Score! You're getting a tax refund this year! Which means you'll have some extra cash deposited into your account for a nice family dinner or to pay off some bills. To have that refund automatically deposited into your account, you've set up your tax account with your banking information. It's so convenient, now you're wondering how you can set up that process to transfer payments electronically for your own business and how that process works.
Here's the breakdown:
Your tax refund was likely deposited into your account through an Automated Clearing House (ACH) payment.
ACH payments are "push" payments initiated by the individual or entity sending the money, like the tax department. This system uses the same process your company does to "push" payroll to your employees. Basically, ACH is simply a system of bank-to-bank electronic payments.
The question currently is if you could use ACH to streamline other payments - yes.
Many companies use ACH B2B transfers for one-time and recurring bill payments. Far better than paper checks "“ cheaper and more secure, it makes sense to use ACH payments.
But you can also accept ACH payments from other businesses and individuals "“ as an alternative to accepting credit cards for purchases.
Which brings us to consider the similarities and differences between credit cards and ACH Payments.
How Do Credit Cards Fit into the ACH Scheme of Things?
Everyone is familiar with how credit cards work in-person or online. The cardholder decides to make a purchase and they provide their card (or at least the number, expiry and CVV) to you, the vendor.
This exchange initiates a transaction that might be instantaneous but might take a few days. The cardholder borrows money from their banking institution, which is then paid to you as the merchant and the cardholder pays their bank back later. Merchants will pay a fee for the ability to process the customer's credit card, unless they implement a surcharge or convenience policy to pass this cost onto the customer. These fees are often more expensive than ACH payments but have nearly the same functionality.
Why Bother to Consider ACH vs Credit Cards?
Diners Club started the credit card trend in 1950, but the frenzy of bank credit cards didn't really take off until the 1980s. Now ubiquitous, most businesses offer the flexibility of credit card payments to their customers but at higher processing costs than cash, debit or ACH payments. That is just one of the reasons many businesses will choose ACH over credit cards, especially for BTB transactions where they might not be able to take advantage of rewards programs and cashback options like many consumer cards.
ACH can help your business through:
- Widely accepted for business operations
- Transfer instead of borrowing money
- Lower fees than credit cards
- Automated and recurring payments or deposits
- Account information doesn't expire like a credit card
Things like your tax refund, paying your vendors, and making payroll, work much like a credit card, except that nobody borrows money from an institution, and instead the funds are pulled from one account and deposited into another.
Plus, your employees don't accept credit cards. Maybe some of your vendors do, but probably only from their consumer clients (if they have some), not from your business. Hence why you need a standardized and automated process to pay payroll every month.
Finally, consumer credit cards are everywhere. And you may even have a credit card for business expenses to make retail purchases. But accepting credit cards B2B for larger amounts has always been less common than paying vendors by check or money transfer.
The differences you'll want to know about ACH vs Credit Cards
Both ACH and credit cards let your company accept payments. That's the bottom line. The question is "“ which one is better, or should you use both?
The answer, right up front, is that both are probably the right answer. Some consumers prefer using their credit cards, especially for their perks, hence why you should continue accepting those. On the other hand, many vendors or customers prefer the convenience of payments being pulled from their account instead of paying their credit card off, they might not qualify for a credit card, or a multitude of other reasons why they may prefer ACH.
Now let's look at how that impacts your company.
The three critical issues are:
- Payment guarantees
- Processing times
Credit cards provide guaranteed funds. The network verifies that the cardholder has the credit and approves the transaction, so the funds are guaranteed. ACH does not guarantee funds. An ACH transaction could be rejected for Non-Sufficient Funds (NSF) or because the sender closed their account, more like a check, without the paper.
Credit card payments process between 24 hours and 3 days, but usually, you receive the payment immediately. This speed of payment can significantly impact cash flow. ACH processing times could take more than 3 working days to be deposited into your bank account but usually 2-5 after the first deposit is approved and made.
Credit cards typically charge 2.5% or more on the transaction's value, plus additional processing fees. ACH fees vary depending on the processors. Some processors charge a flat rate, usually between $0.25 and $0.75 for each transaction. Others charge a flat percentage, usually between 0.5% to 1.0%, for each transaction. You could also be charged an additional monthly fee so watch out for hidden fees. But ultimately, ACH transactions have the lowest costs of any payment system. The higher your sales volume, the faster your savings from ACH transactions add up.
ACH vs Credit Cards "“ What is Best for Your Business?
Yes, you still need to accept credit cards, but they have a time and a place. In the meantime, offering your customers as many of their preferred payment options as possible is not a bad thing. They get the flexibility while your business can take advantage of medium specific benefits such as ACH. When it makes sense, you can set up ACH payments to streamline recurring payments at a lower cost for a slightly longer processing time. If time is not your primary concern, ACH is a viable alternative for processing payments, paying vendors or bills, setting up automatic payments, deposits, and even payroll.