Mixing Real Estate, Direct Lending, and Crypto Investing

real estate investing

Real estate and lending have always been closely associated. What Aperture, a Los Angeles-based real estate technology and investment company, has done is integrate real estate, lending,and cryptocurrencies to create a new model for funding and investing in real estate. The Aperture Business Model Aperture was formed in the year 2016 by three co-founders: Andrew Jewett, Rudy […]

real estate investing

Real estate and lending have always been closely associated. What Aperture, a Los Angeles-based real estate technology and investment company, has done is integrate real estate, lending,and cryptocurrencies to create a new model for funding and investing in real estate.

The Aperture Business Model

Aperture was formed in the year 2016 by three co-founders: Andrew Jewett, Rudy Cortes, and Matt Miles to monetize the opportunity in real estate through creation of a large national fix and flip investor and lender. The company is focused on two things:

  1. Buying residential properties to renovate and resell (“flips”) and
  2. Making loans to other property investors (“investor loans”).

The company bridges the gap for fix-and-flip investors by offering short-term loans for fix and flip, bridge, rehabilitation, or rental purposes. The main focus are homes that do not qualify for traditional lending. The company provides a quick and convenient way to finance property to borrowers with low interest rates and reasonable up-front fees as compared to its competitors. It also helps home owners to sell their houses at best possible prices. Availability of advanced features like ACH payments, interest-only payments, certainty of close, no minimum credit score requirements and a dedicated team of underwriters are some of the core areas of competencies which differentiates Aperture from its competitors.

As a direct buyer, Aperture looks for affordably priced real estate in need of repairs. The aim is to fix it and resell to end users for profit. The company partners with local contractors to determine the scope of repairs and review the work performed.

The Technology Behind It All

The company has developed its fully integrated proprietary loan origination software (LOS) to handle property management services and reporting. The entire workflow of loans is managed through the software.

Borrowers can apply for property loans through the company’s website, which is interactive and intuitive. They are required to register on the company’s web portal and fill the information in terms of basic borrower data, property facts, and amount of loan requested. The loan process is not completely reliant on technology for the assessment of the proposal. The company will also do a manual review to perform the due diligence on a proposed loan. Aperture strives to close each project loan within a period of five to 10 working days.

The company does not focus on saturated states like California, Nevada, Florida, and Arizona. It will instead concentrate on capturing a higher quantum of deals at a higher percentage rates. This reduces its cost of acquisition per client and will also ensure higher margins.

Aperture is one of the only lenders that is also a property investor. This allows the company to provide additional benefits to borrowers by referring profitable deals to them in which the company has skin in the game. The company targets experienced investors, real estate agents, and contractors wishing to build a portfolio of two to 20 investment properties.

Fundraising Through Property Coin

Aperture is actively lending and is targeting to achieve a portfolio of $180 million in the next 12 months. Head of Loan Operations Dan Goldman helped build another originator to $55 million in monthly originations in just 15 months. The company, to date, is self-funded.

Aperture is also looking to raise $50 million through an ICO. Launching a 100% asset backed coin called Property Coin, they provide investors fractional interest in all real estate purchased by Aperture. The company has also filed a Reg D and Reg S for the purpose of fundraising. Half of the profits from the investments and loans will flow to the coin holders. The token is a way to securitize the real estate assets while giving crypto holders an opportunity to diversify into an asset-backed coin.

Trends and Future Goals

According to the founders, availability of financing to property investors has increased in the last three years. The residential investment market was previously dominated by “mom & pop” investors (who usually own less than 10 houses). On the other hand, attractive market returns and higher margins, as compared to traditional lending, are attracting institutional investors to jump into the market. These trends show that the industry is at a pivot point, and Aperture is at the right place and the right time to grab hold of this opportunity.

The company has generated 50 percent unleveraged returns on its investments. That, along with the management’s experience in real estate and loan origination industries, is a big positive. By incorporating the blockchain, the company has created an investment vehicle that will be attractive to multiple sections of the investor base. Property Coin is a safe bet for those taking their first steps into the crypto space. The coin can also be attractive to institutional players looking for a stable crypto asset in their portfolio with strong cash flows and a tangible underlying asset.

The Competition

The company’s biggest competitor is Lending Home founded in 2013. Finance of America is another player in this segment and was formed in 2017 with the merger of B2R Finance and Jordan Capital Finance offering residential rehab fix-and-flip loans, single rental home loans, and blanket loans. It is also a portfolio company of the private equity giant, Blackstone.

Lima One is another strong contender, offering services to residential real estate investors with a funding period of 15 to 45 days. The company was formed in 2010 and has funded over $200 million with more than 720 residential deals up through 2017.

The Aperture Founding Team

All three founders were part of the senior management team at Wedgewood, one of the largest fix-and-flip investors in the US. Jewett and Miles were co-heads of the capital markets division. Both also worked previously at RBS Securities. Cortes was the head of fix-and-flip operations at Wedgewood and has previous experience at Marcus & Millichap Real Estate Investment Services, Inc.

Aperture combines the best of marketplace lending with traditional real estate and asset-backed cryptocurrency to provide opportunities for investors interested in diversification and building a strong real estate portfolio.

Author:

Written by Heena Dhir.

