When researching your options for a payment system, you may have come across the choice of supporting ACH transactions but weren’t quite sure if they applied to your shop.
While ACH transactions make the most sense for merchants running eCommerce businesses, any merchant who conducts online or recurring transactions in any capacity could benefit from implementing ACH.
Let’s dig in.
ACH stands for Automated Clearing House, and you can think of it like a check without the paper. If you’re enrolled in a direct deposit program or pay your bills with monthly auto-drafts, you’re already used to using ACH.
It’s a little wordy, but technically speaking:
“ACH is a computer-based clearing and settlement facility established to process the exchange of electronic transactions between participating depository institutions.”*
To dig deeper, let’s define the individual terms:
Examples of ACH transactions:
Every year, ACH transactions move upwards of $41 trillion dollars across 24 billion transactions.* With that in mind, it’s no surprise that ACH now represents a significant portion of the financial transaction market, and it is widely considered a safe and reliable option for both B2B & B2C transactions.
ACH payments are easy to understand on the surface level, but what’s going on behind the scenes is actually quite complicated and fascinating. Here’s is what exactly is going on via NACHA.org (the electronic payments association that governs ACH payments):
Most business owners don’t need to know all the nitty-gritty, but here’s what you definitely need to know:
While the ACH payment processing time isn’t as fast as credit cards, transactions do move quickly. It usually takes a few days for a transaction to transfer, and that speed is increasing every year.
Why does ACH take longer than other transaction types?
While NACHA’s guidelines make sure credits are processed within 1-2 days and debits by the next day, the receiving bank usually takes a few more days to process the fees from the ACH network.
Good news is on the way, though! ACH payments typically batch only once at the end of the day, but NACHA is working on changing that frequency to three times a day in 2018.
A.k.a. Why should I care as a business owner? Well, let’s start with the most direct motivator:
It’s the cheapest transaction method.
When running a business, you’ll notice that common transactions typically fall into three categories: ACH, Paper Check, and Credit/Debit cards, and ACH is cheaper by far.
Let’s do a bit of math to demonstrate:
If you’re selling an item at a list price of $300, let’s consider the fees via each transaction method. It will never be uniform across the board, but let’s play along for this example.
Typical fees for each type are approximately:
In this example, the ACH isn’t even 10% of the card transaction projected cost. And keep in mind, this is just a single payment, so if your business is conducting even 100 of these transactions every few months, you could be saving around $500 year after year.
ACH is Great for Subscription Services
If you offer any sort of recurring service or product (e.g. monthly coffee deliveries), then ACH transactions are a great option for you. Customers don’t have to worry about paying you every month since ACH supports auto-draft capabilities, and you don’t have to worry about spending time and energy tracking down payments.
Plus, you’re likely to have fewer headaches since ACH transactions can only be disputed for three reasons: the charge was the wrong amount, it was authorized earlier than anticipated, or it wasn’t authorized at all. This reduces the payment hassles that typically accompany credit card transactions — especially when handling larger transaction amounts.
Banks process electronic payments first, which means your business will get paid faster than physical checks by transacting via ACH. ACH transactions are usually processed the next day and transferred within 3-5 days, and companies are improving that speed by the day.
With high profile credit breaches serving up harrowing reminders of the importance of cybersecurity and with financial fraud on the rise, it’s important to take the security of your customer’s financial assets seriously. The same information required for checks is required for ACH, but it’s all transferred over an encrypted network and doesn’t pass through multiple hands like a physical check does.
Make sure that the ACH provider you choose has stringent security measures in place to prevent information leaks. NACHA keeps a close eye on ACH security, and their rules outline a variety of processes you and your processor need to follow to remain compliant. Their goal is to provide the ACH service while protecting sensitive customer data, so any transfer of information over an unencrypted network or vulnerable web forms is strictly prohibited.
Reduces Paper Waste
Supporting ACH reduces the need for paper checks, and this reduces paper waste while saving you time and money.
The benefits aren’t just on the business side. ACH payments can be much more convenient for consumers when paying for certain types of services, retainers, and subscriptions.
It’s possible that you’re already set up to accept ACH payments, but you’re just not taking advantage of that service offered by your payment processor. Your first step is to look into your existing provider and see if they offer it. Either way, it’s a smart decision to do a bit of shopping around when it comes to payment providers that offer ACH capabilities. There are a lot of options, and many payment processors fail to pass on sufficient savings to their customers.
Make sure you compare the offer your existing payment processor is giving you with a variety of businesses online. As represented in the scenario above, even a small rate change can have a large, compounding effect moving forward.
If you’d like to know exactly how much you could save by introducing ACH into your business process model, have the Tidal Commerce team review your payment statements for free and offer suggestions on how to cut costs.
While setting up ACH isn’t as easy as accepting a credit card, the benefits often outweigh the inconvenience. When setting up an ACH payment system with your customer or client, you’ll need:
That’s it! Some processors may require additional information, but that’s all you’ll need to ask of your customers.
When an ACH payment fails, you’ll get a specific code for why it did and when from your bank. Here are the most common of those codes:
R01 – Insufficient funds.
The customer just doesn’t have enough money in the associated account. At this point you should notify the customer and establish that service will be discontinued unless the issue is resolved OR procure a different account for payment.
R02 – Bank account closed.
R02 fires when the account you had ACH payments set up with no longer exists or is closed. This is common when consumers just change banks and don’t update their payment information. Just reach back out and ask them to update their information.
R03 – No bank account/unable to locate account.
This usually occurs before the ACH relationship is set up — the system can’t find the account the user is referencing with their information.
R29 – Reject
This code fires when the customer’s banks has a preventative measure against ACH payments. You’ll need them to deliver your ACH originator ID to their bank and ask them to enable ACH payment privileges.
R29 could also open you up to penalties tied to rejected ACH payments. Make sure you resolve any issues as quickly as possible and only establish ACH relationships with customers you can count on.
ACH payments are an obvious choice for many businesses — they’re cheaper, more secure, and getting faster by the day. And since it’s more convenient for customers as well, signing up customers is easy and comfortable if you sell subscriptions or recurring services. Just make sure you use a good processor who respects NACHA and keeps up with their changing rules!
Tidal Commerce loves to work with smart, driven business owners. We work with retail, healthcare, professional services, eCommerce, nonprofits — you name it. And as long as you want to grow your business and appreciate transparency and honesty, then you’ll fit right in.
Think you’re in that camp and want to use ACH payments in your own business?
Subscribe to our newsletter and get payment processing news & insights sent to your inbox.
You can unsubscribe at anytime.