ACH payments, also known as echeck or electronic fund transfers (EFT), are bank-to-bank payments made through the Automated Clearing House network. Automated Clearing House (ACH) is a system that settles financial transactions between institutions. Traditional banks, merchant account providers, dedicated ACH processing companies, and certain accounting software companies are all capable of handling ACH transactions.
How ACH Payment Processing Works
The Automated Clearing House is an electronic system based in the United States that settles payments between financial organizations as a neutral third party. The ACH was created in the 1970s as an alternative to paper checks. Today, it processes billions of transactions each year and streamlines transactions for thousands of businesses. Almost every traditional bank and major financial institution is a member of the ACH, which is governed by NACHA, The Electronic Payments Association.
Now that you know what an ACH payment is, here is how ACH processing works in four steps:
- The originator, such as your business, initiates the ACH transaction. This can be a one-time payment or part of a series of recurring payments.
- Your bank or processing company, known as the originating depository financial institution (ODFI), aggregates ACH requests from customers and sends them to an ACH operator, either the Federal Reserve or the Electronic Payments Network (EPN). Many businesses use third-party software or service that interfaces between the customer and the bank for a more user-friendly experience.
- The ACH operator then sorts through requests and sends them to their respective receiving depository financial institution (RDFI).
- The RDFI then checks to ensure there are sufficient funds in the ODFI to complete the transaction. If there are sufficient funds, the RDFI will debit them from the account.
Overall, ACH payment processing sounds like a complicated process, but most of it happens behind the scenes. For business owners, the only thing you need to worry about is making sure your merchant services or payment processing account has a mechanism for accepting ACH payments. This can take the form of a check scanner, virtual terminal, online checkout, or web portal.
“ACH, or Automated Clearing House Payments, are ideal for most businesses because they are generally considered to be safe and will save your business time and money with automatic payments. It’s similar to a purchasing card, and many of the benefits and risks are the same. They will save you on administrative fees that would otherwise be applied when processing checks and invoices, as well as leave a paper trail.”
– Jacob Dayan CEO of Finance Pal.
ACH Payment Processing Time
ACH payments are less expensive than processing credit cards, debit cards, or online payments. They are also very secure. However, the big drawback is that they take much longer to process. ACH processing can take two to five business days. This is extremely slow compared to credit card processing, which usually takes one to two business days, with some processors offering instant payments. However, ACH payment processing time can vary depending on the banks involved and any third-party software you use.
Why Do ACH Payments Take So Long?
Unlike credit and debit transactions, ACH payments are not processed in real-time. Instead, ACH payments are processed in batches. The initiating bank gathers all ACH payments and sends them out either at several intervals throughout the day, or just once a day.
Plus remember, the originating and receiving bank aren’t just transferring between each other. Everything is passing through a clearinghouse, which only clears payments once a day (overnight). If any part of this process happens over a weekend or holiday, ACH payments can be delayed even further.
ACH Payment Processing vs Credit Card Processing
Credit card payments have interchange and assessment fees from when the transaction passes between the bank and the issuing card, like Visa or Mastercard. ACH payments are direct bank-to-bank transfers and bypass the credit card networks altogether, so there are no interchange fees.
While debit card payments also draw actual funds from an account like ACH payments do, they still go through the credit card network (e.g., Visa, Mastercard), so they are still prone to interchange and assessment fees. Because ACH payments are strictly bank to bank and don’t touch the credit card network, they are less expensive to process than credit and debit card transactions.
Who ACH Payments Are Right For
Many businesses can benefit from having ACH as a payment option. ACH payments are especially a good idea for subscription- and membership-based businesses, and businesses that need to arrange payment plans.
ACH payments are an ideal payment method for:
- Gyms, spas, and subscription services: Any business model that has contracts or agreements with customers and regular monthly, weekly, or quarterly billing would benefit from using ACH payments to save on processing costs.
- Medical offices: Doctors, dentists, chiropractors, and any medical provider that offers payment plans would benefit from ACH payments.
- Service providers: Software companies, utility providers, or anyone that offers regular ongoing services would benefit from setting up automatic, low-cost ACH payments.
- Employers offering direct deposit: If you have employees, paying them via direct deposit is cheaper than debit payments and often easier than paper checks.
Overall, ACH payments are a good option for any business that wants recurring payments, a cheaper alternative to credit cards, or a secure option for processing payments when the customer is not present.
“I’m a big fan of using ACH payments as opposed to credit cards. I’ve found ACH payments to be fast and reliable. Plus, there are fewer fees involved than using credit cards or PayPal. We typically process ACH payments via QuickBooks. I’ve found this method to be user-friendly and effective. That’s how we send all of our invoices to customers.
“Alternatively, you can use a merchant account provider [to] accept payments via check scanner, virtual terminals (i.e., just type in the customer’s account information) or by setting up a web portal. Typically, it only costs 25 cents to 75 cents per ACH transaction, which is a lot cheaper than credit cards or the fees taken by PayPal.”
– Matthew Ross, co-owner and COO of RIZKNOWS and the Slumber Yard
QuickBooks is a popular option for online payments, including ACH. Businesses can simply send customers an invoice and they can pay via ACH. This is an awesome option if you use QuickBooks to manage your business. However, QuickBooks Payments is a great option for all businesses to consider because they offer free ACH payments. Click here to get started.
ACH Payment Costs
ACH payments are popular largely because they cost a lot less than regular credit and debit transactions. ACH payments are bank-to-bank transfers that are processed through a clearinghouse instead of a credit company like Visa, so ACH payments are not subject to the same interchange fees.
