Third-Party Sender or Third-Party Service Provider: Key Differences for Better Payment Processing

One of the critical drivers for fintechs has been the fast-growing amounts of ACH payments, which is why more and more companies are eyeing these as potential growth opportunities. For fintech companies, staying on top of the latest regulations is essential. This means identifying the difference between a third-party sender (TPS) and a third-party service provider (TPSP).

With a payment intermediary involved in the transaction, it can take time to identify who handles what responsibilities. As new payment methods continue to emerge, it also takes time to list all the potential business cases and accounts for every role in-depth.

Moving money is a necessary part of many businesses. Knowing the basics will make it easier to manage your account.

Note Sila is a TPSP.

The Difference Between A Third-Party Service Provider and A Third-Party Sender 

There is a difference between a third-party sender and a third-party service provider.

From their names, they both involve an outside organization doing something, but they're not the same. The critical difference between the two is their tasks and responsibilities. After all, they are different entities under the Nacha Operating Rules and Guidelines. So if you're running a company that needs to transfer funds, it would be good to understand what separates them.

This post will briefly cover the following third-party payment flows and their consequences and provide examples of both TPS and TPSP. You'll quickly see why these are so beneficial to various companies. Let's examine the difference between third-party senders and service providers.

Third-Party Sender Vs. Third-Party Service Provider

While they may share some similarities, there are vital differences between third-party senders and third-party service providers which set them apart. A third-party sender is a party that facilitates transactions, meaning funds will move through their account in the funds transfer process. Third-party senders are used to handling transaction initiations on a company or individual's behalf.

On the other hand, a third-party service provider will not automatically move money and will instead offer services that provide convenient ways to pay bills, make an ACH transfer, and other financial services.

Third-Party Sender

A third-party sender is an organization that is not the originator and has authorized an Originating Depository Financial Institution (ODFI) or a third-party service provider. 

This authorization allows a third party to transmit an entry to the receiver's account at the Receiving Depository Financial Institution (RDFI). Third-party senders are entities that originate ACH entries on behalf of other business organizations, and they are defined explicitly in the ACH Rules.

Nested Third-Party Sender

A nested TPS is defined as a third-party sender which operates under an agreement with another third-party sender to act on behalf of the originator and is not contracted directly with the originating depository financial institution.

A TPS helps with transactions (flow of funds) by moving money straight to a bank account. This means that a third-party processor (TPP), like a payroll service, will deliver the payment on behalf of their client, who is the originator, by using a debit from their account and not the originator's bank account.

Here's one example of how a third-party sender works:

  1. A company, Treats and Sweets, contracts an accounting and invoicing service, Accounting 4 U, to send out their invoices.
  2. Treats and Sweets shares their payment information with Accounting 4 U.
  3. They received an invoice from a company called Chocolate Cheers.
  4. Accounting 4 U initiates a debit from Treats and Sweets' account to pay the invoice, which is then deposited to their account.
  5. Once the funds clear, Accounting 4 U will pay the invoice on Treats and Sweets' behalf.

One way third-party senders intermediates funds is by requiring an account balance from their customers that can be debited.

The second flow of third-party senders could look like this:

  1. Treats and Sweets send a lump sum (or agreed installment deposits) to Accounting 4 U to be kept on balance.
  2. Treats and Sweets can take advantage of advanced accounting (accounts payable) from Accounting 4 U that don't involve wait periods because the funds are already on the books at Accounting 4 U.

One drawback to this second example is that Treats and Sweets need to manage funds at two different financial institutions, and they will no longer be able to benefit from the interest they would receive from having their funds on deposit in their own account. It will now go to Accounting 4 U.

Third-Party Service Provider

A third-party service provider is a company that offers services to users of the Automated Clearing House network. Essentially, TPSPs are responsible for the transfer of funds in an ACH process. Fintech enterprises offering modern payment services, digital wallets, and other financial solutions are great examples of this.

Let's look at the flow of funds with a third-party service provider by using Sila as an example. Sila, as a third-party service provider, integrates with the bank account of its customer. Using our previous model, Sila is connected to Treats and Sweet's bank account at CookieBank. Treats and Sweets don't need to worry about how to pay its Chocolate Cheers invoice because it can do so directly through CookieBank. This way, they can skip routing through a bank account before payment. Sila simply facilitates the transaction, making it easier for users.

Third-Party Senders and Third-Party Service Providers Examples

As we've discussed, a third-party sender is involved in the flow of money. 

Some examples of third-party senders include:

  • payroll processing services
  • bill payment services

Third-party service providers often act as third-party payment providers. They're also generally known as payment aggregators or credit card processing companies. These are programs that can be installed on practically any device, allowing vendors to accept credit card payments and other cashless payments without the need to set up a merchant account or have funds flow through a third-party sender.

Sila is a third-party service provider that connects with our client's bank accounts to automate the movement of money. Sila does not hold money for any period during transactions.

Benefits of Using Third-Party Service Providers

TPSP business entities offer merchants simple payment flows and the ability to transfer funds more efficiently. With a robust suite of tools, they aim to make your life easier. 

To simplify payment processing, you can use an ACH payment API such as Sila, which will allow you to process payments without the hassle of starting or maintaining your own merchant account.

Working with a third-party service provider can be an excellent way to keep the business running smoothly and automate processes such as bank transactions. It's imperative to make an intelligent choice, so the output has no significant errors that can lead to financial losses or overcomplicate your situation. Sila provides straightforward and efficient communications and offers more integrations for less frustration with manual regulation. This means you can dedicate more time to understanding your customers' needs and developing ways to serve them.‍

Potential Drawbacks of Third-Party Senders and Third-Party Service Providers

There are several benefits to using a TPS and TPSP. However, there are also some potential drawbacks, as follows:

Third-party senders

  • Delays during customer onboarding: Manual Know Your Customer (KYC) and Know Your Business (KYB) processes can lead to customer friction.
  • Expensive: Often, TPS must charge more because they are exposed to higher risk
  • Slower processing times: TPS act as a intermediary between the ODFI and the RDFI, where the funds must go into the TPS account before being released to the payee. This leads to slower processing times.

As the sender of electronic payment can come with substantial risk, TPS often offers very little protection via risk management and imposes constraints or other rules.

Third-party service providers

  • Compliance: KYC and other mandatory regulatory procedures must be followed; compliance must be integrated into an API to ensure businesses can handle processing delays.
  • Integration: Fintech developers will need to write the code for integrations to be competitive. However, this issue can easily be solved with a solution like Sila, where the API provides the integration you need to offer your customers the products and services they need.

Final Note 

When you offer digital payments for your business, you also need a reliable way to process those payments. A third-party payment processor can make the process a breeze and potentially reduce fees, set-up costs, and compliance hassles. 

Sila offers fintech companies the use of our cutting-edge technology with our enterprise clients for seamless, more efficient, and transparent banking. Businesses can link bank accounts and transfer money quickly using the Sila API.