Merchant Cash Accounts With a Personal Touch

merchant cash accounts

Credit Cards NJ CEO Jennifer Glass recounts how she was “paralyzed by fear” with the process of trying to set up a merchant account for herself. Having consulted so many businesses to do so, she couldn’t make a decision. When a friend told her to “pull the trigger and pick one,” she did bringing about […]

merchant cash accounts

Credit Cards NJ CEO Jennifer Glass recounts how she was “paralyzed by fear” with the process of trying to set up a merchant account for herself. Having consulted so many businesses to do so, she couldn’t make a decision. When a friend told her to “pull the trigger and pick one,” she did bringing about what she says was “one of the worst experiences I’ve ever had.”

Fifteen years later, she serves as CEO of a company designed in part to help people avoid those bad experiences.

In 2003, she accepted a vice president position in marketing. After serving two years in that capacity, she founded Credit Cards NJ, a payments processing and marketing company. She has steered that ship for over 12 now. On a good month, the company sees as much as $3 to $4 million dollars go across its books.

The Philosophy of Credit Cards NJ

If the playing field is going to be leveled with the giants who supply credit cards and other ways of getting credit, modestly sized companies like Credit Cards NJ need a strong philosophy to succeed and grow.

“Most business people are not aware of the potential profits that await them,” Glass said adding that she doesn’t let her sales reps out into the field until they understand the industry at least half as well as she does. They have to prove themselves with proposals. That’s important, she said, knowing the kind of trust that’s on the line.

This trust is necessary for a business that applies what Glass refers to as a cradle-to-grave approach. “Our clients are more than numbers. We’ve been there for clients at weddings and funerals, and when they have their babies,” Glass said. “That’s the kind of relationship we form.”

CCNJ and its Place in the Industry

Relying on mentors and industry veterans, as well as the network she brings her customers into, the company serves hundreds of clients from every business type. Among their customers are companies from the medical, legal, non-profit, and e-commerce fields. They also do business with dry cleaners, restaurants, florists, chocolate shops, gift shops, and car dealers. They even work with escort services.

Glass attributes this wide reach in part to CCNJ’s drive to make it as easy as possible for companies to make their businesses grow. If a business needs working capital, CCNJ has cash advances to work against credit card receivables.

Using ACH, Glass said, “We’ll put money in a bank account for the client, which they can access as needed, but which won’t be based on credit card receivables.” The company can also offer a merchant cash advance or a business cash advance to fund working capital.

The company relies on relationships with SBA lenders to help most businesses. Whether a micro-loan of under $25k is needed or a more typical SBA loan, CCNJ can put its clients in touch with the organizations that can make that happen.

Unlike GE Care Credit, which begins charging interest on day one if a payment is missed, CCNJ’s customers can’t miss a payment because the business gets the money up front, or in installments.

Compared to other merchant cash companies, CCNJ offers a greater breadth of solutions. “The way we look at it, if we can help the client get inventory and working capital right now, we can help them get more people in the door to pay off a cash advance and put revenue on the bottom line more quickly,” Glass said.

The approach seems to be working. When the industry standard churn rate averages 20-27 percent, CCNJ’s mark of less than 3 percent has to proof that the company’s approach is working. One key reason for the company’s ability to retain clients is its focus on where it grows or doesn’t grow in terms of processing volume through monthly trends. For that, Glass attributes her ability to see market trends, even before the government says they will be happening, to working across so many industries. This allows her to see how the portfolio is doing across the board, which tells her what to focus on at a specific time.

The total package gives the CEO the confidence to say, “We’re able to have a solution for 98% of legal industries in the U.S., Canada, Israel, and the UK.”

The company’s pricing varies per program. Merchant cash accounts are purely commission-based while marketing solutions depend on the specifics of the program. Other programs are easier to control. Text messaging is a flat rate based on keywords and subscribers in the database, and web development usually costs a 20% margin before the company hands it off to a developer.

CCNJ Going Forward and the Future of the Industry

The CEO said the prospects for the industry to grow in the next few years are good, as MCAs and ACHs continue to interest small businesses that don’t qualify for a bank loan. She does, however, see regulations coming at some point, reasoning that, like banks, once you get too big or start charging what is perceived as too much, someone is going to start saying “no.”

Glass said that CCNJ’s main goal right now is to grow more ideal clients in order to have pilot programs to see how things are going. “My goal is to show my clients the value we offer them. Our solutions and breadth of knowledge in the industry is one of the big things.” If businesses aren’t taking Level 2 credit card data, they could be leaving as much as a half a percent on the table. CCNJ’s solutions can help clients get that and more.

Announcing CCNJA

To the end of doing whatever it takes to help clients grow, CCNJ has announced the spin-off, CCNJA Marketing.

“Businesses now need an entire marketing campaign, and we place high value on those solutions,” Glass said.

Among the marketing tools at the firm’s disposal will be e-mail blasts, LinkedIn optimization, website development, and other social media tools.

Conclusion

Credit Cards NJ is a company based on the central principles of good business, no stone left unturned, and friendly personal service. They are there for just about any small business owner who needs a payments processing and/or marketing firm, especially those who like the more personal touch and finding a firm they can form a life-long bond with.

