Selecting the right payment method plays a big role in maintaining steady cash flow and meeting customer expectations. ACH and credit card transactions stand out as two widely used options, each with its own advantages. From recurring payments to one-time purchases, knowing how these methods work and where they excel can help businesses make smarter choices that align with their goals.
Let’s take a closer look at these two payment methods below.
What are ACH Payments?
ACH transactions are a type of electronic funds transfer that moves money between bank accounts using the ACH network. Governed by the National Automated Clearing House Association (Nacha), this network acts as an intermediary, helping financial institutions process large volumes of transactions efficiently.
These transactions are perfect for recurring payments, such as subscriptions, payroll, or utility bills. They also offer a cost-effective solution for B2B payments, avoiding the manual processing associated with paper checks.
How Do ACH Transactions Work?
ACH transactions follow a structured process to ensure accuracy and efficiency. Here’s a step-by-step breakdown:
- Initiation: The process starts with an originator—a business, individual, or government entity—requesting a payment. This could involve crediting funds to a bank account (like payroll deposits) or debiting funds from an account (like utility payments).
- Batching: Instead of processing each transaction separately, the originator’s bank, also known as the Originating Depository Financial Institution (ODFI), batches multiple transactions together. These batches are then sent to the ACH network for processing.
- Processing: The ACH network sorts the batches and routes each transaction to the appropriate financial institution. Processing occurs at scheduled intervals, often overnight or several times during the day.
- Settlement: Once sorted, the transactions are sent to the Receiving Depository Financial Institution (RDFI), which updates account balances by crediting or debiting as needed. This step finalizes the transaction.
The entire process generally takes one to three business days, though same-day ACH options are now available for faster transactions.
Why ACH Transactions?
ACH payments are a reliable and cost-effective method for businesses that handle recurring payments or large-scale transactions. By using the ACH network, businesses can lower transaction costs compared to credit card networks, making it a preferred choice for managing cash flow efficiently.
For example, a subscription service can use ACH payments to collect monthly fees directly from customers’ bank accounts, avoiding the higher fees associated with credit card processing.
Understanding Credit Card Payments
Credit card payments are a widely used option for businesses to receive funds quickly and efficiently. They involve several steps, ensuring secure and accurate processing.
- Authorization: When a cardholder makes a purchase, they swipe or insert their credit card or enter their details online. This action triggers an authorization request, which the business’s point-of-sale (POS) system sends to the acquiring bank. The acquiring bank forwards the request to the credit card network, which then contacts the cardholder’s issuing bank.
- Approve or Decline: The issuing bank reviews the cardholder’s account to ensure enough credit is available and the card is in good standing. If approved, the issuing bank sends authorization back through the credit card network to the acquiring bank and then to the business. If not, the transaction is declined, and a message is sent explaining the issue.
- Batching: At the end of the day, businesses batch all approved transactions and submit them to the acquiring bank for settlement.
- Settlement: The acquiring bank processes the transactions with the credit card network, which forwards them to the issuing bank.
- Funds Transfer: The issuing bank transfers the funds to the credit card network, which sends them to the acquiring bank. The acquiring bank then deposits the funds into the business’s account, usually within one or two business days.
- Billing: The cardholder receives a monthly statement from their issuing bank, detailing all transactions and the total amount owed. They must make at least the minimum payment by the due date to avoid late fees or interest charges.
Key Differences Between ACH and Credit Card Payments
Transaction Fees
When it comes to fees, ACH is usually the more budget-friendly option. Businesses pay either a flat fee or a small percentage of the transaction amount, making it a great choice for saving money. On the flip side, credit card payments often come with higher fees because credit card companies charge a percentage for processing.
For example, a $100 ACH payment might cost a business just $1, while the same amount via credit card could end up costing $3 or $4.
Processing Times
ACH payments typically take one to three business days to process. Sure, same-day ACH is available, but it's not always an option. Credit card payments, however, are faster, with funds often arriving within one or two days, making them a better fit for businesses that need quick access to cash.
Accessibility
Credit cards are widely accepted and offer the instant gratification that many customers love. ACH payments, on the other hand, are still mostly tied to bank accounts, which can limit their appeal to customers who prefer the convenience of card payments.
Risk and Chargebacks
Credit card payments carry a higher risk of chargebacks since customers can dispute transactions directly with their credit card company. ACH payments have fewer chargebacks, as disputes need to follow stricter guidelines and timelines, reducing risks for businesses.
Customer Experience
Credit card payments are fast, easy, and ideal for those who want quick transactions. They're the go-to choice for both online and in-person purchases. ACH payments, while not as fast, are great for recurring payments like subscriptions or utility bills—where convenience is key, but speed doesn't matter as much.
Transaction Limits
Credit card payments are fast and convenient, making them the go-to choice for many, especially for online and in-store purchases. ACH payments, though less immediate, work well for recurring transactions such as subscriptions or utility bills, where convenience matters but speed isn’t as needed.
Which Payment Method is Right for Your Business?
In the debate between ACH vs. credit card payments, each has its strengths. ACH transactions are affordable and perfect for things like recurring payments or large transfers. Credit cards, on the other hand, are all about speed and flexibility, making them a great choice for quick purchases and customer convenience. For instance, a business offering subscriptions might prefer ACH to keep fees low, while a retail shop would likely opt for credit card payments to speed up transactions.
Finding the right balance between these options can help your business save money, improve customer satisfaction, and keep cash flowing smoothly. Take a step back, think about your needs and your customer's preferences, and choose the mix that fits your growth.
