will also have to contract directly with your customer and do underwriting in accordance with their banks expectations. The upside is they are ready to go almost immediately and they have the experience to help you design your process to insure compliance at every level.