By now, almost every consumer has had experience with Automated Clearing House payments, and many business owners also use the service to manage their bills. However, few consumers will ever encounter the service directly, and to new entrepreneurs, that phrase — Automated Clearing House and even its slightly more recognizable abbreviation, ACH — looks utterly foreign.
Though it seems incomprehensible, Automated Clearing House is merely the technical name for a network that processes checks and credit transactions in batches. If you are considering adding electronic payments to your business, you should learn a little about ACH, first.
How ACH Works
Typical credit and debit card processing allows merchants to authorize and receive payments from customers almost immediately. After a customer swipes or inserts a card, the information travels from the issuing bank through a processing service provider and credit card network to the acquiring bank. While merchants and customers wait patiently, the processor authorizes the payment, authenticates the card, and clears the payment.
Alternatively, when customers pay with paper money or paper checks, merchants can accept those payments automatically. However, most merchants must wait several days (if not weeks) before the money is deposited in their accounts and is therefore useful to the business.
The third option is setting up an Automated Clearing House payment system, which allows customers to make payments online. Rather than processing each transaction separately, ACH services process batches of payments all at once. Plus, customers can pay with an ACH check, which is a paper check that has been converted into electronic payment.
Benefits of ACH
The primary benefit of typical card processing is the ability to take unexpected payments. For example, retail stores can make transactions whenever customers want to buy something, and because customers do not make purchases predictably, having card processors available is necessary. Unfortunately, processing can take anywhere from a few seconds to several minutes, depending on internet connection speed, business of banks and clearing houses, and other factors, and delays in service can cost merchants paying customers. Further, merchants typically absorb fees associated with card processing, which can be a significant monthly cost.
Though paper payment has several upsides — many merchants like the physicality of paper cash coming into their business — but it has several more downsides. There is always a chance that checks and cash aren’t legitimate, and the merchant must absorb the loss. Worse, paper money is exceedingly easy to lose; an estimated $80.6 billion per year is lost to small and medium businesses that can’t keep track of their paper money.
Meanwhile, ACH payments exist entirely online, which means there is no way to lose track of your payments, and there is little opportunity for theft — especially if you select an ACH service provider that emphasizes security. In fact, electronic payments are inherently more organized than paper deposits because they are tagged with customer information, such as name, date, and purpose, which allows you to keep impeccable accounting books.
ACH payments are not necessarily ideal for retail merchants accepting payments from customers, but they have a number of other uses. Some common ones include:
- Accepting payments for predictable services or products
- Depositing paychecks into employees’ accounts
- Making payments to suppliers for products
- Moving money from one bank account to another
Finally, ACH processing costs remarkably less than typical card processing, making in an affordable payment solution for most merchants.
Costs of ACH
Card processing fees can range dramatically dependent on a number of factors, including its average ticket size (or average transaction amount) and whether it is card-present or non-card-present (i.e., offline or online). Different providers will offer different rates and fees, but regardless, a business usually ends up paying several hundreds of dollars every month to maintain the ability to process cards.
On average, ACH payments cost just 11 cents per transaction. As with card processors, ACH systems vary in how they levy costs; some take a small percentage of each transaction while others impose a monthly fee. Your ticket size will matter for ACH providers as well, but costs tend to be lower because payments are automated and more regular — and transactions are processed in large batches rather than individual purchases.
To add ACH payment processing to your business, you must partner with a provider that is right for you. Sometimes, online providers offer better rates, but it is imperative that you feel comfortable and confident with your payments partner.