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. It's a solution that serves a wider population, as well, as not everyone has or wants to use a credit card.
Despite these advantages, many businesses remain slow to adopt ACH. This is, in part, due to persisting concerns around customer experience, fraud risk, and liability, as well as a lack of understanding.
What is the ACH payment method?
The Automated Clearing House (ACH) 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 2021, ACH processed 29.11 billion transactions with a total value of $72.6 trillion—or roughly 87 payments per American. This total value represents a 17.4% increase compared to 2020.
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.
ACH payments saw significant volume growth across all payment types in 2021. P2P payments showed the highest growth at 24.6%, while internet-initiated payments continue to lag behind, despite double-digit growth.
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ACH vs credit card: the benefits of receiving ACH payments
For a business choosing payment methods, many factors must be taken into account. Speed, ease of use, and customer experience, for example, are some of the most important considerations along with cost. Aside from settlement time (over which credit cards rule), ACH is the clear frontrunner.
ACH costs a lot less.
Like credit card fees, costs for ACH transactions vary across providers. Unlike credit cards, however, these costs remain quite low for most transactions.
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.
For recurring payments such as monthly subscriptions, there’s little reason to pay repeated high processing fees. ACH direct debit, also known as ‘auto-pay’, offers a simple and cost-effective option for these types of payments. It can be effortlessly replicated and relied upon every month.
ACH reduces payment churn.
The average bank account is held for 14 years. Compare this to the 3-year lifespan of most credit cards. Along with input errors, things like lost, stolen, and expired cards create more opportunities for payment churn than ACH.
This is especially true for recurring payments like software subscriptions. In fact, in the B2B payments space, 20-40% of churn comes from unresolved credit card failures. For affected companies, the switch to ACH offers a simple way to increase long-term revenue.
ACH is not as slow as people think.
A common objection to using ACH for payments is that it takes too long to settle. The typical expectation of 3-5 business days is actually a myth. Today’s ACH network offers the option of same-day, next-day, or 2-day payments.
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A Modern Guide to ACH
How to add ACH to your platform and reduce losses and risks
How to request ach payment from customers: 4 ways
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, as well as ensure a friction-free payment experience.
A business that saves on transaction fees with ACH can pass those savings onto 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 SmartPay Rewards’ 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.
Other businesses can create similar rewards programs that 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.
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The pitfalls of receiving ACH payments and how to avoid them
As customers start making the switch to ACH in bulk, issues are likely to arise. Here are some common pitfalls of ACH payments and ways to avoid them.
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 have “balance check” tools. These ensure the customer has enough funds in their account to cover the transaction. Without them, businesses risk sending goods without payment, while customers risk incurring unintended overdraft 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 via unauthorized ACH transactions. To combat this, some payment processors incorporate ACH fraud prevention tools like Plaid’s Signal product. These tools use an automated machine learning process to flag high-risk ACH transactions before they are initiated, providing a ‘risk score’ that enables organizations to choose whether or not to proceed.
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A business planning to use an ACH payment method must make sure they’re compliant with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. 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 to see how they meet these requirements. If nothing is available, they should ask.
No one likes a surprise account debit or an unexpected overdraft fee from their bank. Nonetheless, this can happen if a customer forgets they've bought something before getting charged two days later. The best way to resolve these kinds of issues is to set customer expectations ahead of time. Whether using next-day, same-day, or 2-day ACH, businesses should inform customers about the time it will take for funds to be withdrawn.
Additional resources on ACH
ACH can be simple to use, but the system behind how it actually works is much more complicated. For those who want to get more technical with ACH, 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.
ACH benefits businesses and customers alike
ACH offers businesses several benefits, the strongest of which is lower fees. These savings can be passed on to consumers in the form of discounts, bonuses, and rewards.
At the same time, upon connection of a bank account, online cart checkouts make ACH as easy to use as a credit card. Paired with tools to overcome some of ACH’s weaknesses, the payment method becomes a viable option for businesses tired of paying high processing costs.
One thing is for sure: Consumers are becoming more and more accustomed to ACH, thanks to everyday apps like Venmo. That means people might very well begin to choose ACH over other payment types—allowing everyone to reap the benefits.