What is ACH?
The Automated Clearing House (ACH) is a secure network that connects all banks and financial institutions in the United States. It enables electronic funds transfer (EFT) for direct deposits as well as debit and credit card payments. It was originally developed to allow California banks to collaborate with the Federal Reserve to facilitate paperless transactions.
This procedure accelerated the completion of transactions. With the passage of time and the rise in transaction volume, additional financial institutions joined the network, and regional organizations were created. NACHA was formed to coordinate regional initiatives and connect them into a countrywide network.
ACH payments are an increasingly appealing choice for businesses to collect payments since they are inexpensive, convenient, secure, and straightforward. In reality, over the years, ACH has evolved to become one of the largest and most efficient systems in the financial industry, handling more than $72 trillion in transactions every year.
This is why we're confident you've heard of this payment option. However, as a business owner, you may still have questions, such as how ACH payments operate. What are their advantages and disadvantages? How do they stack up against other payment options? And, most importantly, are they appropriate for your company? This post will walk you through the solutions.
What exactly does an ACH payment mean?
ACH is an acronym for Automated Clearing House, a financial network in the United States used for electronic payments and money transfers. ACH payments are a means of moving funds directly from one bank account to another using the ACH network. This implies that no credit cards, cash, cheques, or wire transfers are used in the transaction.
Although ACH payments may be used to make one-time payments, they are most typically utilized for recurring transactions. As a consumer, you may use ACH bank transfers if you have recurring payments for your mortgage or gym membership, as well as digital invoicing and estimates, which were taken from your bank account on a regular basis. As a business owner, you may use ACH payments if you have automated payments set up for your employees on a weekly or monthly basis.
The ACH network is still expanding
As a business owner, you should be aware that ACH payments are becoming extremely prevalent. According to Nacha, more than 2 billion internet transactions will be initiated in 2020. This is a 15.2 percent gain over 2019. The increase through 2021 was far more remarkable: ACH processed over $72.6 trillion in bank transactions last year!
Even if recent sorts of pandemic-related government aid have stopped, the ACH Network witnessed overall growth in the first quarter of 2022. Business-to-business (B2B) payments and an increase in the Same Day ACH amount limit fueled growth in the first quarter. B2B payments grew by 15.5 percent in the first quarter of 2021, with over 1.4 billion ACH B2B payments processed. This is a 35.5 percent increase over the first quarter of 2020 when COVID-19 shuttered several businesses.
Overall traffic on the ACH Network was 7.3 billion payments, up 2.2 percent from the previous year, and moved $18.5 trillion, up 7.1 percent. This expansion happened despite the lack of pandemic-related assistance payments in 2021 when economic impact payments were provided and extended unemployment benefits were granted.
What ACH payment types are currently available?
Credit ACH Payment
ACH credit payments, often known as direct deposits, are deposits into a bank account. This happens when a client (payer) transfers a certain quantity of money to a merchant (payee) in order to acquire products. Another example would be manually paying monthly bills.
Direct Debit ACH Payment
ACH debit, often known as a direct payment, is a sort of transfer in which money is withdrawn from a bank account. In reality, this occurs when a client (payer) authorizes a merchant (payee) to deduct funds from their account in order to satisfy a recurring payment arrangement, such as paying monthly electricity bills.
How do ACH payments function?
An ACH transaction is essentially a data file providing information about the requested payment. To complete a transaction, the file must be forwarded to the originator's financial institution, then to the clearing house, and lastly to the recipient's bank, where the monies are transmitted to the receiving account.
Let's take a look at how to actually start an ACH direct debit transaction whenever you need to charge a client:
1. Client consent
Before you begin the transaction, check sure you have permission to withdraw funds from your customer's bank account. Your client can approve recurring payments by completing a bank permission form.
2. Processing of Transactions
As the initiator, you send the payment information to your financial institution or ACH network operator, recognized as the Originating Depository Financial Institution (ODFI).
3. Transaction has been forwarded
Your ODFI transfers the payment information to an ACH operator. This might be the FedACH (Federal Reserve Banks' Automated Clearing House) or the Electronic Payments Network (EPN). The ACH operator then transmits the transaction data to your customer's bank, also known as the RDFI (Receiving Depository Financial Institution).
4. Payment has been received.
Before processing the payment, the RDFI verifies that the specified account has adequate money. If so, the RDFI withdraws money from your customer's bank account and pays you. Prior to actually processing the payment, the RDFI verifies that the specified account has adequate funds. If so, the RDFI withdraws money from your customer's bank account and pays you.
Which is better: Wire Transfers or ACH payments?
Now that you understand what ACH payments are and how they work, you may be wondering what the distinction really is between ACH transactions and wire transfers. The main distinction is that wire transactions are executed in real-time. In contrast, ACH payments are handled in batches a few times each day. As a result, wire transfer money is assured to arrive on the same day, whereas ACH takes one to three business days on average. However, same-day ACH processing like Stripe ACH Direct Debit is becoming more popular as a solution to this problem. Between 2020 and 2021, same-day ACH volume increased by 73.9 percent, with 603.8 million payments completed in 2021. ACH payments are significantly less expensive than wire transfers in terms of costs. Sending wire transfers within the United States incurs standard outgoing costs of $25 per transfer. However, they can cost clients up to $50 in some situations! ACH payments, on the other hand, are often less than $2.
What are the advantages of using ACH payments?