Glass does a presentation at the Small Business Development Center every month in Bergen County, NJ. She has been doing these for about two years at the request of the center’s regional director. The presentation covers how to use payments processing to grow a business. She also has a number of informational videos on YouTube.

Authors:

George Popescu
Allen Taylor

APIs That Facilitate the Money Transfers of Online Lenders

Dwolla money transfers

College dropouts either make it in life or end up under a bridge while the MBAs rule the world. Ben Milne has made it, and what’s more, he created a company that has made a spectacular splash in the fintech pool. Dwolla. Once an early money transfer tool, Dwolla has transformed into a SaaS product its […]

Dwolla money transfers

College dropouts either make it in life or end up under a bridge while the MBAs rule the world. Ben Milne has made it, and what’s more, he created a company that has made a spectacular splash in the fintech pool. Dwolla.

Once an early money transfer tool, Dwolla has transformed into a SaaS product its creator could only have dreamed of. Here’s the story from start to finish.

Dwolla as a Consumer-Facing Mobile App

Milne owned a manufacturing company while working his way through college. In 2010, he came upon the concept of Dwolla, a consumer-facing mobile app that allowed users to quickly and easily send and receive money without exchange fees. He built the app himself as far as he could then hired a development team to take it the rest of the way. He figured he could monetize it later. Eighteen months in, however, and he began getting requests from customers to take the Dwolla name off of the product. That’s when he came upon the idea of white labeling the app to meet customer demand.

Banks are the primary target. They access Dwolla through an API that connects to the customer software solution.

“We found that companies were facilitating B2B transactions through the app, making disbursements, and making other transfers,” Milne said. “They wanted their name on it instead of Dwolla’s. So we changed the technology to allow software developers to build into the application.”

To get off the ground, Milne raised $40 million of venture capital funding from top investors such as Union Square Ventures, Founders Group, and Andreessen Horowitz.

How Businesses Use Dwolla to Move Money

One of Dwolla’s top customers is real estate marketplace lender Patch of Land. Real estate project managers, investors, and other professionals use the platform to borrow money from lenders who provide the funding for their deals. Because Patch of Land funds millions of dollars worth of deals each year, they needed a way to move that money from the lender through the platform to the borrower and move returns back to the various investors. Patch of Land uses Dwolla’s APIs to make those money transfers.

“Some customers can use the APIs to authorize automated payments,” Milne said. “There is a range of money being transferred during a certain period of time.”

With a product like Dwolla, companies don’t have to build out their own money transfer platforms, which saves them in development costs. Some of Dwolla’s customers build their own admin panels into the system. Dwolla provides the integration support for those companies. Others want real-time chat rooms. Dwolla can make that happen, too. Through Dwolla’s analytical interface, companies can see how much money is going through their software, how many customers are transferring money, and what’s trending.

Companies using ACH have to negotiate their terms. If you want same day transfers, you’ll pay more. With Dwolla, you get a little piece of text, Milne said, that allows you to designate same-day transfer, same window, and other parameters. The time to market is much faster for the money movement.

So what kind of business can benefit from Dwolla’s transfer access APIs? Virtually any kind of business that makes transfers. That can include backend treasury systems, mobile app developers, governments, big businesses, banks, and more. Even online lenders.

How Dwolla Maintains a Competitive Edge

Dwolla was a pioneer in money transfers. That gives them an edge over most of the competition. Milne said it’s not the cheapest solution on the market, but he’s accustomed to working with well-funded companies trying to improve on execution. At that stage of development, they’re wondering if they should build it themselves, partner with a bank, or work with stand-up technology infrastructure like Dwolla. He’s hoping many of them will choose the latter.

“If you do it yourself,” he said, “you’re looking at a six to 12 month commitment. If you work with us, it’s a couple of weeks. It’s much cheaper in the short-term.”

That’s good news for companies that need to watch their cash flow.

Another selling point for Milne is the track record his company brings to the table. He believes his company can teach businesses the best practices of money transfers based on his seven-year history of doing it. That too can save companies a lot of money in trial-and-error expenses.
Dwolla has a dedicated account management protocol as well as dedicated software support. And they have a financial crime unit that combats fraud and other cybercrimes. Customers are given options in how to manage fraud if it’s found, which can then be extended into their own applications. Dwolla also has a variety of specialty teams to service its customers, which include FIU, BSA, in-house legal, information security, marketing, sales, and more.

Dwolla’s Growth and Expectations

Dwolla’s revenue has grown substantially over time. They have a few more than 100 customers currently using their access APIs while Milne and his team focus on onboarding the next 100. They’ve got billions of dollars flowing through their platform with no charges. Milne said that’s proof his technology works and will continue to work.

Service fees fees begin at $1,500 and go up from there. Rather than charge per transaction, they opted for the flat fee model and offer instant account verification as well as three different account types. Customers choose the features they want and Dwolla negotiates the final price for the customized package.

“This approach allows us to get engineering support if necessary,” Milne said. “We ask if the client wants to build their own or have us help. We want to make sure we approach the problem the right way for every customer.”

When Dwolla was an upstart money transfer app, they were infused with 50,000 small businesses signing on to send money. Many of those are still using the product in some capacity, Milne said. That’s a testament to the company’s staying power.