Comparatively, credit cards can cost as much as 2.75% per transaction for in-person sales. If a business manually types in a customer’s credit card number to charge, the processing fees are even higher because there is a higher risk associated with the payment. So, keyed-in payments are generally 3.5% plus 15 cents. Especially for processing payments when the customer is not in front of you, ACH processing can save you a lot of money in fees.
Every ACH processing service is slightly different. Chase Merchant Services, for example, charges $25 per month for 25 ACH payments. Additional ACH collections are just 25 cents each. Additional outgoing ACH payments are just 15 cents. Visit Chase Merchant Services to set up an account.
Pros & Cons of ACH Payment Processing for Small Businesses
Overall, ACH payment processing has more benefits than drawbacks, especially if you need recurring payments or you need to process payments from customers who are not present. The main drawback is that they take longer to process.
Here are the basic pros and cons of ACH payment processing for small businesses:
Pros of Accepting ACH Payments for Small Businesses
- Less expensive: ACH parocessing costs less to process than credit, debit, and online payments.
- Easier to handle than paper checks: ACH payments are digital, so there’s no chance of checks getting lost in the mail.
- Can process remote payments: Customers do not have to be present to process ACH payments, making them a great option for online payments.
- Good for recurring payments: ACH payments are a preferred method for subscriptions, memberships, and automatic payments because they are secure, low-cost, and use actual funds instead of credit.
- Leaves a paper trail: ACH payments are processed directly through banks, so they are easy to trace and mediate if there is a dispute.
- No expiration date: Credit and debit cards expire, which often leads to declined payments and interrupted services.
Cons of Accepting ACH Payments for Small Businesses
- Takes longer to process: Funds from credit card transactions will appear in your account generally within one to two business days, sometimes instantly. ACH payments take two to five business days to process.
- Requires account and routing numbers: Many customers don’t have their account and routing numbers memorized, and don’t always have them on hand. It’s more of a hassle to find and enter those numbers, especially if the alternative is swiping a credit card.
- Only for domestic payments: ACH payments are only for payments within the U.S. So, if you are an ecommerce business that ships overseas, for example, ACH payments are not right for you.
How to Accept ACH Payments in 3 Steps
The exact process for setting up ACH payments will vary depending on your processor.
Partner With a Payment Processor
The first step in accepting ACH payments is finding a services provider to process them. Most banks offer ACH payment processing, as do some merchant service providers, and there are some specialty ACH processing companies. If you are already working with a provider to process credit cards, I recommend checking with them first about ACH payments. It’s always best if you can have everything done through one provider.
Also, consider how you need to collect payments when choosing your provider. Are you sending invoices? Do you need a website set up for customers to enter their own information? Can you enter the information into the processor yourself? Every provider has a different setup, so be sure to ask before signing up.
Create a Customer Contract for Remote & Recurring Payments
If you are setting up recurring payments, make sure to have your customer sign an agreement that explicitly grants you permission to charge their account for those specific amounts. Also known as a payment authorization form, this step is important because it helps protect your business in the event of any chargeback disputes, and it outlines clear expectations on how and when a customer’s account will be billed.
Collect Customer Data
In order to actually process the transaction, you need to collect the customer’s routing and account number. If you’re using Chase, you can set the customer up as a payor, save their information, and set a payment schedule.
ACH Payment Processing Frequently Asked Questions (FAQs)
Most people have either requested or paid ACH payments, but may not be familiar with the technical terminology. If you’ve ever joined a gym, paid a monthly utility like cable or internet, or received regular direct deposits from an employer, you’ve encountered ACH payments. Don’t see your question below? Head over to our Fit Small Business forum to ask an expert.
Here are some FAQs around ACH payments and the terminology:
Difference between wire transfers & ACH payments?
Wire transfers operate on a separate wire network. ACH payments cost very little, but can take several days to process. Wire transfers are basically instant, but cost between $20 and $30 dollars to process. Wire transfers can also be used for domestic or abroad accounts. Wire transfers are generally only used for extremely urgent payments of large amounts.
Difference between ACH & echecks?
ACH and echeck (electronic check) payments are essentially the same things. The two terms are often used interchangeably.
Are ACH deposits safe?
ACH payments are generally safe. Customers are only exposing their bank account information once when they first sign up for the payments. After that, the information is encrypted. ACH payments are also between two U.S. bank accounts, which generally have an identity attached to them, minimizing fraud opportunities. In the worst case scenario, if you do have any issues or fraud, you are protected under federal law.
What is an ACH payment chargeback?
A chargeback is when a customer disputes a charge on their bank account. If a customer files a chargeback with their bank, you are given an opportunity to defend the charge. This is when the payment authorization forms come in handy. Whenever you set up recurring payments, have your customers sign a contract. This helps prevent confusion and chargebacks from arising, and even if they do, you’ll have proof the charge is valid. Without proper proof or documentation, the chargeback will be awarded to the customer and you will lose that money plus a chargeback fee.
Overall, ACH payments are a great option for businesses that regularly deal with memberships, subscriptions, and recurring payments. Payment processing can be unexpectedly expensive for many small businesses, and using ACH payments is one way to help save on processing fees.
The best way to process an ACH is directly through your bank. Using banks cuts out middlemen, which can increase the otherwise affordable ACH processing fees. We recommend Chase Merchant Services. They have great reviews, 24/7 customer support, and next business day funding with a Chase business checking account.