Accepting payments shouldn’t cause businesses to get hit with exorbitant charges. Yet credit card processing fees remain expensive, costing around 1.3% to 3.5% of every transaction. And that's without taking into account the payment processor’s cut. For businesses with thin profit margins, it's far from ideal. For others still, it’s untenable.
A cheaper solution exists in the Automated Clearing House (ACH). A $5,000 transaction completed via ACH, for example, can cost a merchant $0.25 to $5, as opposed to the $65-$175 cost of a credit card. In fact, paying by ACH rivals credit cards across many points, such as ease of use, payment churn, and even speed, thanks to the option of same-day service.
Despite these advantages, some businesses remain slow to adopt ACH due to persisting concerns around customer experience, fraud risk, and liability, as well as a general lack of understanding.
What does it mean to pay by ACH?
Paying by ACH means using the Automated Clearing House (ACH), which is a financial network that processes electronic payments and money transfers in the United States. It allows both businesses and individuals to transfer funds between bank accounts without the use of checks, cash, or cards.
The ACH network processes a high volume of payments and continues to see robust growth. In 2022, ACH processed 30 billion transactions with a total value of $76.7 trillion—or roughly 89 payments per American. This total value represents a 5.6% increase compared to 2021.
ACH is widely used for many types of payments, including internet-initiated payments, peer-to-peer (P2P) payments, and direct deposits. In fact, 93% of US employees get paid via ACH direct deposit, despite a small year-over-year decline in the payment type’s volume for 2022.
All other payment types saw a significant increase in volume in 2022, with B2B payments showing the highest growth at 11.8%.
The benefits of receiving ACH payments
There are many factors to take into account when choosing a payment method, including speed, ease of use, and customer experience. ACH delivers on nearly all points.
ACH is low on cost.
Costs for ACH transactions vary across providers but remain quite low and are generally capped at around $5. For example, For example, if a business chooses to use Checkout.com to process their payments, this is what their fees could look like on a $100 transaction:
This clear cost savings of using ACH for larger transactions applies to smaller transactions as well.
ACH is great for recurring payments.
ACH direct debit, also known as ‘auto-pay’, offers a simple and cost-effective option for recurring payments. It can be effortlessly replicated and relied upon every month.
ACH reduces payment churn.
The average bank account is held for 14 years, creating little chance of payment churn. In the B2B payments space, for example, 20-40% of churn comes from unresolved credit card failures (think lost, stolen, or expired cards).
ACH is not as slow as people think.
A common objection to using ACH is that payments can take 3-5 business to settle. Today’s ACH network, however, offers the option of same-day, next-day, or 2-day payments.
How to accept ACH payments
Accepting payment via ACH is fairly straightforward. Below are the three main steps:
1. Select an authorization method. To onboard a new customer for ACH payments, a business must first verify the customer’s account. Solutions like Plaid’s instant account authentication make this step fast and secure. This is a far cry from the cumbersome and time-consuming micro-deposits and voided checks of the past.
2. Select a payment processor. A business can choose a payment processor that integrates with their authorization methods, such as Dwolla or Square. Or they can opt for an all-encompassing solution that handles both ACH authorization and payment processing, such as Plaid Transfer. The latter eliminates the need for multiple service providers, enabling businesses to connect user accounts, make smarter transaction decisions, and move money via a single integration.
3. Add ACH to the payment flow. A business’s ACH payment flow will vary depending on its use case (recurring subscription payments, account funding, one-time payments, etc.). In all scenarios, achieving a high conversion rate requires a friction-free onboarding and payment flow.
Plaid Transfer enables customers to authenticate and connect their accounts within seconds. They can then use ACH to pay, fund an account, or set up an automatic payment.
A Modern Guide to ACH
How to add ACH to your platform and reduce losses and risks
Can businesses accept ACH payments instantly?
Same Day ACH service allows for the same-day settlement of ACH payments. This does away with the traditional need to wait up to 3-5 business days. By pairing Same Day ACH with risk-assessment software, businesses can choose to process low-risk transactions prior to settlement, for a near-instant payment experience.
Plaid’s Signal product, for example, uses an automated machine learning process to help predict the likelihood of an ACH transaction return. For transactions deemed low-risk, businesses can choose to immediately grant access to funds. The result is a real-time experience.
Other real-time alternatives include the RTP network and the recently launched FedNow service. To help manage the complexity of these multiple payment rails, Plaid also offers Instant Payouts. This instant, multi-rail payout solution provides intelligence on RTP and FedNow eligibility. Transactions linked to an ineligible account can be seamlessly re-routed to Same Day or Standard ACH.
→ Want to create a real-time payment experience with ACH? Plaid Signal provides instant risk assessment and enables you to customize payment flows based on the likelihood of a return.
