The Pros And Cons Of ACH Payment Methods
Short for Automated Clearing House, ACH is an electronic financial network that allows users to send and receive funds securely. The process works when two parties (i.e., a sender and recipient) authorize their respective banks to transfer money between each other.
ACH transactions share many similarities with traditional paper-based checks, but all payments happen digitally across the ACH network, so they’re often referred to by two other names:
- Electronic funds transfers (ETFs)
The Automated Clearing House network is ideally suited for recurring payments. Once two partnering banks have established a secure connection, it’s easy to continue transferring funds on behalf of the sender and receiver. This explains why so many companies use ACH payments for direct deposit.
However, payroll isn’t the only potential application of this payment method.
Many businesses also use ACH to sell products and services to their customers. Although there are certain advantages of this approach, ACH payments have certain drawbacks. before adding this payment option to your business, it’s important to understand the relative pros and cons.
The Pros of ACH Transactions
Arguably the biggest advantage of ACH is cost. Because all transfers happen directly between the users’ banks, there aren’t as many middlemen (like payment processors). As such, ACH fees typically range between $0.25 and $0.55 per transaction, which is a fraction of what most merchants pay to accept credit cards.
Below are some additional benefits of this payment method:
- Greater convenience. ACH transactions happen largely behind the scenes — without your having to physically collect, carry or process paper-based checks. This frees you up to focus on more important tasks.
- Increased security. ACH payments help shield you from fraud, as transactions can be initiated only after both parties have authorized their respective banks to cooperate.
- Fewer chargebacks. It’s very difficult to reverse a successful transaction once it processes. You (the merchant) always have the option to refund a buyer’s purchase, but that buyer can’t necessarily initiate a chargeback from his/her end.
- Smaller carbon footprint. ACH payments happen electronically, meaning there are practically no material resources involved. This is in sharp contrast to checks, which use envelopes, ink, stamps, printers, photocopiers and gasoline (for delivery) — not to mention the physical checks themselves.
Given these benefits, why doesn’t every merchant accept ACH payments?
The Cons of ACH Transactions
The biggest drawback of ACH is that all transactions are processed in batches. Incoming requests accumulate on the network until a certain threshold is reached, at which time all pending transfers are processed at once.
This makes ACH payments unsuitable for time-sensitive transactions.
Worse still, there’s always the potential that a buyer doesn’t have sufficient funds. Because of batch processing delays, you might not learn of the declined sale until after you’ve released your product or service to that customer.
This is essentially the digital version of a “bounced” check.
Should You Use ACH Payments in Your Business?
If you currently accept paper checks, ACH transactions offer a lot of benefits. They’re faster and greener. And since ACH payments happen electronically, they’re much easier to process.
However, if you’re concerned about settlement delays and the potential of “bounced” payments, ACH might not be the best approach for you — at least when selling to customers.
However, low cost and high security make ACH payments perfect for covering personal expenses — for example, when making recurring payments to:
If you already have a sizable number of employees, there’s a good chance your payroll department is already using ACH for direct deposit.