Where Do We Go From Here?

The Fed is making a lot of functional improvements to payment systems, Milne said. Along with that, ACH is doing a lot to keep the economy going. But new payment systems are coming along and making things faster. Technically, Dwolla looks like a private ACH system.

“Functionally, the idea of sending money to a private company instead of the Fed is a big deal.” He sees technology moving into the future having a compound effect, but he’s not sure how to measure it.

One thing Milne has noticed is that companies want to grow their businesses. Many of them want to move beyond their core competencies. Dwolla wants to be there to grow with them. To do that, Milne and his team need to focus on their core competency—moving money.

“There’s no silver bullet,” he said. “We can’t get distracted. It’s time to execute our mission rigorously.”

Authors:

Allen Taylor

Loan Payment Processing by Debit Card

loan payment debit card

A state-licensed lender can provide installment loans, title loans, lines of credit, flex loan products, and the like, but getting repaid sometimes is a gamble. Rising regulatory hurdles like the infamous “Operation Chokepoint” have made it difficult for service organizations like ACH processors to stay in compliance. What happens when the borrower wants to use […]

loan payment debit card

A state-licensed lender can provide installment loans, title loans, lines of credit, flex loan products, and the like, but getting repaid sometimes is a gamble. Rising regulatory hurdles like the infamous “Operation Chokepoint” have made it difficult for service organizations like ACH processors to stay in compliance. What happens when the borrower wants to use their debit or bank card to pay but state and federal regulations limit its use?

James Celli, CEO/Co-founder, recently spoke about the LoanPaymentPro solution to the problems that can occur in repayment processing.

“The company came from the realization that many acquiring banks will not work with processors,” Celli said, “because there is not an adequate mechanism for processing Visa/MasterCard according to state and federal regulations.”

The company’s primary client is the state-licensed lender. They do not support payday loan lenders or single loans. Founded five years ago, LoanPaymentPro completed a seed round and began marketing two years ago, starting with nation-wide lenders as clients. But 18 states do not allow any sort of consumer lending.

“We have technology that adheres to regulations,” Celli said. “We also have a patent pending. We work with state-by-state licensed installation loan lenders to instantly verify and accept debit cards, bank cards, ACH, and RCC/Check21. The lender has the ability to integrate LoanPaymentPro into their loan management system or to use it as a standalone payment gateway to process any of those payments.”

The flow of money is processed by LoanPaymentPro, settled by settlement or the acquiring bank, and disbursed to the lender in a corporate bank account with standard 2-day processing.

“We offer revolutionary payment acceptance for consumer lenders,” Celli said. “We’re built by lenders for lenders. You can use a bank card, debit card transactions, credit cards, margin-based, or consignment cards to be repaid.”

There are other domestic acquirers that service the industry but they lack the proprietary patent-pending technology. LoanPaymentPro only supports state-licensed, non-payday lenders who are not prohibited by state or federal regulations. They recently launched a product validating accounts and verifying cards, allowing a lender to validate and verify all cardholder and card data. This will reduce fraud and increase payment acceptance. By the end of Q2, they will launch instant bank verification technology that will allow lenders to perform funds confirmation prior to processing a payment.

“I think the payment processing industry is only going to become more difficult with the increase in state and federal regulations,” Celli said., “however, with the current administration and our understanding of its direction, those regulations will loosen. We’d like to have further dialogue and develop relationships with regulators to ensure lenders aren’t prohibited from accepting payments. That will provide an ability for us to service our clients in a more lax compliance environment.”

Authors:

Written by Nicki Jacoby.

How a Lender Can Make an End Run Around ACH

ach payment card

When lenders collect payments from consumer or business accounts via ACH, the network charges 15 percent for declined transactions and 0.5 percent for unauthorized returns. To eliminate ACH charges, FPS came up with the Bolt Virtual Payment Card. The card is an instant issue funding mechanism for sending money enabling lenders to transfer funds via […]

ach payment card

When lenders collect payments from consumer or business accounts via ACH, the network charges 15 percent for declined transactions and 0.5 percent for unauthorized returns. To eliminate ACH charges, FPS came up with the Bolt Virtual Payment Card. The card is an instant issue funding mechanism for sending money enabling lenders to transfer funds via the ACH network into the bank account of their customers. This lessens the chance of a delay in transfer. It also moves funds as promptly as an e-mail and allows lenders to send funds at any time. When money is sent, the lender gets an e-mail with a password that allows them to access the card’s funds.

Flex Payment Solutions (FPS) launched in 2015 to bring innovative solutions to the world of payment processing. Headquartered in a St. Louis suburb of Missouri, the company is an offshoot of PH Financial Services, a family-owned lending business and offers a pair of proprietary solutions for lenders that eliminate the need for monitoring payment requests all the time. Founder Rob Zeitler has served as director of an electronics payment company for 16 years.

FPS’s parent company comprises more than 150 people and see more than $17 million annual revenues. The vision behind FPS was to provide a non-NACHA solution for credit and debit transactions.

With a Bolt Virtual Payment Card, a lender can provide customers with more loans each month. It’s accepted at all MasterCard locations and customers can spend available funds within 20 seconds of transfer. The lender has no ACH fees.

