Personal Finance: Using Plaid

Many merchants these days charge as much as 3% if you use a credit card to pay. Often a bank ACH transfer (Automated Clearing House - synonyms are direct deposit, electronic check, electronic funds transfer, and direct debit), if offered, is the only no cost way to pay. 

In the old days, you enter the bank information into the merchants website. The merchant make two micro payments to your bank account (less than a dollar each) and a third transaction to reverse these deposits. After the transactions settle, you enter the value of these two deposits into the merchants website. That lets the merchant know that the account really is yours. The merchant then sets up the link to your account and the payment proceeds including setup for future payments. This whole process takes a few days. 

A company called Plaid then emerged that allows the relationship to be established in a few minutes and the ACH transfer is initiated, including setup for future ACH transfers. Plaid acts as an intermediary between your bank and the merchant. The merchant website sends you to Plaid. Plaid associates your email, phone number, bank account and the merchant you want to pay into a set. The email and phone number is verified. A robust mechanism like you logging into your account is used in Plaid to rapidly establish the account is yours. Once the set is created, future transfers to that merchant can use that set. The merchant never knows your bank details. 

A plaid account is not needed to create the set. However a plaid account is needed to view all sets you have created and manage them. For example you might want to delete a set at a future date. 

Today, most merchants who offer ACH transfers to pay have switched over to using Plaid.