ACH vs eCheck: What Every Small Business Owner Needs to Know

The continued growth of the global payments industry reflects clearly in record-setting ACH payment volumes. In fact, the National Automated Clearing House Association (or NACHA) set two new volume records during the first quarter of 2021.

The volume of payments in Q1, 2021 was 7.1 billion, which is an increase of 11.2% from Q1, 2020. The value of these payments was $17.3 trillion — almost a 19% increase from the same period in 2020.

New ACH processing volume records were also set in February and March 2021. In March, ACH payment volumes reached 2.7 billion, the biggest ever. This impressive figure includes approximately 110 million direct-deposit economic impact payments from the federal government.

Common payment processing methods 

The digital payments industry continues its rapid expansion. As a result, small business owners have access to an increasing number of payment methods.

Common transaction types include wire transfers and card payments, with credit card payments being especially popular. Although some consumers still prefer traditional check payments, their use continues to decline — electronic checks (or eChecks) are quickly taking their place.

What are eChecks? 

An eCheck, or electronic check, is a widely used form of online payment. An eCheck involves the electronic withdrawal of funds from the payer’s checking account. Then, the money is transferred over the Automated Clearing House Network (or ACH Network) before being sent to the payee’s checking account.

For reference, the Automated Clearing House Network is an electronic network used by virtually all United States financial institutions. Most brick-and-mortar retailers typically maintain ACH merchant accounts.

Having an ACH account enables a retailer to deduct goods or services payments directly from each customer’s bank account. Ecommerce retailers also use the ACH Network to process their customers’ online purchases.

eCheck processing guidelines  

Note that a business owner cannot arbitrarily withdraw money from a customer’s bank account. Instead, the customer must authorize each electronic payment.

This authorization can be in the form of a signed contract or a recorded conversation. If a customer clicks the “Accept” box of a website’s relevant “Terms and Conditions” text, they have likely authorized eCheck usage.

When processing an eCheck payment, a merchant pays a smaller fee compared to any other electronic payment method — regardless of the payment amount.

This makes eChecks extremely popular for big-ticket items such as mortgage payments, rental fees, and car loan payments. Using an eCheck to pay high-dollar monthly fees, such as an attorney’s retainer, makes good business sense. 

An eCheck deduction is also an efficient way to execute recurring payments such as utility bills and online magazine subscriptions.

How electronic checks differ from paper checks

When comparing electronic checks to paper checks, there are several major differences. The following comparison shows that electronic checks have four clear advantages over traditional paper checks.

1. Reduced production expense

Electronic checks do not involve printing costs. In addition, paperless transactions mean less environmental impact.

2. Personal convenience 

ECheck users do not have to maintain and carry a checkbook. In addition, they do not need to worry about check theft and fraudulent use.

3. Stronger security measures 

Electronic checks offer more robust security protection. Specific protocols are in place to ensure electronic payment security.

4. Streamlined payment operations 

Electronic checks enable employers and other business organizations to utilize direct deposits. This payment processing modality is useful for paying employee wages along with other business obligations.

How eCheck payments work 

The eCheck processing cycle somewhat resembles the paper check processing cycle. However, eCheck transactions are processed in seconds while paper checks often take several business days to clear.

All eCheck payments follow the same check processing guidelines:

Business authorization – The business receives authorization to debit the funds from the customer’s bank account. To do this, the customer signs a contract or completes an online order form. Alternatively, the customer can electronically agree to the website’s relevant “Terms and Conditions.” Some customers opt to provide their approval in a recorded phone conversation.

Payment framework – The business enters the payment information into its online payment processing system. Essential details include the customer’s bank routing number and bank account information. Recurring payments must also include schedule-related details.

Payment submission – The business confirms the accuracy of the information, and then clicks “Save” or “Submit.” This action puts the ACH payment processing cycle into motion.

Payment completion – The payment amount is deducted from the customer’s bank account, and the customer immediately receives a payment receipt. The funds are then deposited into the business’ bank account. The merchant typically receives those funds three to five business days after the ACH transaction begins.

What are ACH payments?

ACH payments (or ACH transactions) are a specific type of electronic payment method. These electronic funds transfers (or EFTs) take place between two banks. ACH payments can be executed using only a bank routing number and bank account number.

How ACH payment processing works 

Every ACH transaction involves an originator and a recipient. The National Automated Clearing House Association (or NACHA) monitors each payment for accuracy.

Here’s how ACH transfers work:

1. The originator’s bank transmits an ACH transaction to the NACHA portal.
2. NACHA ensures that all needed payment information, such as the bank routing number and customer account number, are present. If everything checks out, NACHA approves the transaction.
3. The recipient’s bank receives the approved ACH transaction request.
4. The money is deducted from the originator’s bank account.

ACH vs eCheck: What’s the difference? 

ACH and eCheck payments are essentially processed the same way. In the United States, NACHA monitors and approves both payment transaction types.

ACH transactions are generally used for payments between two individuals. In addition, this payment method is frequently used for batched salary payments and a certain number of recurring payments.

In contrast, eChecks are commonly used for recurring payments. Examples include monthly mortgage or rent payments along with regular supplier expense disbursements. Note that your business’ recurring payment option depends on your bank’s or payment provider’s offerings.

ACH vs eCheck: Which is better for your small business?

In the ongoing ACH vs eCheck debate, their similar functions make it difficult to decide which option is a better fit. In fact, banks and payment processors frequently interchange these two terms, further confusing the issue.

To make the decision, consider the nature of your small business and which factors are most important to its growth. Within that context, decide which method you should use to process payments.

1. Geographical limitations

ACH transfers only take place in the United States. If your company does business internationally, eChecks should be the default choice.

2. Transaction speeds

Banks send batched ACH payments three times per day. Allow two to three banking days for routing of a typical ACH transaction.

An eCheck’s processing time depends on the service provider’s procedural complexities. Allow two to five business days for eCheck funds to be deposited into the recipient’s account. For faster cash flow, ACH payments would appear to be the better choice.

3. Security and safety

ACH payments and eChecks are both extremely secure types of electronic payments. NACHA controls these transactions in the United States. No NACHA equivalent exists on an international level.

When processing an eCheck through another country’s banking system, that country’s ACH system manages your electronic payment. An international framework of financial institutions oversees electronic transactions in the global marketplace.

4. Transaction fees

You should generally not incur an ACH transaction fee for paying a utility bill or sending payments to another individual from a bank account. However, businesses will pay ACH transaction fees.

For example, a company that pays its employees via ACH transactions will be charged a transaction fee. You should expect to pay between 0.5% and 1.5% of the total dollar amount of a single batch.

ECheck fees range between $0.2 and $1.50 for each transaction. International eCheck fees will be different from domestic eCheck charges.

Your bank or payment processor can help you compare ACH vs eCheck transaction speeds and costs. If the two payment methods are essentially equal, either option should be fine.

The bottom line

Now that you know the differences (and similarities) between ACH payments and eChecks, you should be better prepared to make the right choice for your small business. Providing your customers with varied payment methods will make them more likely to perceive that your business meets their specific needs. 

Contact the Payment Depot support team today to learn how ACH transactions fit into the larger payments universe.