There are several reasons why ACH payments are becoming a more appealing alternative for organizations that take regular payments. Particularly:
Processing expenses are really cheap
The most significant benefit of ACH payments is that they offer the lowest transaction fees of any sort of payment, including credit cards! Credit card transactions typically cost roughly 2% of the total amount, while wire transfers cost between $10 and $35. ACH payments, on the other hand, cost less than $2 regardless of the amount paid. Flat charges are typically between $0.25 and $0.75 per transaction. Some ACH processors may impose a flat percentage fee on each transaction, ranging from 0.5 percent to 1 percent. As a result, it's reasonable to conclude that if your company frequently issues digital invoices and takes regular payments, the savings can be substantial.
ACH payments are simple to implement on your website and have a smooth payment flow. You also don't have to hunt down delinquencies on invoices or remind clients to pay. Similarly, using ACH payments helps your consumers spend less time on each transaction because payments are handled automatically. They will never have to be concerned about losing a payment ever.!
Did you know that one in every six US individuals does not have a credit card, yet just one in every twenty does not have a bank account? This is where ACH payments come in. Because your customers simply require a bank account to utilize this payment option, you may reach clients who do not have credit cards and thus enhance checkout conversion.
Issues, such as fraudulent activity, rejected checks, and wire transfers made in error, can cause a hassle for your consumers and potentially harm your company's reputation. You and your clients will not have to fear any of the above if you accept ACH payments! Because of the direct transaction between the parties that are involved, ACH ensures safe payments. Unlike some other electronic payment options, ACH allows you to set up recurring payments without having to ask your customer for their bank account details each time. This decreases the possibility of deception.
Better Customer Retention
Card transactions expire, which frequently results in unwanted churn. This is not a problem with ACH payments. Moreover, ACH payments are conducted directly from bank account to bank account, which dramatically minimizes the risks of payment interruption and, as a result, client turnover.
Are there any potential downsides?
It goes without saying that ACH payments provide major benefits to organizations. ACH payments, like any other payment mechanism, have certain possible negatives to consider.
The procedure is time-consuming
As previously stated, ACH payments may take several working days to complete. The excellent news is that ACH debit transactions must be completed on the same day or the following working day. ACH credits might be processed the same day or up to two days later. Because many banks now accept same-day or next-day ACH transfers, ACH transactions typically take one to two business days. As a result, as long as the request is made before the day's cut-off, the money might be received within 24 hours.
Numerous banks limit the amount of money your clients can pay via ACH transfer. Limits can be set on a daily, weekly, monthly, or per-transaction basis.
Availability is limited
Finally, one downside of ACH payments is that most banks do not enable ACH transfers to and from overseas bank accounts. In general, only businesses and companies can accept ACH direct debit transactions from clients who have a bank account in the United States.
Are there any penalty fees?
Even though rejections are uncommon, they may result in a significant burden for your company. So, how can you prevent these penalty fees? If you receive a return code, the first thing you should do is rectify the problem as soon as possible. In the case of insufficient funds, for example, you should attempt to retry the transaction if the consumer moves additional money into their account or offers a new mode of payment. You may avoid paying extra charges on each recurring billing cycle this way.
The next question would be "Is the ACH method suitable for your business"?
When it comes to making the appropriate choice, weighing the pros and drawbacks of ACH payments is a difficult process. Try to answer the following questions:
- Do you have recurring payments in your business?
- Do you have an invoice system like Blinksale?
- Do you get a lot of paper checks or credit card payments from your customers?
- Would they prefer a more comfortable option?
- Do your consumers have a bank account in the United States?
- Would you spend less for ACH processing than you would for credit card transactions?
- Would your consumers accept ACH payments?
If you answered "yes" to any of the following questions, your company might benefit from taking ACH payments.
Using Stripe to Accept ACH Payments
Every business owner understands that accepting new payment options helps your company extend its reach and increase checkout conversion. The good thing is that ACH payments may be added to your accepted payment methods if you are a US-based business utilizing Stripe as your online payment processor.
Taking ACH payments in Stripe functions similarly to accepting credit card payments in that a confirmed bank account is used as the source for a charge request.
But compared to accepting credit cards, accepting ACH payments necessitates a somewhat different process:
- Before you can debit your customer's bank account, you must first obtain a mandate from them.
- To comply with ACH Direct Debit requirements, bank accounts must be validated.
After completing both procedures, your client may select ACH from the list of payment options on your website and utilize it for recurring charges:
How much do ACH payments cost?
Stripe charges 0.8 percent for ACH direct debit payments, with a $5 maximum. There are no monthly or verification charges. This implies that a $100 payment will cost $0.80, while payments over $625 will cost $5. This is extremely helpful if you charge substantial amounts to your clients on a regular basis.
ACH payments are becoming increasingly popular because they offer a safe, inexpensive, and convenient way for businesses to receive cash, particularly if they handle regular payments. Its ease of use and capacity to boost client retention make it an appealing alternative to the traditional payment methods such as cheque, card, or wire transfer.
Shifting to ACH payments is a wise option if you're a US-based firm that already accepts recurring payments, and your clients have a US bank account. To take advantage of this sophisticated payment solution, Blinksale Invoicing proudly integrated Stripe into its payment gateway arsenal. Stripe integration eliminates the requirement for a merchant account; instead, you will receive straightforward, comprehensive, and modern account administration and reporting at a glance.