Automated Clearing House (ACH) is a popular choice for many transactions in the US, including paying taxes, employees, and suppliers. In fact, direct deposit via ACH is the way 93% of employees get paid.
While it has been traditionally slow to pick up steam in certain areas, such as point-of-sale (POS) payments, ACH usage has increased in many use cases, such as peer-to-peer (P2P) payments, which saw a 24.2% increase between 2021 and 2022.
There are many reasons why ACH payments are growing relative to credit cards, including a wider range of use cases. This article explores the many benefits of ACH payments vs credit cards, different use cases for ACH payments, and how businesses can get started accepting ACH payments.
ACH vs credit cards: ACH benefits for businesses (and consumers)
While it's easy to assume customers prefer pulling out their credit or debit cards when it’s time to pay, ACH usage is growing rapidly. Between 2020 and 2022, the yearly value of all ACH transactions increased from $61.9T to 76.7T—a greater than 19% increase in just two years.
The cause of that increase is likely due to the variety of benefits of using ACH payments—for both consumers and businesses.
ACH can offer a better user experience
'Pay with your bank’ options are often just as easy or easier to use than credit cards. With online credit card checkout flows, consumers often have to manually enter their credit card number, expiration date, card verification code, and address. This is time-consuming.
Our research found most people have their bank login memorized (57%), and those who don’t have it easily accessible via a password manager (31%). On the other hand, most people (65%) have to manually enter their card info by reading it off the card.
Modern tools such as Plaid Transfer make paying with ACH even easier. Instead of entering their account and routing numbers, users only enter their online banking credentials to link their bank account and are quickly ready to make an ACH payment. Reducing friction increases the percentage of customers that complete the payments flow.
Lower costs vs credit cards
The strongest motivator for businesses to use ACH is the cost. While various processors and banks charge different ACH fees, most charge just a few pennies per dollar. Some payment processors may charge a fee of up to 1-1.5% for larger transactions, usually with a cap of $5.
Credit cards, on the other hand, charge a percentage fee between 1.5-3.5%. Wire transfers, another common alternative to ACH for larger transactions, can cost up to $65 per transfer, though most banks average around $35.
Many customers prefer ACH
When businesses offer a ‘pay with your bank’ ACH option alongside credit and debit cards, they’re giving customers the option to choose what works best for them. Having ACH as a choice reduces barriers for customers who don't have credit cards, either due to a low credit score or an unwillingness to go into debt.
Additionally, many people simply prefer ACH for bill pay, recurring payments, large purchases their credit limit doesn't support, or when they’d otherwise have to write a check, wire or cashier’s check (like buying a car.)
ACH reduces customer churn
Due to the fact they are either lost, stolen, or expire, credit cards have a typical shelf life of three to five years. Bank accounts, on the other hand, are used for an average of 17 years. Once a business is connected to a customer’s bank account for ACH payments, payment churn is highly unlikely, which reduces drop-off and increases revenue over the long term.
→ Ready to implement seamless ACH payments? Plaid Transfer provides a cost-effective all-in-one solution for secure bank payments via a single API.
ACH use cases for businesses
ACH usage has been growing in recent years and works for a multitude of use cases. According to internal Plaid research, 85% of consumers are open to using ACH to pay recurring bills and 51% have used or would use ACH for larger purchases, such as cars or furniture.
85% of people are very open to paying recurring bills with ACH, while 35% directly prefer ACH over cards for bill pay.
ACH payments can be used in a variety of ways—often more than most people realize. Ways businesses can use ACH include:
Funding customer accounts: For fintech businesses, ACH is a viable and cost-effective option for customers to fund financial or investment accounts. Once a customer shares and verifies their external bank account information, they can quickly add the desired funds to their account and add more funds from that external account at any point in the future.
Enabling customers to move funds: Once a customer funds a financial account, such as a digital wallet, they will want to spend some of that money. Whether it be for peer-to-peer (P2P) payments or buying goods and services, ACH is a reliable, safe, and easy way for customers to move (or spend) their funds—which is why it’s the most popular payment method used by P2P payments apps like Venmo.
Accepting payments: ACH is used in payments for a variety of goods and services. One example is a chain of gas stations and convenience stores that uses SmartPay Rewards, a mobile app for ACH payments. Customers can pay ahead of time or at the store, and merchants pass on the savings from lower ACH fees in the form of discounts and rewards.
Billing/recurring payments: ACH direct debit, also known as ‘auto-pay’, is a widely-used tool for businesses to accept regularly recurring payments, such as those for monthly bills like online newspaper subscriptions or insurance premiums. Once businesses get customers to authorize ACH direct debits, they have a cost-effective, reliable, and hassle-free way to collect recurring payments for as long as they remain a customer.