Lenders also have access to an analytics report to help them understand customer spending patterns. Like a real credit card, it has a CVV number on the back. After satisfying customers with its credit product, FPS began developing a product for debit side payments called eCheck 21.

eCheck 21 is a debit solution for lenders with no NACHA and threshold stipulations. It takes customer payment requests, which are converted into digital checks. Further, these checks are submitted to the partner bank to settle payment at the lender’s account. For collecting payment from customers, lenders do not need to get support from the banks they have an account with. It sets up a lender’s account with the Flex Payment’s partnering bank. eCheck 21 is top of the list for most lenders as the price is very affordable as compared to ACH network. Lenders need not worry being dropped from the ACH network or paying fees for threshold returns. Through eCheck 21, a lender can get money faster than a debit card as funds are available the next day. The only constraint attached is that a lender is allowed to debit customer account only three times.

Other FPS services include Flex Account Verification, Flex Customer Identification, debit card processing, and ACH debit processing.

  • Flex Account Verification: Delivers real-time confirmation of account status, information about fund availability and fraud history on an account with 95 percent of total coverage. This solution provides lenders with a data report outlining suggested a course of action for each bank account.
  • Flex Customer Identification: Knowing your customer is necessary to secure business from all types of customers. FCI is 99 percent accurate in identifying customer is and developing a risk profile.
  • Debit card processing: Provides a 100 percent domestic solutions to licensed lenders for Visa/MasterCard debit processing. A lender no longer has to face debit card processing problems of related to distant locations.
  • ACH debit Solutions: Provides licensed lenders with ACH debit solutions. As lenders, inclination towards ACH options is decreasing because of high return rates and NACHA regulations.

The FPS business model is based on volume. The company develops its products in-house and in partnership with banks. Since it is a volume-based model, it includes flexible monthly pricing terms. Lenders get a 90-day trial with no customization for $5 and no setup fee. Once a lender is fully on-board, they receive a customized branding of their card, email, and portal.

The price for the eCheck 21 service is also based on volume, but with a slight difference. For every debit transaction, FPS charges a nominal fees ranging from 50 to 75 cents. The charge for returned checks is no more than $3 compared to $8 to $10 with the ACH network.

In the first quarter of 2017, FPS is looking ahead to launch a digital check product that initiates payment with customers rather than lenders. If regulatory authorities do not change their standpoint on covered loans, FPS will incorporate a system where customers can make payments after signing on the digital check. The expect this to increase the company’s share in mobile P2P payments. FPS is definitely on threshold of creating a new paradigm in the payment solutions world.

Authored with Heena Dhir.

Authors:

Allen Taylor

A Look at the Automated Clearing House for Lenders

A Look at the Automated Clearing House for Lenders

Alternative lenders do not have to be relegated to a dark corner of the financial industry just because of the connotations associated with the word “alternative.” Rather, lenders of all stripes can take advantage of some of the legacy systems that have been in place for years. One of those systems is the Automated Clearing […]

A Look at the Automated Clearing House for Lenders

Alternative lenders do not have to be relegated to a dark corner of the financial industry just because of the connotations associated with the word “alternative.” Rather, lenders of all stripes can take advantage of some of the legacy systems that have been in place for years. One of those systems is the Automated Clearing House or ACH.

ACH has, since 1974, provided a way for financial institutions to deliver and receive payments electronically in the U.S. The system is governed by the National Automated Clearing House Association (NACHA), a non-governmental organization with two missions. NACHA’s first mission is to oversee the ACH process, which consists of three components: 1) operating rules, 2) enforcement and risk management, and 3) ACH network development; the second mission is to serve as an industry trade association.

How ACH Works for the Benefit of Lenders

ACH allows lenders a way to receive payments quicker and more efficiently. Before electronic payment systems, payments were made by check, money order, or other types of paper transactions, including cash. With the advent of credit cards, payment and money transfers could be made more directly, more quickly, and more efficiently. Types of transactions that can be made through ACH include credit card payments, debit card transactions, payroll direct deposits, government benefits, bill payments, online banking payments, money transfers, person-to-person (P2P) transactions, business-to-business payments, e-commerce, charitable donations, loan repayments, and more.

The process begins with an originator. It can be an individual, a business, government agency, a non-profit organization, or any legal entity. The originator electronically enters a direct deposit or payment transaction into the network using a routing number similar to those used for check processing. Each transaction is received by an Originating Depository Financial Institution (ODFI).

ODFIs must register with NACHA and follow all NACHA rules to remain in good standing. Once transactions have been received by various originators, each ODFI transmits those payment transactions to an ACH Operator in batches at predetermined intervals. Currently, there are only two ACH Operators, The Federal Reserve, or FedACH, and Electronic Payments Network (EPN), also known as The Clearing House. These two institutions serve as clearing houses for all ACH transactions.

The ACH Operator then sends each transaction to the Receiving Depository Financial Institution (RDFI). The RDFI debits or credits the payment receiver’s account accordingly. According to NACHA rules, credit transactions settle within two business days while debit transactions settle within one business day. NACH has even modified its rules to allow for same-day processing.

