Breaking Down ACH Payments: Benefits and Drawbacks

ACH is short for Automated Clearing House and is a network that facilitates electronic transfers between bank accounts in the U.S. The National Automated Clearing House Association (Nacha) is responsible for setting the rules and regulations for ACH.

The most common use cases for ACH payments are digital B2B purchases, peer-to-peer (P2P) payments, direct deposits, subscriptions, disbursements, and online bill payments.

ACH credit vs debit

There are two main uses for ACH: credit and debit. ACH debit takes (pulls) money from a checking or savings account for a purchase or bill payment. An ACH credit adds (pushes) money into an account.

For instance, if a customer wants to pay their electric bill online and chooses ACH to pay the recurring bill, this would be a debit. Each time payment is due (monthly, quarterly, yearly), the amount would be pulled from their bank account and pushed to the electric company's account.

An example of an ACH credit would be a disbursement or payout. Let’s say you are an insurance firm that needs to make payments for home or car insurance claims. Historically, these payments were made with business checks, which took several weeks for claimants to receive. With ACH, you can transfer funds into a claimant’s bank account much more quickly.

When exploring ACH options, you’ll likely come across the terms EFT, eCheck, and wire transfers. These terms are commonly confused with one another, but there are slight distinctions between them.

Electronic funds transfer (EFT) is a blanket term for all digital transactions, including ACH, eChecks, credit and debit cards, mobile wallets, wire transfers, and direct deposits. You can think of EFT as the “umbrella” that covers all the different ways you can move money electronically.

Examples of what wouldn't fall under the EFT umbrella are cash, paper checks, money orders, and traveler's checks.

ACH payments

ACH payments are electronic payments made between bank accounts and are mostly used for recurring payments like subscriptions, bill pay, and direct deposits. That’s why in most cases, banking information from ACH payments is kept on file for later use.

ACH is also frequently used for high-value purchases, as processing and transaction costs are typically lower than other methods.

eChecks

An eCheck is a type of ACH payment. The main difference is that an eCheck is a digital version of a paper check that’s predominantly used for one-time payments and no banking data is stored.

For example, when someone pays with a check at a grocery store, the cashier runs it through a Check21 machine. The physical check is then converted to an electronic transaction that processes over the ACH rails. That’s why the cashier will hand the paper check back to the customer after they run it through the check reader.

Wire transfers

One of the key differences between wire transfers and ACH is that wires move money directly between banks and third-party agencies, therefore bypassing the Automated Clearing House. Wire transfers can also be used internationally and are typically faster than ACH payments but come with higher costs. Another important distinction is that wires are irrevocable, whereas ACH transfers can be reversed.

Wire transfers run on networks like Fedwire, which is managed by the Federal Reserve Bank, or Clearing House Interbank Payments System (CHIPS), which is a privately owned company.

One of the biggest draws to using ACH is the lower processing costs in comparison to credit and debit card payments. But there’s a catch. The savings you receive in lower fees come at the expense of longer processing and settlement times.

The average time to move and settle standard ACH payments is approximately two to five business days, but it can take up to 10 depending on the bank. For example, Finix’s default timeframe for settling ACH direct debits is 5 business days or T+5. This timeline starts at the date of the transaction and ends when the money is added to the seller’s account and provides ample time for payments to clear.

Depending on your provider, you can opt for faster transfers like two-day and same-day ACH, albeit for a higher fee. At Finix, you can adjust your ACH schedule to be faster or slower to fit your unique business needs.

Pro tip:  T + number means transaction date plus the number of days it takes to settle the transaction. Standard ACH is T+5, while next-day ACH is T+1. While accelerated ACH funding is an option, it runs a much higher risk of payment returns due to things like insufficient funds and account closures.

As with any payment method, ACH isn’t without risk. Cybercrimes like account takeovers, vendor impersonation, and ransomware are threats to any organization processing ACH payments. But one of the biggest risks is ACH returns from bad actors and friendly fraud, as well as the cost of legitimate returns.

Pro tip: A common misconception is that there are ACH chargebacks, but chargebacks are only applicable to card payments. ACH purchases are subject to returns.

ACH returns

The good news is most ACH payments process without a hitch. However, while typical use cases for ACH are low risk, fighting and winning returns is harder than winning chargebacks against card payments, even though cards are at higher risk of fraud.

There are more than 80 ACH return codes. The most common causes are due to insufficient funds, wrong account numbers, and stop payments. Nacha requires businesses to keep their overall ACH return rate below 15%. Otherwise, you risk falling out of compliance.

Another thing to note is that different facets of ACH have different thresholds. For instance, unauthorized returns should remain below 0.5%, and administrative returns below 3%.

See our ACH documentation for more codes and details about how to handle ACH. returns.

Cost of returns and ACH disputes

Even for legitimate ACH returns, your business still incurs a fee. The amount varies by provider, but at Finix, ACH returns are a fixed $5 each for Flat Rate and Dynamic pricing. There is also a $15 charge for each dispute. Fees can vary for custom plans. See our pricing page for full details.

Where it gets especially costly is high-value or large transactions due to returned payments. Some processors require you to pre-fund accounts if your average ACH transaction is above a certain threshold. On top of that, you’re responsible for return fees and can be out a sizable amount of money, especially if goods or services were delivered.

For this reason, the ACH network recommends having an established relationship with a buyer before accepting eCheck payments for products. Options like cards, B2B invoicing, bill pay, and subscriptions are more suited for e-commerce.

Managing ACH risk

The best way for businesses to protect themselves from ACH-related cybercrime is to remain in compliance with Nacha rules and regulations and to partner with a payments provider that offers advanced fraud protection.

When it comes to chargebacks and friendly fraud, you can minimize risk by allowing more time for ACH settlements. This is the reason Finix’s default funding timeline is five days, as this timeframe provides you with the most protection.

We also support slower and faster ACH processing times, along with the ability to set up security deposits to help reduce the risk for businesses that need faster payouts.

An ACH fee cap is a way to prevent ACH fees from going over a certain amount. It’s vital that your payments provider support fee caps as without them, fees can get outrageously expensive—especially for large transactions. This can end up hurting your bottom line. If your platform manages merchants, these fees can also cause bad experiences and lead to higher customer churn. At Finix, we support the use of ACH fee caps, but it’s important to check with your compliance team on what’s a reasonable fee related to your ACH transaction sizes.

Regardless of size, any business that maintains ongoing customer relationships can benefit from adding ACH payments to their available payment methods, as it ensures customers can choose their preferred option. But ACH is most beneficial for businesses that offer subscriptions, have recurring payments, or B2B companies that sell high-ticket items or services.

ACH processing works the same way for small, mid-sized, and enterprise-level businesses. The only difference would be costs, which are typically based on your provider and your processing volume. Small businesses would likely use standard or starter plans that included ACH payments, while large corporate businesses are most often on custom plans based on transaction volume.

Multiple payment options make for better customer experiences

While card payments are the most popular option for businesses and consumers, offering ACH is a great addition to your payment portfolio as it gives your customers more flexibility in how they can pay. For software companies that cater to merchants, it also gives your merchants an additional payment method to offer to their customers, which helps improve their experience and reduce churn rates.

At Finix, we’re all about flexibility and allowing you to create the experience you want for your customers. We support all major credit and debit cards, Apple Pay, Google Pay, ACH, and more. To learn how our payment solutions can help your business move money and make money. Fill out the form below: