ACH Payments (aka ACH Transfers): What are They and How Do They Work?

The average consumer may not realize they regularly make and receive payment from the Automated Clearing House network (ACH), but this network was responsible for 26.8 billion payments in 2020.

Electronic transactions have taken over in popularity, and paper checks are starting to feel like a vestige of a bygone era. The ACH network is already in use for most organizations in the form of ACH direct deposit payroll and recurring payments done outside of debit and credit transactions.

In fact, 93% of Americans are paid through direct deposit, meaning this network is a part of the daily lives of most of the country already. Direct deposit combined with other payments and deposits, such as mortgage and utility payments, tuition and recurring subscriptions, made through the ACH network exceed 55 trillion dollars annually.

The terms ACH payments and ACH transfers are interchangeable in meaning and work by moving funds from one bank to another through a centralized system (the Automated Clearing House). This payment method saves time and money for the business and customer, and is ideal for many types of payments, including but not limited to recurring and scheduled transactions.

Related Content: What is a Payment Gateway?

ACH Transactions vs. Credit Cards

Credit card payments are straightforward and well known. The card number, expiration date and CVV security code are required to process a payment or send a refund. The average credit card processing fee varies, but is typically between 1.4-3.5%, excluding other monthly fees to the merchant services provider and other costs of equipment.

Credit and debit card transactions may be costly for merchants but are a mainstay of business operations. Digital wallets linked to credit and debit cards are also gaining traction in small and large businesses. These offer a convenient solution for the customer, with fees similar to those of a typical swiped card transaction.

ACH payments are done directly through a bank account, requiring the name of the bank, type of account (checking or savings), and the routing and account number. ACH transfers usually take one to three business days to complete and can be a lower-cost option for businesses (the average cost of a transaction is about $.29).

These payments are commonly used for direct deposit payroll, recurring bill payments, large business-to-supplier transactions, and payments and refunds to and from the IRS.

ACH Transactions vs. Wire Transfers

Wire transfers may seem similar to ACH payments on the surface but operate with a few key differences. Wire transfers are more costly, with an average charge of $10-$35 per transaction, and operate like an electronic cashier’s check. This means that when sending a wire transfer, the funds are immediately pulled from the sender’s account and cannot usually be reversed.

Processing time is faster with wire transfers and usually cleared within the same business day. Wire transfers also have a level of risk associated with them because once sent, they are difficult to cancel. Wire transfers can be done internationally, which is both a benefit and a risk. Verifying the recipient is imperative to protect against fraud and users should be careful when sending a payment via wire transfer.

Benefits of ACH Payments

Now that we’ve covered the fundamentals of ACH payments, let’s look at some of the benefits of this payment type.

Less expensive than other methods of payment

One of the main benefits of ACH payments is the cost savings for large transactions.  ACH transfers cost 1% of the transaction amount, with a cap of $10, so they’re less expensive than wire transfers or credit card payments.

Great for recurring transactions

Recurring payments are convenient via the use of ACH transfers and are already in use for many consumers for transactions like automatic bill pay. An added benefit for the consumer and businesses using ACH transfers is not being inconvenienced by expiring credit and debit cards, as bank account numbers do not change unless an account is closed or compromised.

While most payments are made either electronically or through ACH transfers, checks are still in use for many. The convenience factor for ACH deposits is a big draw to move away from paper check payments. For a customer using checks, they have to remember to make the payment, write out and mail the check and then wait for the postal service to deliver and payment to be processed. This adds days to the process and leaves a lot of opportunity for human error.

Using an ACH payment means the customer does not need to remember to pay the bill, the processing time is sped up, and the business doesn’t need to physically deposit a check and wait for it to clear.

Safe and secure

ACH is also a safer option for customers since they only need to share their banking information once with the business, reducing the risk of lost or stolen checks or exposing credit card information online. Since ACH payments are not immediate, they are able to be reversed which makes it harder for a bad actor to compromise banking information.

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How to Accept ACH Payments

Many businesses already offer a variety of secure payment options to their customers. Giving customers the ability to choose what suits their payment preferences can encourage purchases and increase business; and companies benefit by being able to accept payment in multiple forms, eliminating a potential barrier to purchase.

If you’re planning to accept ACH payments and enable ACH transactions between your business and your customers, here are some steps you can take to get started.

1. Determine the role of ACH payments in your business

As with any business decision, it’s important to determine how ACH payment adoption fits into your strategy. Before implementing it, be sure to have a clear business case for ACH transactions.

Do you have customers who are requesting the ability to work with ACH direct deposits? Will ACH streamline processes, improve the customer experience, and ensure that you actually get paid? The answers to these questions will help you figure out if there truly is a need for ACH payments, and if so, how to implement them properly.

2. Choose the right payments processor

The next step is to sign up with a payments processor that supports ACH payments. It’s best to choose a provider that supports multiple payment options (i.e., credit cards, ACH, invoicing, etc.) from one solution. Doing so streamlines payment processing, and it also makes reporting and analysis easier, since you’ll be able to see the status of various payments under one platform.

For instance, if you want to monitor and manage settlement and funding status for ACH payments alongside your credit card transactions, you can do so if all your payments are handled through a single solution.

Stax is an all-in-one payment platform that allows for merchants to collect all manner of payments with transparent pricing, and no contracts or hidden fees. Implementing this solution can increase convenience for the customer and lower costs for the merchant.

With Stax, businesses can accept payment through swiped cards, manually keyed payments, text-to-pay, mobile payment integrations – and of course, ACH transfers. Payments are made simple, and the platform also provides data and analytics and financial reporting to better understand sales trends. These capabilities make Stax an affordable and convenient solution to accept all payment types without having to manage multiple payment systems.

Stax charges a monthly membership fee instead of pay by transaction model, making it ideal for high-volume transactions. The monthly membership fees depend on the capabilities a business enables and offer predictability in monthly costs and transparent pricing.

3. Figure out the logistics of ACH transfers in your business

You should also iron the steps you need to take to enable ACH payments. You have a number of options here, including:

  • Using a virtual terminal. You can enter your customers’ account information into your virtual terminal, similar to how you would deal with keyed-in credit card transactions. This option is best used when taking payments over the phone or via mail order.
  • Setting up online payments with an option to pay using ACH. If you’re conducting business online, you can add an option to take payments via ACH and ask customers to enter their account details. The specifics of this process will depend on the payment gateway you’re using, so check with your provider on how to enable ACH payments online.

Also Check Out: Protect Your Customers with Secure Payment Systems

The Bottom Line with ACH Payments

ACH transfers are a safe and convenient way to pay and offer significant cost savings for large transactions and recurring payments – especially when compared to credit cards and wire transfer fees. With many options to choose from, deciding on the payment processing merchant is an important decision for any size business.

Considerations for the type of business, amount, type, and volume of transactions, and customer demographics will determine the best fit. Many providers offer several solutions, and finding the best fit for the business helps to manage costs and provides a streamlined and convenient experience for customers.

As technology advances, savvy consumers expect options to suit their needs. Offering a variety of payment options, including ACH transfers is a safe and convenient way to better serve customers and grow business.

Request a custom quote to see how the Stax can add ACH payments to your business.

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