No matter what type of products or services you offer, or how long you’ve been in business, every organization needs to accept payments!
Although credit card payments and ACH payments allow you to manage recurring payments quickly and easily, there are a couple of essential distinctions that must be understood. Read further to learn about ACH vs. credit card payments and how to determine which payment method is best for your business!
What is an ACH Payment?
In an ever-changing world of financial transactions, ACH payments play a pivotal role in streamlining payments, enhancing security, and advancing business operations. ACH is a type of electronic payment that can be processed as a credit transfer or direct debit. ACH is short for the National Automated Clearing House Association, which is the primary network used for processing electronic transactions between participating financial institutions.
There are two main categories of ACH transactions: direct deposits and direct payments.
A direct deposit any type of electronic transfer made from a business or government entity to a consumer, usually for payroll, government benefits, tax refunds, and interest payments. On the other hand, a direct payment can be used by individuals, businesses, and any other organization that is sending money. Examples would be sending money to a friend, purchasing a product or service, and paying bills.
What is a Credit Card Payment?
Most people are a lot more familiar with credit card payments compared to ACH. Credit card payments are the primary way businesses collect payments both online and in person! When comparing ACH vs. credit card transactions, it’s helpful to know how credit card payments are processed. Card transactions can be authorized in seconds but generally take between one and three business days to settle. Each card and payment type (online or in-person) commands different merchant fees. Card fees include:
- Interchange fees: These go to all parties but primarily the issuers, who handle the marketing and servicing of cards, as well as the customer relationship.
- Assessment fees: Paid by the merchant to be part of the card network.
- Payment processor fees: These are for a payment service provider (PSP).
ACH vs. Credit Card Payments
Processing Times
There can be a great difference between ACH and credit card processing timelines. While either transaction type is often completed within 24 hours, ACH payments may drag on for longer periods. Although ACH transactions are settled within one business day, the upper end of common payment timelines can be as long as seven business days.
Fees
There is a price to pay for this faster processing time! Before you even know it, credit card payments are hit with a variety of fees. Your bank, the customer’s bank, the bank issuing the credit card, and the credit card company all take a portion. By the time the payment enters your merchant account, you could be looking at 2-4% of the payment taken in processing fees. Although this may not seem like a lot, these fees definitely add up over time.
Regarding ACH vs. credit card fees, ACH transactions have an advantage. ACH processing fees are often much lower than credit card fees because the fees are usually flat and nominal, even for large transactions.
Payment Guarantee
Payment guarantee is another factor when it comes to ACH vs. credit card payments. As previously mentioned, a credit card transaction engages in an up-front authorization process that ties up the relevant funds, essentially guaranteeing that they will be available to the seller once the transaction closes. This allows for a more predictable cash flow and simplified planning efforts. On the other hand, ACH transactions offer no such guarantee and can potentially fail to close out for certain reasons.
With that being said, card numbers can change, or cards can get lost or stolen – all of which can interrupt recurring payments. ACH payments transfer money using bank account numbers. As long as the account is open, the account and routing numbers will not change, which means no interrupted payments!
Availability
When it comes to ACH vs. credit card payments, the question of availability is key to ensure both the payment issuer and recipient can support either one. For business-to-business (B2B) payments, ACH often wins out since most businesses rely on the banking system, whereas not all businesses can accept cards. For merchants, and specifically consumer-to-business (C2B) payments, supporting a variety of payment options, including cards, makes the most sense. Unbanked individuals, for instance, may rely on cards to complete transactions.
ACH vs. Credit Card Payments | Which one is better for your business?
Now that we’ve looked at ACH vs. credit card payments, it’s time to determine which one is best for your business.
If payments from customers are large (hundreds or thousands of dollars), ACH payments provide high savings opportunities over the percentage of credit card fees. If your business charges recurring payments or allow customers to pay in installments, ACH payments offer excellent automated, business-initiated payment options. Many businesses who choose to use the ACH network don’t mind the longer processing time because of the amount of savings per transaction!
So, when are credit card payments better than ACH? For storefront settings, ACH payments are not convenient because, generally, shoppers don’t know their bank account numbers off the top of their head. If your business consists of checkout lines (like a food venue or retail outlet), credit card payments are clearly the way to go for quick and seamless customer experiences. Credit cards are quick for customers to access, fast to process, and they’re not going anywhere anytime soon – especially as they transition from physical plastic to being stored digitally on mobile devices.
When determining ACH vs. credit card payments for your business, you must think about the pros and cons of each method. Chances are if you’re reading this article, you’ve already been thinking about ACH payments. Maybe you weren’t exactly sure how they worked, how they are different from credit cards, and how they would be better for your business. While ACH and credit card transactions have some similarities, credit cards process faster but come with percentage fees on every transaction. So, is the faster processing worth it?
When To Choose ACH:
- For lower-cost high-dollar and/or high-volume payments and B2B payments
- For automated, recurring payments
- For payments between parties with an established relationship
- For reduced fraud risk
When To Choose Cards:
- For customer convenience
- For quick authorization
- For payments between parties with no established relationship
- For businesses that wish to make a purchase using credit
