How ACH Payment Processing Works and Its Better Alternative

By Raven Haynes

If you’ve ever used direct deposit for your paycheck or signed up for recurring payments where the merchant deducts the funds from your checking account, then you’ve experienced ACH payment processing firsthand. It’s just one of the digital ways to move money from point A (your customer’s bank account) to point B (your business bank account). 

Now that recent changes have made ACH processing faster and easier to use, you may be looking at this payment method with fresh curiosity. How can business owners take advantage of ACH payments? And how do ACH payments compare to credit card payments and other electronic payment options?

We’ve got answers. Learn the basics of ACH payment processing for small businesses and service providers, then see how ACH payments and credit card payments stack up by cost, wait time, and reliability.

What is ACH Payment Processing?

ACH refers to the Automated Clearing House, a U.S. payment processing network that’s managed by the National Automated Clearing House Association (Nacha).

ACH payments are electronic fund transfers between banks. So, ACH payment processing is a convenient way to send and receive money using only a bank account number and routing number — no cash, checks, or cards necessary. 

There are two main kinds of ACH transfers: 

• An ACH debit transactions “pulls” or withdraws funds from an account. (Ex. Your bank automatically withdraws a monthly membership fee from your customer.)
• An ACH credit “pushes” or sends funds from an account. (Ex. The customer activates auto-pay for their monthly gym bill in their bank account, so their bank automatically sends you the fee.)

Businesses save time using ACH payments because they eliminate the need to deal with fraud-prone paper checks, handle recurring billing manually, or hunt down payments sent by mail. You simply ask your customers or vendors to authorize ACH transactions. Also, businesses can now send up to $100,000 per transaction, making it a better option for large B2B payments. 

Banks gather ACH transactions into “batches” and process them two to three times each day. Batching transactions lets banks reduce operational costs and pass the savings to your business as lower transaction fees. 

The trade-off? It can take up to five business days to receive your funds with this stop-and-go process — a deal-breaker for businesses with tight cash flow or thin margins. There are now same-day ACH options, which we’ll cover later. 

How Does ACH Payment Processing Work?

Here’s a high-level example of what happens when you request an ACH payment:

1. Your company sends an invoice to your client.
2. The client submits the invoice to their bank, known as the Originating Depository Financial Institution (ODFI).
3. The client’s bank enters the invoice amount and necessary account information then batches it with the day’s other ACH payments.
4. Your batched invoice payment is sent to your bank, known as the Receiving Depository Financial Institution (RDFI), after it’s cleared. 
5. Your bank credits your account for the invoice amount.

ACH Payment Lookalikes

See how to distinguish ACH payments from similar terms:

• ACH vs. electronic funds transfer (EFT): EFT is an umbrella term that refers to ACH payments, e-checks, wire transfers, and other kinds of digital payments. ACH is just one type of EFT. 
• ACH vs. e-check: E-checks are virtual checks that can be processed using the Automated Clearing House network. Most importantly, e-checks are governed by different rules than ACH payments.
• ACH vs. wire transfer: Generally, wire transfers are real-time bank-to-bank transfers, while ACH transfers are processed in batches and take several days to process.

ACH Fees vs. Credit Card Processing Fees

ACH payments	Credit card processing
3-5 business days processing time	2-3 days processing time
Fees range from $0.20 to $1.50 per transaction or a percentage of 0.5% to 1.5%.	Fees range from 1.5% to 2.9% +

By now, it’s common knowledge that modern businesses need to accept credit cards to serve the majority of consumers. (One survey showed that 90% of small businesses take credit card.) But business owners still need to understand the major differences between card payments and ACH payments. Use this side-by-side comparison:

ACH Payment Processing Time

ACH payment processing time is generally slower than credit and debit card payment processing time. The typical turnaround for ACH payments is three to five business days, as opposed to two to three days for credit card transactions. 

The time of day you initiate an ACH influences wait time, so ask your bank about its batch cutoff times. Same-day ACH payments became more widely available in 2019, but be aware that some banks add on fees or reserve this service for top clients.

ACH Transfer Fees

Although they take longer to process, ACH payments tend to cost less. ACH payment providers either charge a flat fee of $0.20 to $1.50 per transaction or a percentage fee of 0.5% to 1.5%. 

By contrast, the average credit card processing fee ranges from 1.5% to 2.9% for swiped cards. Reputable merchant services providers and payment processors like Payment Depot will help you get the lowest rates regardless of which processor or method you choose. 

ACH Transfer Payment Reliability

For each credit card transaction, card networks verify that cardholders have enough funds left for payment. If funds are approved, they’re guaranteed to the merchant — what’s known as a “guaranteed funds” transaction.

ACH payments don’t offer a comparable payment guarantee. An ACH is first and  foremost a fund request. Your transaction could be rejected or returned — days after receiving funds — because the sender was found to have insufficient funds or a closed account. 

How to Set Up ACH Payments for Your Business

Thinking about accepting ACH payments in your business? Here are the steps you should take to do it right.

1. Select an ACH Payment Processor

The first step is to select a provider that can support ACH payments. If you already have an existing payment processor, it’s worth checking they offer ACH services. This way, you can keep all your payment needs under one roof. 

If you decide to shop around, you can look into the vendors and providers.

• Payment processing platforms. Companies such as Stax by Fattmerchant and Stripe offer ACH services in addition to credit card processing. 
• Your bank. Check with your banker and ask if they support ACH. Most financial institutions, including U.S. Bank and Chase, offer ACH as part of their business banking offerings. 
• Financial services software. Your accounting, bookkeeping, or invoicing software may also have features that support ACH payments. For instance, QuickBooks has built-in capabilities for accepting ACH transfers and eChecks. 

Whichever option you choose, remember that ACH processing isn’t free. The good news is that the fees are typically minimal. QuickBooks, for example, charges 1% with a maximum cost of $10.

2. Setting Up ACH Transfer Tools and Procedures

The next step is to establish the software and procedures for accepting ACH payments. The nuts and bolts of this step will vary depending on your provider, but the following tools are typically used to power ACH payments and transfers:

• A virtual terminal, which you can use to input the customer’s banking info.
• An ecommerce website, which can provide a self-service platform for shoppers who’ll enter their banking information themselves. 
• ACH forms, which you’ll send to customers so you can get obtain their banking details. 

Which Merchant Payment Method Wins Out?

If you have to pick one, credit card payments have the advantage. They’re widely adopted, transmit funds quickly, and provide merchants crucial payment protection. That said, ACH payments are a wise addition to your payment methods, particularly if you need recurring billing. They make up for the long wait time with added revenue predictability.

Which Businesses Should Use ACH Payment Processing?

If you answer “yes” to any of the questions below, ACH payments might be a worthwhile addition: 

• Do your customers need to use recurring bill payments? 
• Do you process a high volume of paper checks or invoices? 
• Does your target market avoid using credit and debit cards, especially for card-not-present transactions (online, phone, etc)? 
• Is part of your target market currently ineligible for credit cards?
• Are B2B goods or services a significant portion of your business?
• Are you a high-risk business that’s unable to set up a merchant account to accept credit cards? 

The Bottom Line

Now that you know the ins and outs of ACH payment processing, you’re prepared to make the right choice. Consumers have different payment preferences, so the more options you provide, the more likely you’ll have a happy customer and another sale. 

Have questions about how to get set up with credit card processing or how ACH payments compare to other payment solutions? Get in touch with the Payment Depot team.