Know the ins and outs of an ACH transfer
When it comes to accepting payments you have a variety of options, including cash, credit cards, debit cards, checks and ACH payments. Most of these are self-explanatory, but ACH payments can cause a bit of confusion, so let's take a closer look.
ACH, or automated clearinghouse payments, are similar to paying by check, without the check. ACH transactions allow merchants to receive an electronic payment directly from a customer's checking or saving account. For this reason, ACH payments are also called "eCheck" payments.
Customers can use ACH payments for POS, online, mail order, telephone, and person-to-person payments. If you've ever used a service such as PayPal to pay another person, you've used an ACH transfer.
You might see increased interest in these payments because they are growing in popularity. According to the National Automated Clearinghouse Association, in 2015, ACH transaction volume grew to more than 24 billion electronic payments. That's an increase of 1.3 billion payments or 5.6 percent, over 2014 volume. It also marks the second consecutive year in which ACH payments grew by more than 1 billion.
You've got questions and we've got answers, so let's get to it.
How do ACH payments differ from debit 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 do not use the card networks, they aren't subject to the same fees that you'd pay when processing a credit or debit card transaction.
You pay a percentage for every credit or debit card transaction you process, but with ACH, you might pay a flat fee or fixed percentage per transaction. And when you do pay a percentage on ACH transactions, it's lower than with debit and credit cards.
How much does it cost to process ACH payments?
It depends on the provider you're using to process the payments. You'll either pay a flat fee, typically between $0.25 and $0.75 per transaction, or you could pay a percentage fee ranging from 0.5 percent and 1 percent.
For comparison, consider the standard fee for card transactions can reach 3 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 cheaper 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.
Keep in mind that there could be additional fees involved depending on your payment processor, but this gives you a sense of how ACH compares.
How long before I get paid?
ACH transfers take longer to post than credit or debit card payments. The customer's funds typically arrive within seven days. So, if you're interested in speed alone, ACH transfers are slower than credit or debit, but faster than paper checks.
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 by bank, typically banks 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, the customer's bank account information is encrypted within a secure system.
Environmentally friendly. No checks means less paper. It also reduces ink, fuel to transport checks, and time and labor to handle and deposit checks. If you're looking for ways to reduce your environmental footprint, ACH can help.
Okay, what are the drawbacks?
No payment method is perfect. While ACH does offers certain benefits compared to credit card, debit card and paper check payments, they are not instant or guaranteed. ACH network payments also can be reversed if the customer doesn't have the funds to cover the transaction.
Another issue to consider is that customers might be hesitant to enter their bank and routing number during a transaction, and reaching for their credit or debit card is faster than digging out their checkbook.
What do I need to accept ACH payments?
You can accept ACH payments at the POS, online or via telephone 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.
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.
If you plan to accept ACH payments via telephone or mail, you'll need a virtual terminal to complete the transaction.
Regardless where you sell your products and services—in a store, online, mail order or telephone--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. If you have additional questions about ACH, check out this FAQ.