Around the U.S., businesses are growing tired of dealing with complicated credit card processing. The services are expensive and time consuming, and for safety’s sake, they require an uninterrupted internet connection, which many mobile businesses simply cannot ensure. Worse, credit card processors sometimes make major mistakes that can cripple a business – financially or reputationally – so every card processed is a significant risk.
Fortunately, a solution is emerging: automated clearing house payments. To many business owners, ACH sounds more complicated and less rewarding than slogging through the old credit card processing systems – but the opposite is true. This guide to ACH will explain why ACH processing is such a valuable service for any business.
What ACH Means
ACH stands for automated clearing house – but for most people, that doesn’t explain much. The National Automated Clearing House Association (NACHA) consists of several large American clearing houses, or institutions that exchange one payment form for another. In the 1970s, NACHA formed to offer businesses, consumers, and government groups a faster, less expensive, and more secure way to transfer money than paper check. Today, ACH electronically processes financial transactions across the United States. ACH handles large numbers of credit and debit transactions in batches, and it performs a number of services for businesses and consumers alike. NACHA estimates that ACH handles about $41 trillion per year, but it is capable of much more.
ACH services are exceedingly useful. For businesses, ACH can manage electronic payments like vendor payments, payroll, and direct deposits. For consumers, ACH can transfer money for insurance premiums, mortgage loans, and a variety of other bills. In the past, ACH was primarily used by government entities, but more and more businesses are moving toward ACH processing for online payment services because credit and debit payment systems are becoming increasingly untenable. Plus, it isn’t difficult to transition between a different payment processor and ACH; in fact, few businesses and consumers will even recognize a change.
How ACH Works
More likely than not, most consumers and businesses have used ACH services in the past without realizing; after all, the service has been around for more than 40 years, and with the advent of computers and the internet, ACH has only grown in utility and popularity. In their simplest form, ACH payments are merely electronic bank transfers. Therefore, the transaction is incredibly familiar:
- The payment originator initiates payment with its financial institution.
- The originating depository financial institution records the ACH entry.
- The financial institution batches multiple ACH requests and sends them to an ACH operator.
- The ACH operator processes the request and transmits it to a receiving depository financial institution.
- The financial institution credits the recipient’s account.
Because all of this can occur online, through digital bank portals, everyone saves time and resources. Businesses and consumers can make payments from the comfort of their homes without paper and ink, and banks no longer need to send enormous bundles of checks and other documents daily via truck. The process is efficiently streamlined, so payments can be complete in just one or two days.
Businesses can enact ACH payments by partnering with a payment processor that offers ACH options. ACH is affordable for nearly every business, averaging about 11 cents per transaction, but those with higher volumes of transactions – as well as higher ticket sizes – will likely be able to secure lower rates. Plus, these aren’t the only benefits of ACH.
Why ACH Works
Compared to nearly every other payment option, ACH is superior for one reason or another. For example:
- Paper checks follow the same process as ACH and seem to cost no fees. However, paper checks are a hassle to collect, organize, send away, and process, so businesses expend untold hidden resources to accept them. The same can be said of cash.
- Because they cut out the middle man, wire transfers may be faster than ACH, but they are prohibitively expensive – between $15 and $25 per transaction.
- ACH tends to be less expensive, more secure, and more efficient than credit card processing, though credit card fraud liability is slightly more favorable.
After creating an ACH payment portal, businesses can immediately begin accepting payments. Consumers can set up recurring payments to avoid late fees and ensure continuation of service. Payment information rarely needs to be updated because unlike credit cards, checking accounts rarely change numbers or locations. ACH tends to be as close to error-free as possible for payment processors, and because electronic payment systems rely on encryption and other secure practices, there is a lower chance of fraud or theft. Overall, it is a smart and effective system for sending and accepting payments – for businesses and consumers alike.