Paying employees: Most US-based employers use ACH direct deposit to pay their employees directly from bank to bank. Direct deposit reduces administrative overhead as payments are run in large batches, and is much easier than writing checks.
Paying taxes: The IRS allows businesses to pay taxes using ‘Electronic Funds Withdrawal’, which is an ACH debit (meaning that the IRS ‘pulls’ money from the account). This payment option is more convenient than writing and mailing a check and is free to use.
Paying suppliers: Some business-to-business suppliers that used to take paper checks have switched to ACH. This helps them reduce the administrative overhead and waiting time for checks to arrive by mail.
Moving internal funds: Businesses often have multiple bank accounts for different purposes, sometimes with different banks. Using ACH to move money between accounts is more cost-effective and efficient than wire transfers or writing checks.
Beyond the credit card
Learn why more consumers are choosing to pay with their banks.
The flip side: Why would a business choose credit cards over ACH?
While there are some obvious advantages to ACH, there are still compelling reasons to accept credit cards or both methods at the same time. For some use cases, such as point-of-sale (POS) transactions, credit cards can be a great choice, despite the higher fees. Here are a few reasons why businesses might choose credit cards instead of, or in addition to, ACH payments.
Credit cards offer instant settlement
For businesses that accept a high volume of one-time payments, it can make sense to skip the onboarding process ACH requires and go straight for the credit card. This is mainly because credit card payments settle instantly, allowing a business to reliably accept payments from anyone. Compare that to ACH settlement times, which can be 1-2 days.
However, this settlement time gap has been reduced via same-day ACH. Instead of settling within a day or two, same-day ACH enables payments to settle within one day, hence the name ‘same-day ACH’. It's worth noting that same-day ACH popularity is growing at a rapid pace with a 94.4% increase in 2022, up to $486B in total transaction value.
While credit cards are familiar and universal, most consumers aren’t as used to the idea of ‘paying with their bank’. In fact, if a business only offered ACH and not credit cards, it might turn a good number of consumers away. However, recent trends show that alternative payment methods—such as P2P payment apps—are becoming increasingly popular. In 2022, 84% of consumers said they have used P2P services.
Despite the speed and rewards that credit cards can provide, ACH is still a viable option that can help businesses reduce costs. On top of the savings, it can be a better customer experience than credit cards for many use cases, such as recurring billing, funding new accounts, and increasingly accepting payments.
→ Need to reduce the risk of ACH fraud and returns? Plaid Signal provides an instant transaction risk assessment and enables you to customize payment flows based on the likelihood of an ACH return.
Three steps to get started with ACH
Getting started with ACH payments might be easier than you think. Here are three steps to get started:
1. Choose an authorization method: To onboard new customers to make ACH payments, a business must verify their customer’s account numbers are valid and that the account is able to complete ACH transfers. The traditional method had customers manually verify microdeposits or provide a voided check for later verification (both of which can take several days to complete). However, authorization solutions like Plaid’s instant account authentication drastically reduce onboarding time and make ACH more secure.
2. Choose a payment processor: Many businesses choose a payment processor that integrates with their authorization methods, such as Dwolla or Square.
Another option is Plaid Transfer, an all-in-one solution for both ACH authorization and payment processing.
When deciding which ACH processor to use, it’s important to ask the right questions, such as:
How quickly do I need to go live?
How fast do I need to process payments?
How much control do I need to have?
What are this processor’s fees compared to others?
What kind of fraud prevention capabilities do they have?
How robust is their compliance process?
3. Add ACH to the payment flow: How a business adds ACH to its payment flow will depend on the use case, which could be recurring subscription payments, new customer account funding, accepting one-time payments, or something else. They’ll need to work with their authorization and payment providers to find the best ways to create a frictionless ACH onboarding and payment flow that converts at a high rate.
An example of an ACH payment flow with a business that uses Plaid Transfer could look like this:
The customer chooses ‘pay with my bank,’ ‘set up auto-pay,' or ‘fund a new account,’ depending on the use case.
Once their account is successfully authenticated and connected, customers can use ACH to pay, fund an account, or set up automatic payments, which Plaid Transfer handles on the back end.
Is ACH the future of payments?
As businesses seek to offer their customers more options to pay in a way that works for them, more will look at ACH as a viable new option. This is already happening across many areas, as the total volume of ACH transactions rose to 30 billion in 2022.
In the future, it’s reasonable to expect more ‘pay with your bank’ options, especially in fintech and online shopping.
For businesses that want to save on credit card fees and provide an alternative payment method that some consumers might prefer (and are increasingly getting used to), ACH makes sense.