What is an ACH Transfer?
Modern consumers enjoy an ever-evolving menu of options. From what we read to how we communicate to where we shop, consumers not only love options, they demand them.
When it comes to payments, modern options include cash, credit cards, debit cards, traditional checks, and digital wallets, to name just a few. Despite being a fixture in the payments landscape for over 40 years, another payment method, ACH transfers, remain poorly understood. This article addresses some frequently asked questions about ACH transfers and the important role they serve in moving money between organizations and individuals.
What is an ACH transfer and why does it matter to my business?
The ACH (Automated Clearing House) is a network that facilitates payments between financial institutions. ACH transfers are like paying by check, without the physical check. ACH transfers are therefore also known as “eCheck” payments.
ACH transfers are a major pipe through which the money that lubricates our economy flows. ACH transfers are commonly used for online, MOTO (mail order, telephone order), business-to-business (B2B) and direct debit transactions. If you’ve ever done any of the following, you’ve used ACH:
- Used PayPal or another peer-to-peer (P2P) service to pay a friend or family member
- Setup a recurring payment online, i.e. for an electric bill, loan payments, or car insurance premium
- Received a direct deposit from your employer or received a direct government benefit
ACH payments are growing in popularity. According to the National Automated Clearinghouse Association (NACHA), ACH transaction volume grew to more than 25.6 billion transactions in 2016, an increase of 5.3 percent over 2015. In 2016 a remarkable $43.7 trillion changed hands over the ACH network.
Are ACH payments the same as wire transfers?No. Both methods transfer money from one account to another, but there are crucial differences between the two, including in method, speed, cost, and security of the transaction.
ACH transfers take place in batches, are almost entirely automated, and are processed through a central clearinghouse. ACH transfers take place in batch and may take one to several business days to complete. Wire transfers move money from one account to another manually, guided by a bank employee. Wire transfers use the bank as the direct middleman between account holders.
Due primarily to their one-off nature and requirement for manual intervention, wire transfers are much more expensive than ACH, often upwards of $30 per instance. Wire transfers do carry a distinct advantage in that they money is transferred immediately. The flip side of that convenience is that wire transfers cannot be reversed and thus are considered less secure than ACH.
How do ACH payments differ from debit and credit card transactions?
They are similar in that ACH transactions are drawn from a checking or savings account much like debit card transactions, but that’s where the similarities end. Because ACH payments don’t use the card networks, they aren’t subject to the same interchange fees (from networks like Visa or American Express) that you’d pay when processing a credit or debit card transaction.
Businesses pay a percentage for every credit or debit card transaction processed. That fee has a mandatory component (the interchange fee) as well as additional fees to the merchant acquirer that provides additional merchant services. Debit and credit transactions are significantly more convenient vs ACH for a whole range of transaction types. Perhaps the biggest difference is that debit and credit card transactions are “guaranteed funds” whereas ACH payments are not.
How much does it cost to process ACH payments?
It depends on the provider you’re using to process the payments and other factors specific to your business, but the short answer is “not much.” You’ll usually pay a flat fee, typically between $0.25 and $0.75 per transaction, or depending on your processing vendor you may pay a small percentage fee.
For comparison, consider the standard fee for card transactions can exceed three percent plus an additional flat fee per transaction. Depending on the number of transactions you process and the average ticket sale, ACH payments can be much less expensive to process than credit or debit card transactions.
Here’s a quick example. Let’s say your average ticket sale is $60. A credit card transaction fee of 2.3 percent would cost you $1.38 per transaction. If you process 1,000 credit card transactions per year, you’re looking at ~$1,380 in fees annually. This doesn’t include any flat fees you pay per credit card transaction, only the percentage fee.
Using these same figures with an ACH payment transaction fee of $0.35, you’re looking at annual fees of $350 ($0.35 per 1,000 transactions), significantly less than the $1,380 for credit and debit transactions. ACH transfers are not free, but they can save your business a lot of money.
How long before I get paid?
ACH transfers take longer to post than credit or debit card payments, but the gap is closing, and fast. Historically, funds received via ACH would be available within several days. NACHA–The Electronic Payments Association, the non-profit organization that administers the ACH Network–has moved to address the speed limitation of ACH. NACHA is moving toward same-day ACH processing. Beginning in September 2016 and completing the third of three phases in March 2018, ACH will institute three batch processes every day, allowing same-day settlement of funds.
In short, ACH transfers have traditionally been slower than credit or debit, but faster than paper checks. That remains the case, but the landscape is changing quickly. ACH may have been born at a time when the time it took to send money was measured in days, but it’s moving quickly to settlement of funds within hours.
Are there other benefits aside from cost savings?
You bet. In addition to lower transaction fees, ACH benefits include:
More convenient: ACH payments create less administrative hassle for you. There are fewer paper checks to handle, paper invoices and trips to the bank.
Recurring billing: Unlike checks, ACH supports recurring billing.
Preferred funding compared to checks: While payment schedules vary, typically banks and credit unions process electronic payment before they process check payments.
Fewer disputes: Credit and debit card transactions can be disputed for a variety of reasons and they have a higher rate of non-payment compared to ACH payments.
More secure: Paper checks touch multiple hands during processing. They could be lost or left out in an unsecured area. With ACH payments, your bank account information is encrypted within a secure system.
Environmentally friendly: No checks means less paper. Electronic checks issued through ACH therefore reduce the use of ink as well as fuel to transport checks. If your company is looking for ways to reduce your environmental footprint, ACH can help.
What do I need to accept ACH payments?
You can accept ACH payments at the point of sale (POS), online, or via phone or mail. For POS transactions, you’ll need a check scanner to scan the customer check. Even though the customer is paying by check, the scanner converts the check payment into an electronic ACH payment. If you plan to accept ACH payments via telephone or mail, you’ll need a virtual terminal to complete the transaction.
For online payments, you’ll simply have to ensure your current software accepts ACH payments. Unlike credit or debit card payments, with online ACH payments customers will have to enter their checking account and bank routing numbers on the checkout page.
Regardless where you sell your products and services—in a store, online, mail order or phone—ACH payments offer a variety of benefits to both merchants and customers. They cost less to process and are much more convenient than paper checks. Using ACH for certain classes of transactions makes sense for most businesses, so be sure to ask your payments provider how they can help your business.