ACH payments: Everything You Need to Know


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ACH payments: Everything You Need to Know

Automated Clearing House (ACH) payments are an alternative to using a credit card. They offer merchants a fast, economical, and environmentally friendly way to transfer money electronically between two different bank accounts, whether they be for individuals or organizations.

An ACH payment is processed through the Automated Clearing House network, which acts as a middleman between the two bank counterparties to a transaction. While ACH payments have been around for decades, there remains a lot of confusion surrounding them.

This article clears up some of the most common questions, including:

  • An explanation of what ACH payments are and when they are typically used
  • The differences between ACH payments and wire transfers
  • ACH payment safety concerns
  • How to process ACH transactions and refunds
  • The benefits to merchants of using ACH payments

What are ACH payments?

ACH payments are growing in popularity. According to the United States Federal Reserve, they “grew 6.0 percent per year by number and 7.2 percent per year by value from 2015 to 2018.” In 2018, they moved past check payments for the first time ever. 16.6 billion payments were made via ACH transfer compared to 14.5 billion via check. In comparison, the figures for the year 2000 were, respectively, 2.1 billion and 42.6 billion.

ACH payments are split into two categories: direct payments and direct deposits.

ACH direct payments

This type of transfer “pulls” funds from a bank account before depositing into another. For instance, they are used widely for customer subscriptions to services that are paid for on a periodic basis. They are also commonly used to make online utility bill payments from an individual’s bank account to the service provider’s account.

ACH direct deposits

These are money transfers from a company or government entity to an individual’s bank account. They are typically used for purposes like tax refunds, interest rate payments, government benefits, and employee salary payments.

Both types of ACH transfer can be peer-to-peer, business-to-business, or business-to-customer.

ACH payments versus wire transfer: what’s the difference?

ACH payments and wire transfers are often confused. They do both involve the transfer of money from one bank account to another, but there are important differences between the two.

Wire transfers typically involve a sizable fee whereas their ACH equivalent usually includes a very small fee in comparison. Another important difference is that the entire wire transfer process is carried out by the banks involved in a transaction while an ACH transfer goes through an intermediary clearing house.

Also, wire transfers are faster than ACH payments. They take up to 24 hours whereas ACH transfers can take anywhere up to three days to arrive in the payee’s account. As mentioned though, the speed of transfer does cost more. Additionally, wire transfers enable businesses to make international payments whereas ACH transfers are only possible from one U.S. bank account to another U.S. bank account.

Are ACH payments safe?

ACH payments offer a greater level of security than wire transfers, and also other alternatives like credit card payments. The enormous and growing popularity of ACH payments is a testament to their reliability. That said, every single payment transfer method carries a risk of fraud.

Just like any other type of financial transaction, appropriate anti-fraud measures should be adhered to with ACH transfers too. As well as ensuring that employees follow an anti-fraud protocol when initiating an ACH transfer, merchants should partner with a reputable, safe payment gateway provider that uses point-to-point encryption and tokenization to secure transfers.

How can merchants accept and process ACH payments?

Merchants can accept ACH payments both online and via their point-of-sale systems. To accept and process them, merchants must capture and handle the counterparty’s bank account and routing number. An ACH processor enables merchants to do this but it’s also crucial for merchants to make sure that their own bank can work with the payment processor on ACH transfers.

When processing ACH payments, best practice for additional security layers is to tokenize counterparty transaction information rather than merely capture the information and pass it to the payment gateway. Tokenization helps merchants add an extra layer of protection against fraud by breaking up sensitive data into individual, or “tokenized”, characters.

Issuing an ACH payment refund

ACH payments can be refunded but they operate differently to refunds for other payment methods. Depending on the ACH transaction in question, parties have up to 90 days to claim a refund from the original process date. In order to process a refund, the original transaction must be completely settled first.

Merchants can typically process ACH refunds through their ACH payment processor.

The multiple business benefits of using ACH payments

There are many reasons for merchants to offer ACH payments.

1. ACH payments are safe

The rise in use of ACH payments has coincided with a sharp fall in the use of checks, discussed previously. One reason is that ACH transfers are much more secure than checks. Rather than print or write sensitive information for each and every check, a party’s details are recorded once with ACH transfers. And with a secure payment gateway provider, this information is encrypted and tokenized.

2. Convenience

ACH transfers involve a lower administrative load. Whereas checks involve visits in person to the bank, as well as paper administration and storage, with ACH payments everything is done digitally.

3. ACH enables merchants to lower their carbon footprint

Checks require paper and ink, and also rely on physical transport, which of course requires fuel and transit materials. With ACH payments, these needs are eliminated, helping merchants to become more environmentally friendly.

4. Lower costs

ACH payments tend to be considerably cheaper than wire transfers and other forms of payment, although fees may vary according to different payment processing providers. ACH transfer fees are usually either a flat fee of $1 or less, or they may also be a percentage of the overall transfer amount, such as 1 percent. In comparison, a wire transfer typically costs about $20 to $30 to send and about $10 to receive.

5. Recurring billing

ACH is an excellent way to set up recurring remittances, such as for monthly, quarterly or annual payments. According to Visa, businesses spend almost three times as much time processing non-digital payments compared to digital methods.

6. Human error minimization

ACH transfers drastically reduce the rate of human error as they are processed electronically rather than manually.

7. Faster than checks

ACH transfers can take anywhere from a few hours to three days to complete. In comparison, the speed of checks depends on the postal service and then the availability of a merchant to deposit them at their bank.

Moreover, ACH payments have become so common across the United States that customers and businesses alike are increasingly used to it as a form of money transfer. Its integration helps merchants become more flexible with regard to the type of payment that they can send and receive, which ultimately makes doing business easier.

Accepting and processing ACH payments for merchant success

ACH payments are one of the most effective ways of transferring money between individuals and organizations. They are safe, low-cost, and efficient in addition to a number of other important business advantages.

To get up and running successfully with ACH payments, it is critical for merchants to choose an appropriate payment processing provider with whom to partner. The right payment processing specialist can help create a seamless environment for accepting and processing ACH payments, and equip merchants to take full advantage of the range of excellent benefits that this payment method offers.

CardConnect will soon launch a new product to support merchants offering ACH payments and help them grow their business through simple and secure payment processing. Make sure to check back and be among the firsts to integrate it into your payment system.

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