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 (not to mention the payment processor’s cut)—hardly ideal for a business with thin profit margins. For some, it’s an untenable situation.
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, compared with $65 to $175 via credit card. Also, not everyone has a credit card or wants to pay with one, so offering ACH is not only about lowering costs, but serving more people.
Despite these advantages ACH offers, many businesses are still slow to adopt it. Concerns persist about customer experience, fraud risk and liability, and a lack of understanding on how it works.
What is ACH?
The Automated Clearing House (ACH) is a financial network that processes electronic payments and money transfers in the US. Essentially, ACH allows businesses and people to transfer money from one bank account to another without the need for checks, cash, or cards.
The ACH network processes a high volume of payments and continues to grow steadily. In 2020, ACH processed 26.8 billion transactions with a total value of $61.9 trillion—which is 81 payments per person in the US. This total value represents a 10.8% increase compared to 2019.
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 2020. P2P payments showed the highest growth at 42.2%, likely due to the increase in the use of P2P payments apps like Venmo and CashApp. This shows that smaller, internet-initiated payments are the strongest growth area for ACH, which could expand beyond P2P apps into areas like mobile shopping.
The benefits of ACH payments
For businesses deciding how to accept payments, many factors must be taken into account. In addition to cost, speed, ease of use, and customer experience are some of the most important considerations.
While credit cards win when it comes to settlement speed, ACH is the clear frontrunner in other areas.
ACH costs a lot less.
Just like credit card fees, there are no “set prices” for ACH transactions. The cost varies across different providers. However, for most transactions, ACH is much cheaper than credit cards.
For example, if a business chooses to use Stripe to process their payments, this is what their fees will look like on a $500 transaction:
This clear cost savings of using ACH for larger transactions applies to smaller transactions as well. For a $10 payment, Stripe’s ACH fees are $0.08 compared to $0.59 for a credit card.
ACH is great for recurring payments.
For regularly recurring payments such as monthly subscriptions, there’s no reason for businesses to pay high processing fees every month. ACH direct debit, also known as ‘auto-pay’, offers a simple and cost-effective option for these types of payments—one that can be effortlessly replicated and relied on every month.
ACH reduces churn.
ACH can also help reduce payment churn, as the average bank account is held for 14 years, compared to the 3-year lifespan of most credit cards (which, in addition, can also be lost or stolen). Along with input errors, expired, lost, and stolen credit 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, between 20-40% of churn comes from credit card failures that are never resolved. For affected companies, switching to ACH offers a simple way to increase long-term revenue by reducing payment churn.
Side note: ACH is not as slow as people think.
One of the common objections to using ACH for payments is that it takes too long to settle. Many people assume it will take 3-5 days, but that’s actually a myth. Today’s ACH network offers the option of “same-day”, “next-day”, or “2-day” payments.
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How to get customers to pay with ACH
Getting customers who are used to paying with credit cards to switch to ACH may take a little persuasion. Some may already prefer to pay with their bank account, such as the 57% of 18-31 year old Americans who don’t have a rewards credit card. But for those who are acclimated to credit card use, there are ways to recommend ACH.
If a business saves on transaction fees with ACH, it can pass those savings onto customers through discounts and rewards. This is exactly how SmartPay Rewards—a payments platform for EG America’s gas station and convenience store chains—incentivizes customers to pay by ACH.
If gas station shoppers choose SmartPay Rewards’ “pay with your bank account” option, they receive $0.10 off every gallon of gas. Additionally, they receive a free coffee or fountain drink for every 80 gallons of gas purchased, among other perks.
For frequent purchases like this, businesses can gain significant savings over time by getting regular customers to switch from credit cards to ACH, making the discounts well worth it. Discounts can also breed more loyal customers, especially when paired with a unique and convenient way to pay.
2. One-time bonuses
Another way to incentivize customers to use ACH is to offer bonuses. This could be in the form of a one-time discount, cash back reward, or store credit. Catch, an ACH-based shopping platform that offers store credit in exchange for using ACH payments, does exactly this.
Along with offering 5%+ store credit for each purchase made via the app, Catch also offers a $10 bonus for signing up, making it an obvious choice for those already shopping the platform’s brands. For frequent shoppers, the minimal amount paid out via a one-time bonus should yield a high ROI, as the merchant’s savings per transaction accumulates over time.
3. Rewards programs
Businesses that accept ACH can create additional features that both benefit users and promote ACH payments. One such feature that has worked particularly well for some businesses are rewards programs.