How to reduce risk when receiving ACH payments
Like any form of payment, ACH comes with its own types of risk. These range from potential returns due to insufficient funds to unauthorized transactions and other fraudulent activities that can greatly impact a business’s bottom line. To mitigate these risks and help unlock near-instant ACH payments, some ACH solutions offer a “balance check” and/or fraud prevention tools.
Because ACH payments don’t settle immediately, customers can make purchases without sufficient funds in their bank account. Though the ACH network will eventually reject these transactions, it might only do so after the goods have been shipped. To remedy this, some ACH solutions—including Plaid Transfer—have “balance check” tools. These ensure the customer has enough funds in their account to cover the transaction. Otherwise, businesses risk sending goods without payment and customers risk incurring unintended fees.
According to a 2022 study, checks and ACH debits were the payment types most susceptible to fraud. 37% of organizations reported ACH debit fraud attempts in 2021, up from 34% in 2020. Fraudsters commit ACH debit fraud by attempting to make purchases or withdraw funds from an account they do not own, or via other types of unauthorized ACH transactions. To combat this, Plaid Signal gives ACH transactions a 'risk score' before they’re initiated. This enables organizations to choose whether to proceed or to take other steps to mitigate risk.
A business planning to use an ACH payment method must make sure they’re compliant with applicable Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. This means verifying the customer’s identity, engaging in ongoing monitoring, and ensuring funds are neither laundered nor used to finance terrorism. Businesses should check their ACH payment processors’ publicly available information around this. If nothing is available, they should ask.
4 ways to encourage customers to pay via ACH
Getting customers to pay by ACH might take a little persuasion, as many are accustomed to using their credit cards. To actively drive customers towards ACH payments, businesses can lean on tender steering—or the use of incentives such as discounts, bonuses, and rewards—while also ensuring a friction-free payment experience.
A business that saves on transaction fees with ACH can pass those savings on to customers. SmartPay Rewards—a payments platform for EG America’s gas station and convenience store chains—does exactly this.
When gas station shoppers choose the option to “pay with your bank account”, they receive $0.10 off each gallon of gas. Among other perks, they also receive a free coffee or fountain drink for every 80 gallons bought.
Frequent purchases such as this can mean significant processing fee savings for businesses over time, making the investment well worth it. Discounts can also foster greater customer loyalty. This is especially true when paired with a unique and convenient way to pay.
Another way to incentivize customers to pay with ACH is to offer a bonus. This can be in the form of a one-time discount, cash-back reward, or store credit. Such is the approach of Catch, an ACH-based shopping platform that offers store credit in exchange for paying by ACH.
Along with offering 5-10% store credit for each purchase made via the app, Catch also offers a $10 sign-up bonus. This makes it an easy choice for those already shopping the platform’s brands. The minimal amount paid out via a one-time bonus can yield a high return on repeat shoppers, as the merchant’s savings per transaction will accumulate over time.
Businesses can create special features that benefit users when collecting ACH payments. Drop’s robust reward program is a prime example.
Drop allows users to connect their financial accounts via Plaid to pay with ACH. It then gives them the ability to earn points on food, shopping, and travel purchases from a multitude of vendors. These points can be redeemed at businesses such as Starbucks, Amazon, and Netflix.
Such rewards programs benefit users, boost brand loyalty, and promote ACH payment method adoption.
Thoughtful user interface (UI)
For customers to make the switch to ACH, it needs to be easy. Fortunately, modern bank account verification methods have done away with the need for micro-deposits or voided checks, which could take up to five days to process. Customers can now connect their bank accounts for ACH payments in a matter of seconds.
Even credit cards typically require customers to fill in multiple fields, including the card's sixteen-digit number, expiration date, and card verification code (CVC), along with the associated billing address and zip code. A user who chooses to link their bank account via Plaid for ACH payments need only enter their online banking username and password.
This type of user-friendly experience makes it easier to complete the onboarding process. In turn, users may be more inclined to use it, leading to greater savings on fees.
Additional resources on setting up ACH payments
ACH offers an attractive payment alternative to credit cards for both businesses and consumers. This is particularly so when paired with tools to overcome some of its weaknesses and mimic an instant payment experience.
And while it can be simple to use, the system behind how ACH actually works is much more complicated. For those who want to get more technical, here are some useful resources:
Nacha: Nacha provides governance over the ACH network. They ensure a secure, smart, and fast system that stays in touch with US bank and credit union accounts. Additionally, they provide consulting, education, and certification resources around ACH. The Nacha website is an excellent resource for diving deep into ACH topics.
Plaid’s Modern Guide to ACH: This whitepaper provides a deeper look at how to effectively leverage the ACH network. It examines how payments are processed, how businesses can best put the network to use, and how best to reduce risk.
One thing is clear: Consumers are becoming more and more accustomed to ACH, thanks to the multitude of everyday apps that use it. That means people might very well begin to choose ACH over other payment types—allowing everyone to reap the benefits.
→ Learn more about how you can use Plaid Transfer to accept and streamline ACH payments.