As a lending institution, you can have your clients set up a loan account and use ACH to receive loan repayments automatically by withdrawal or through a manual system where the debtor makes periodic payments to you through ACH processing. Through this system, you’ll receive your payments more quickly without risk of paper checks bouncing or taking days or weeks to arrive in the mail before you can cash them. The system is also less expensive than check processing since multiple transactions can be processed simultaneously through electronic means.

How Lenders Can Use ACH for Payment Processing

When it comes to ACH processing, lenders can use electronic payments both for borrower repayment and for sending approved loan monies to borrowers. Before you underwrite new loans, however, make sure you verify borrower bank accounts and perform some due diligence on borrowers who want to use ACH for sending and receiving money.

ACH transaction fees vary from one financial institution to another. Typically, they are either a percentage of the transaction or a flat fee. However, some entities allow free payment transfers under certain conditions. For instance, PayPal allows its users to withdraw from their accounts and send money directly to their own banks at no charge. ACH can be used for such transactions. If your lending institution wants to use free payment transfers as a selling point to entice borrowers into doing business with you, you can use ACH.

Another reason to use ACH is for account verification ( Once you receive a borrower’s application with their bank account information, you can send a real-time verification check electronically to that financial institution or use a bank account verification tool like IBV or databases to verify the account exists. This can save you a lot of time and expense in collections if you approve a loan and find out later the borrower has no bank account.

Even with ACH transfers, there is always a risk that a borrower’s loan repayments will return unprocessed. You cannot predict whether an individual has the necessary funds to make a payment. Therefore, a certain amount of risk is involved. You can diminish that risk by collecting transaction history on a potential borrower and underwriting a loan based on what you find. If a borrower has a high number of ACH transactions that have not processed due to insufficient funds, then you can adjust their payback terms or deny the application. Microbilt has a risk verification service you can use to make those judgments (

As mentioned before, if you wish to set up automatic debits for borrowers where loan repayments are made through ACH at pre-established intervals, then you can approve loans based on a pre-arranged electronic repayment schedule.

In recent years, NACHA has made more accommodations for money transfers and payments outside of the U.S. However, there are some tricky rules and language involved with these processes. In terms of ACH, there is no official ACH process for foreign transactions—that is, financial transactions that take place between entities where neither party is in the U.S. That doesn’t mean money transfers can’t take place, but NACHA does not have the authority to oversee or regulate such transactions.

Where NACHA has made headway is in transfers and payments between entities where one party to the transaction is in the U.S. This process requires a Gateway. The Gateway is the financial institution or ACH Operator that processes electronic transactions into or out of the U.S. to or from other countries.

Because of the heightened awareness and sensitivity to international drug and human trafficking, terrorism, financial crime syndicates, tax evasion, offshoring, and other illegal activities, the Office of Foreign Assets Control (OFAC) has worked with NACHA to see that the latter includes in its policies rules that ensure ACH transactions do not run afoul of U.S. law. Therefore, this should be a concern for lenders who loan money to foreign entities and individuals or who are considering payment processing across borders.

One positive for lenders is that ACH transactions involving residents of U.S. military installations, embassies, and other U.S. real estate assets in foreign countries are considered domestic transactions and therefore do not need to follow NACHA International ACH Transactions (IAT) rules.

What is the Dispute Process for ACH Transactions?

Lending institutions can go to great lengths to minimize risk, perform due diligence on borrowers, risk verify bank accounts, and check transaction history only to be faced with disputes from borrowers who claim that an ACH transaction was unauthorized. You might even face a situation where a loan you process through ACH was sent to the wrong bank account, unauthorized due to some type of fraud, or simply processed inaccurately. NACHA does have a dispute process.

Regarding disputes, there is good news and bad news. The good news is if you want to dispute a transaction, NACHA rules are in your favor. If a borrower disputes a transaction, NACHA rules are in the borrower’s favor. That doesn’t mean that all disputes are valid and the disputer automatically gets a free ride. It does mean that the rules protect the consumer’s interest.

According to NACHA rules, an RDFI must honor a stop payment. RDFIs are in no position to make judgments concerning valid or invalid transactions. A transaction made is a transaction authorized, and that includes disputes. It also includes automatic debits. If you set up an automatic loan repayment schedule by ACH and the borrower disputes that, then those transactions will not take place. You still have recourse under the law to pursue repayment of the loan through other means, and that includes reporting the borrower to the appropriate credit agencies. So, while the benefit of the doubt is given to the disputer in ACH transactions, the law is still on the side of the part with the burden of proof. Keep in mind that once a transaction is out of the ACH system, then NACHA is no longer involved.

In other words, the ACH dispute resolution process can work for lenders or against lenders depending on which side of the dispute they are sitting on. Keep your attorney in your back pocket.

A Disruptive Alternative to ACH 

 Disruption in the financial industry is beset by one constant reality – intermediaries are no longer necessary. Peer-to-peer (P2P) networks have impacted almost every corner of the financial world, from real estate transactions to banking. Investors can manage their own portfolios, borrowers can turn to the crowd, travelers can exchange currency electronically, and friends and family can send money direct from one bank account to another through their smartphones. This disruption has hit the lending industry just as well.

