Automated Clearing House (ACH) is the dominant payment rail for many types of transactions in the US, such as paying taxes, paying employees, and paying suppliers. However, it is increasingly being used for accepting payments as well. This article covers the various use cases for ACH payments, why businesses choose ACH over other methods, and how to get started with accepting ACH payments.
What do businesses use ACH payments for?
ACH is a versatile tool that works for a multitude of business use cases. While it has been traditionally slow to pick up steam in certain areas, such as point-of-sale (POS) payments, it has been the dominant payment method for others, such as businesses paying their employees (direct deposit via ACH is the way 93% of employees get paid). It’s also growing fast in other use cases, such as peer-to-peer (P2P) payments, where it saw a 42.2% year-over-year volume growth from 2019-2020.
Common use cases for ACH in business include, but are not limited to:
Funding customer accounts: For businesses that offer brokerage or financial accounts—whether that be for trading stocks and cryptocurrencies or for storing funds on a digital wallet—ACH is a viable and cost-effective option for getting customers to fund their accounts. Once a customer shares and verifies their external bank account information (from which they will fund the new account), they can quickly add the desired amount of funds 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 easyway for customers to move (or spend) their funds, which is why it is one of the popular methods used by P2P payments platforms 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. Catch is another example of a platform that enables ACH payments. When Catch users pay with their bank at various e-commerce sites, they earn up to 10% store credit as they help the merchants save on credit card fees.
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. Direct deposit payments can typically be set up in payroll software and require employees to give authorization and share their account and routing information.
Paying taxes: The IRS allows businesses that either use tax preparation software or file through a tax preparer to pay taxes using ‘Electronic Funds Withdrawal’, which is an ACH debit (meaning that the IRS ‘pulls’ money from a business’ account). This payment option is more convenient than writing and mailing a check, and is free to use. Most tax software will have a ‘pay your taxes’ button built-in, which prompts the user to follow the steps to set up an ACH payment with the IRS and pay the appropriate amount for the quarter.
Paying a supplier: 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, and sometimes with different banks. Using ACH to move money between accounts is more cost-effective and efficient than other methods, such as wire transfers or writing checks.
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Why many businesses choose ACH
While some will assume customers only want to pull out their credit or debit cards when it’s time to pay, that’s simply not true, as the growth in ACH in areas like internet-initiated payments (15% volume growth in 2020) has shown. Aside from the significantly lower costs compared to credit cards and wire transfers, ACH benefits businesses in several ways.
User experience: ‘Pay with your bank’ options are, in most cases, just as easy or easier to use than credit cards. In fact, with credit cards, consumers are often tasked with manually entering not only their credit card number, but also its expiration date, the card verification code, and their address. Modern tools such as Plaid’s instant account authentication make ACH much easier than that. Instead of entering their account and routing numbers, users only need to enter their online banking credentials. Reducing friction in this way can increase the percentage of customers that complete the payments or account funding sign-up process.
Lower costs: The strongest motivator for businesses to use ACH is the cost. ACH costs are not set in stone, as various processors and banks charge different fees. They can also charge a premium for faster settlement times, such as with same-day ACH. Fees can be as little as tenths of a cent per transaction or in the tens of cents for businesses with lower ACH volume. 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, typically cost up to $35 for the sender and $20 for the receiver.
More options: 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 some customers, as not all of them have a credit card due to a lack of credit history or unwillingness to potentially go into debt.
Reduced churn: Due to the fact they are either lost, stolen, or expire, credit cards have a typical shelf life of three years. Bank accounts, on the other hand, are used for an average of 14 years. Once a business is connected to a customer’s bank account for ACH payments, it’s unlikely that they will experience payment churn for quite some time, which reduces drop-off and increases revenue over the long term.
Learn why more consumers are choosing to pay with their banks.
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.
Instant settlement: For businesses that accept a high volume of one-time payments either in a store or online, it can make sense to skip the onboarding process that ACH requires and go straight for the credit card. This is mainly due to the fact that credit card payments settle instantly, allowing a business to reliably accept payments from anyone. It does come at a higher cost and risk of fraud (according to a Fed survey, ACH has the lowest fraud risk of any payment rail), but can certainly make things easier for one-time payments.
Consumer preferences: While credit cards are familiar and universal, most consumers aren’t quite 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 payments apps like Venmo—are becoming increasingly popular, especially among younger generations. 79% of Gen Z consumers use P2P payments platforms at least once a month, indicating a future shift towards other types of payments.
Despite the speed and rewards that credit cards can provide, ACH is still a viable option that can help businesses realize significant savings. 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 for accepting payments.
Three steps to get started with ACH
Countless businesses use ACH to accept payments, and getting started isn’t difficult. Here are three steps that any business looking to collect ACH payments can take:
1. Choose an authorization method.
In order to onboard new customers to make ACH payments, a business needs to verify that their customer’s account numbers are valid and the account is able to complete ACH transfers. The traditional way to achieve this was to have the customer manually verify microdeposits or provide a voided check for later verification (both of which can take several days to complete). However, new methods like instant account authentication have drastically reduced onboarding time and make ACH more secure.
2. Choose a payment processor.
There are countless ACH processors to choose from, including, Dwolla, Square, and others. Some banks can act as an ACH processor as well. When deciding on which processor to go with, 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 could look like this:
The customer chooses ‘pay with my bank’, ‘set up auto-pay’, or ‘fund 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 is handled by the ACH processor 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 are going to look at ACH as a viable new option. This is already happening across many areas, as the total value of ACH transactions rose 8.9% in 2019 and another 10.8% in 2020.
In the future, it’s reasonable to expect more ‘pay with your bank’ options, especially in mobile 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.