Dive Brief:

• Square, a payments company, is partnering with Plaid, a financial data aggregator, to provide Automated Clearing House (ACH) payment options to merchants. ACH payments are debited directly from bank accounts and are lower cost for merchants compared to credit cards. 

• Plaid's services, which link bank accounts to payment portals, will allow merchants in the U.S. to easily process ACH debits, without Square or the merchant needing to hold sensitive customer bank information. The two companies have worked together in the past on other Square services.

• With the ACH payments offering, Square plans to target larger businesses than the typical micro-merchants it has historically courted while also capturing more middle-market participation as its existing Square merchant customers grow. "Our goal here is to build a system that scales with the business," Square CEO Jack Dorsey said during the Q1 earnings call of Square earlier this month.

Dive Insight:

Square is partnering with Plaid to streamline ACH payments to cut transaction costs for retailers, or other large businesses, particularly those with "high ticket items where card processing fees can be cost prohibitive," the company wrote in the press release. The partnership with Plaid will allow customers to link their bank accounts to Square's payment options. The payor's details will be secured by Plaid and allow customers to connect to their bank accounts for ACH payments.

The ACH payment can be initiated between two businesses or consumer to business for purchases and payments done online or on the web. Additionally, merchants can either use Square's payment structure as is, or they can develop their own through Square Web SDK.

"ACH payment acceptance has been a long-standing ask from sellers," a Square spokesperson told Payments Dive in an email. "Square sees this as an opportunity to speak to businesses of all sizes looking for cost savings on large ticket items."

The company has been testing the beta model of ACH payments for quite some time; the average ACH transaction on Square invoices was $3,500 during Q1 of the testing. Additionally, the company found 28% of larger businesses are looking to accommodate a larger volume of transactions as sales increase, while 25% were looking for ways to lower overhead, according to a survey cited by Square. Plaid and Square declined to name the businesses participating in the beta program. 

On average, Mastercard charges 1.55% to 2.6% of credit card transactions, compared to Visa's 1.43% to 2.4% and Discover's 1.56% to 2.3% transaction fee, according to Square. These costs can add up for merchants who deal with big-ticket transactions. Square's ACH processing fee is 1% with a minimum of $1 per transaction which includes Plaid's fee as well, a Plaid spokesperson told Payments Dive. 

The company is "seeing real traction" from "the mid-market sellers" since 2020 and aims to expand its services to better serve them, Square CFO Amrita Ahuja said during the first-quarter earnings call.

Annualized gross payment volume (GPV) for mid-market merchants [$125k-$500k GPV annually] using Square services grew to $9.1 billion in Q1 2021 from $7.1 billion in Q1 2020. GPV for small merchants [less than $125k GPV annually] remained almost the same at $11.6 billion in Q1 2021 compared to $11.3 billion in Q1 2020, according to its quarterly earnings report.

"This partnership is available only in the U.S. right now, but we, Plaid and Square, will continue to evaluate new areas and geographies to extend the partnership in the coming months," a Plaid spokesperson said.

Plaid, which links a consumer's banking account to different payment methods, is experiencing increased demand for account-to-account transfers as customers seek to avoid steep card costs and demand faster payments.

"From our point of view, we’re seeing a shift take place that will make account-to-account payments the norm in the near future," the Plaid spokesperson said. "Paying with plastic or typing in your card details doesn't make sense in a world where everyone has a smartphone with their bank account app on it."

In March, Plaid announced the launch of a payroll verification product meant to make it easier for people to prove their income to secure loans, mortgages and leases. The San Francisco-based company is expanding its services after its $5.3 billion acquisition by Visa fell through due to a Department of Justice antitrust investigation.