Venmo is a mobile app that allows one party to send money to another party without involving multiple intermediaries. Transfers use the ACH system and therefore are subject to NACHA rules, however, Venmo account holders are not required to receive the money you send them. Practically speaking, even if you authorize a loan and you send borrowed money to a Venmo account holder, if the Venmo account holder does not authorize receipt of that money, it hasn’t been borrowed. This is another layer of protection, both for the lender and the borrower.

Another benefit to using Venmo is that a Venmo account must be tied to a bank account. During the loan application process, you can have potential borrowers set up a Venmo account and make it a precondition to transfer money through the app. All transactions are free as long as money is funded through a bank account or money is transferred from a Venmo account balance.

clearXchange is another P2P money transfer app that can be used for borrowing and lending money. The benefit to using clearXchange is that it is owned by fraud prevention and risk management company Early Warning and used by the nation’s largest banks. Network banks include Capital One, Bank of America, and Wells Fargo. It is also web-based, which means that borrowers do not need to use their smartphones to conduct transactions.

Such technology succeeds because developers have placed a high priority on security and data encryption technology. Lenders and borrower can be confident that transactions are secure and payments made quickly and safely.

The best way to stay current in your lending practices is to utilize the technology that makes payments and money transfers easy and more affordable. ACH wins on both points. The future of lending and borrower repayment is electronic, and it’s only going to get better.

Author:

Allen Taylor

 

 

 

ACH for lenders, what it is and how to use it

ACH for lenders, what it is and how to use it

A Look at the Automated Clearing House for Lenders Alternative lenders do not have to be relegated to a dark corner of the financial industry just because of the connotations associated with the word “alternative.” Rather, lenders of all stripes can take advantage of some of the legacy systems that have been in place for […]

ACH for lenders, what it is and how to use it

A Look at the Automated Clearing House for Lenders

Alternative lenders do not have to be relegated to a dark corner of the financial industry just because of the connotations associated with the word “alternative.” Rather, lenders of all stripes can take advantage of some of the legacy systems that have been in place for years. One of those systems is the Automated Clearing House, or ACH.

ACH has, since 1974, provided a way for financial institutions to deliver and receive payments electronically in the U.S. The system is governed by the National Automated Clearing House Association (NACHA), a non-governmental organization with two missions. NACHA’s first mission is to oversee the ACH process, which consists of three components: 1) operating rules, 2) enforcement and risk management, and 3) ACH network development; the second mission is to serve as an industry trade association.

How ACH Works for the Benefit of Lenders

ACH allows lenders a way to receive payments quicker and more efficiently. Before electronic payment systems, payments were made by check, money order, or other types of paper transactions, including cash. With the advent of credit cards, payment and money transfers could be made more directly, more quickly, and more efficiently. Types of transactions that can be made through ACH include credit card payments, debit card transactions, payroll direct deposits, government benefits, bill payments, online banking payments, money transfers, person-to-person (P2P) transactions, business-to-business payments, e-commerce, charitable donations, loan repayments, and more.

The process begins with an originator. It can be an individual, a business, government agency, a non-profit organization, or any legal entity. The originator electronically enters a direct deposit or payment transaction into the network using a routing number similar to those used for check processing. Each transaction is received by an Originating Depository Financial Institution (ODFI).

ODFIs must register with NACHA and follow all NACHA rules to remain in good standing. Once transactions have been received by various originators, each ODFI transmits those payment transactions to an ACH Operator in batches at predetermined intervals. Currently, there are only two ACH Operators, The Federal Reserve, or FedACH, and Electronic Payments Network (EPN), also known as The Clearing House. These two institutions serve as clearing houses for all ACH transactions.

The ACH Operator then sends each transaction to the Receiving Depository Financial Institution (RDFI). The RDFI debits or credits the payment receiver’s account accordingly. According to NACHA rules, credit transactions settle within two business days while debit transactions settle within one business day. NACH has even modified its rules to allow for same-day processing.

As a lending institution, you can have your clients set up a loan account and use ACH to receive loan repayments automatically by withdrawal or through a manual system where the debtor makes periodic payments to you through ACH processing. Through this system, you’ll receive your payments more quickly without risk of paper checks bouncing or taking days or weeks to arrive in the mail before you can cash them. The system is also less expensive than check processing since multiple transactions can be processed simultaneously through electronic means.

How Lenders Can Use ACH for Payment Processing

When it comes to ACH processing, lenders can use electronic payments both for borrower repayment and for sending approved loan monies to borrowers. Before you underwrite new loans, however, make sure you verify borrower bank accounts and perform some due diligence on borrowers who want to use ACH for sending and receiving money.

ACH transaction fees vary from one financial institution to another. Typically, they are either a percentage of the transaction or a flat fee. However, some entities allow free payment transfers under certain conditions. For instance, PayPal allows its users to withdraw from their accounts and send money directly to their own banks at no charge. ACH can be used for such transactions. If your lending institution wants to use free payment transfers as a selling point to entice borrowers into doing business with you, you can use ACH.

Another reason to use ACH is for account verification ( Once you receive a borrower’s application with their bank account information, you can send a real-time verification check electronically to that financial institution or use a bank account verification tool like IBV or databases to verify the account exists. This can save you a lot of time and expense in collections if you approve a loan and find out later the borrower has no bank account.

