- 1Texas's MCA law bars setting up a mechanism to automatically debit a recipient's account unless conditions are met.
- 2ACH Processing Company proposes a per-payment Request for Payment.
- 3Funders can keep their products rather than switching to non-sales-based ones.
A Texas-based ACH processor says merchant cash advance funders may not need to overhaul their products to comply with Texas's MCA prohibition law, which went into effect last year.
The statutory hook
The law prohibits "establishing a mechanism for automatically debiting a recipient's account" unless a number of other requirements are met. ACH Processing Company, which looked closely at that phrase, has come up with what it calls a simple solution.
Authorize every payment
"Our approach is to request the payment at each time and capture the authorization at the time of the transaction," said John Innes, the company's president. Rather than capturing authorization at the outset and embedding it in documents for recurring debits, the funder sends a request asking the merchant to authorize each payment. Innes said that because every payment is individually authorized, the security interest component is no longer needed.
The result is no automatic recurring debits. A Request for Payment requires merchants to authorize debits one at a time, whether daily, weekly or monthly depending on the agreed frequency. Innes said this may have been the law's intent, giving merchants control over each debit and encouraging communication between the parties, and that the interaction can be designed to reduce friction.
Versus other proposed fixes
Other options discussed in the industry focus on a different phrase, that the prohibition targets "commercial sales-based financing providers," and suggest offering a non-sales-based product in the state instead. Innes said ACH Processing Company's approach lets a funder keep its product suite as is: "Continue with the same business plan."
our approach is to request the payment at each time and capture the authorization at the time of the transaction
State of play
Seven months after the law took effect, Innes said many funders are still in a holding pattern. His company believes this approach is a straightforward way to turn Texas back on for those that are ready.
Source reporting: deBanked.