Drop’s robust reward program is an example of how a business can promote ACH payments. Drop allows users to connect their financial accounts for ACH payments using Plaid, then gives them the ability to earn points on food, shopping, and travel purchases from multiple vendors. Those points can be redeemed at several businesses, including Starbucks, Amazon, and Netflix.
Other businesses can create their own rewards programs—similar to Drop—that benefit their users, boost brand loyalty, and promote customers to make the switch to ACH payments.
4. Thoughtful user interface (UI)
For customers to make the switch to ACH, it needs to be easy. Traditionally, ACH verification methods such as microdeposits and voided checks could take up to five days to process. Modern bank-account verification methods have changed all that, as customers can now connect their bank accounts for ACH payments in seconds, rather than days.
Even with credit cards, customers are often required to fill in five fields: their sixteen-digit card number, its expiration date, the card verification code (CVC), their billing address, and zip code. If a user chooses to link their bank accounts to their chosen application using Plaid to make ACH payments, all a customer needs is their online banking username and password.
By making the ACH-payment experience user-friendly and easier to complete the onboarding process—users may be more likely to use it, leading to greater savings on fees over time.
Nacha’s 2021 account validation rule: Is your business compliant?
The pitfalls of ACH and how to avoid them
As customers start making the switch to ACH in bulk, issues will surely arise. Here are some common pitfalls of ACH payments and ways to overcome them.
Given that ACH payments don’t settle immediately, purchases can be made without sufficient funds in the purchaser’s bank account, only to later have that transaction rejected by the ACH network—after goods are sent. To remedy this, some ACH solutions have “balance check” tools that check to ensure the customer has enough funds in their account to cover the transaction. Without a balance check tool, a business is at a higher risk of sending goods before receiving payment and customers are at a higher risk of unwittingly incurring overdraft fees.
According to a Federal Reserve Payments study, ACH has the lowest fraud rate of any payment type, at $0.08 per $1,000 spent between 2012-2015. However, that doesn’t mean the risk doesn’t exist. Fraudsters can attempt to make purchases by attempting to initiate unauthorized ACH debit transactions. To combat this, some payment processors provide fraud prevention tools—such as Dwolla’s integration with Sift—that use an automated machine learning process to reduce the risk of bad actors committing fraud in real-time. Additionally, Plaid Identity can reduce fraud risk for ACH transactions by helping businesses ensure that the person they’re transacting with is the true account owner.
A business that is going to use ACH for payments needs to make sure they’re following Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. This means they’ll need to take actions such as verifying the customer’s identity, engaging in ongoing monitoring, and ensuring funds aren’t being used for money laundering or terrorism financing. Businesses should check their ACH payment processors’ publicly available information to see how they meet these requirements. If nothing is available, they should ask.
Customer expectation setting
Nobody likes being surprised by missing money from their account or an unexpected overdraft fee from their bank. However, this is what can happen if a customer buys something via ACH, forgets about it, then gets charged two days later. The best way to resolve these kinds of issues is to be proactive, setting customer expectations around how long a transaction will take. Whether using next-day, same-day, or 2-day ACH, businesses should let their customers know ahead of time how long it will take for the funds to be withdrawn from their account.
Additional resources on ACH
ACH can be simple to use, but the science behind how it actually works goes deep. For those who want to get more technical with ACH, here are some useful resources:
Nacha: Nacha provides governance over the ACH network, ensuring the system is secure, smart, and fast, and can reach US bank and credit union accounts. Additionally, they provide consulting, education, and certification resources on ACH. The Nacha website is an excellent resource for diving deep into ACH topics.
Dwolla’s ACH 101 ebook: Dwolla provides a free online resource to help businesses understand what ACH is, how to use it, and the benefits of doing so.
ACH benefits businesses and customers alike
ACH offers businesses several benefits, the strongest of which is lower fees. This is good for consumers as well, who benefit through savings passed on from businesses in the form of discounts, bonuses, and rewards.
With online cart checkouts that make ACH as easy to use as a credit card once a bank account is linked—along with the tools available to overcome some of ACH’s setbacks—it’s a viable option for businesses tired of paying high payment processing costs.
In addition, consumers are getting more and more used to alternative payment methods that use ACH, such as Venmo. It’s not a far stretch, therefore, to assume a growing number of people will choose ACH for other types of payments, allowing both businesses and consumers to reap the benefits.