Even with ACH transfers, there is always a risk that a borrower’s loan repayments will return unprocessed. You cannot predict whether an individual has the necessary funds to make a payment. Therefore, a certain amount of risk is involved. You can diminish that risk by collecting transaction history on a potential borrower and underwriting a loan based on what you find. If a borrower has a high number of ACH transactions that have not processed due to insufficient funds, then you can adjust their payback terms or deny the application. Microbilt has a risk verification service you can use to make those judgments .

As mentioned before, if you wish to set up automatic debits for borrowers where loan repayments are made through ACH at pre-established intervals, then you can approve loans based on a pre-arranged electronic repayment schedule.

In recent years, NACHA has made more accommodations for money transfers and payments outside of the U.S. However, there are some tricky rules and language involved with these processes. In terms of ACH, there is no official ACH process for foreign transactions—that is, financial transactions that take place between entities where neither party is in the U.S. That doesn’t mean money transfers can’t take place, but NACHA does not have the authority to oversee or regulate such transactions.

Where NACHA has made headway is in transfers and payments between entities where one party to the transaction is in the U.S. This process requires a Gateway. The Gateway is the financial institution or ACH Operator that processes electronic transactions into or out of the U.S. to or from other countries.

Because of the heightened awareness and sensitivity to international drug and human trafficking, terrorism, financial crime syndicates, tax evasion, offshoring, and other illegal activities, the Office of Foreign Assets Control (OFAC) has worked with NACHA to see that the latter includes in its policies rules that ensure ACH transactions do not run afoul of U.S. law. Therefore, this should be a concern for lenders who loan money to foreign entities and individuals or who are considering payment processing across borders.

One positive for lenders is that ACH transactions involving residents of U.S. military installations, embassies, and other U.S. real estate assets in foreign countries are considered domestic transactions and therefore do not need to follow NACHA International ACH Transactions (IAT) rules.

What is the Dispute Process for ACH Transactions?

Lending institutions can go to great lengths to minimize risk, perform due diligence on borrowers, risk verify bank accounts, and check transaction history only to be faced with disputes from borrowers who claim that an ACH transaction was unauthorized. You might even face a situation where a loan you process through ACH was sent to the wrong bank account, unauthorized due to some type of fraud, or simply processed inaccurately. NACHA does have a dispute process.

Regarding disputes, there is good news and bad news. The good news is if you want to dispute a transaction, NACHA rules are in your favor. If a borrower disputes a transaction, NACHA rules are in the borrower’s favor. That doesn’t mean that all disputes are valid and the disputer automatically gets a free ride. It does mean that disputes are an honor to protect the consumer’s interest.

According to NACHA rules, an RDFI must honor a stop payment. RDFIs are in no position to make judgments concerning valid or invalid transactions. A transaction made is a transaction authorized, and that includes disputes. It also includes automatic debits. If you set up an automatic loan repayment schedule by ACH and the borrower disputes that, then those transactions will not take place. You still have recourse under the law to pursue repayment of the loan through other means, and that includes reporting the borrower to the appropriate credit agencies. So, while the benefit of the doubt is given to the disputer in ACH transactions, the law is still on the side of the part with the burden of proof. Keep in mind that once a transaction is out of the ACH system, then NACHA is no longer involved.

In other words, the ACH dispute resolution process can work for lenders or against lenders depending on which side of the dispute they are sitting on. Keep your attorney in your back pocket.

A Disruptive Alternative to ACH 

Disruption in the financial industry is beset by one constant reality – intermediaries are no longer necessary. Peer-to-peer (P2P) networks have impacted almost every corner of the financial world, from real estate transactions to banking. Investors can manage their own portfolios, borrowers can turn to the crowd, travelers can exchange currency electronically, and friends and family can send money direct from one bank account to another through their smartphones. This disruption has hit the lending industry just as well.

Venmo is a mobile app that allows one party to send money to another party without involving multiple intermediaries. Transfers use the ACH system and therefore are subject to NACHA rules, however, Venmo account holders are not required to receive the money you send them. Practically speaking, even if you authorize a loan and you send borrowed money to a Venmo account holder, if the Venmo account holder does not authorize receipt of that money, it hasn’t been borrowed. This is another layer of protection, both for the lender and the borrower.

Another benefit to using Venmo is that a Venmo account must be tied to a bank account. During the loan application process, you can have potential borrowers set up a Venmo account and make it a precondition to transfer money through the app. All transactions are free as long as money is funded through a bank account or money is transferred from a Venmo account balance.

clearXchange is another P2P money transfer app that can be used for borrowing and lending money. The benefit to using clearXchange is that it is owned by fraud prevention and risk management company Early Warning and used by the nation’s largest banks. Network banks include Capital One, Bank of America, and Wells Fargo. It is also web-based, which means that borrowers do not need to use their smartphones to conduct transactions.

Such technology succeeds because developers have placed a high priority on security and data encryption technology. Lenders and borrower can be confident that transactions are secure and payments made quickly and safely.

The best way to stay current in your lending practices is to utilize the technology that makes payments and money transfers easy and more affordable. ACH wins on both points. The future of lending and borrower repayment is electronic, and it’s only going to get better.

Allen Taylor