Process Differences Between ACH Payments and Credit Cards

Process Differences Between ACH Payments and Credit Cards

An ACH payment is a bank-to-bank transfer facilitated by the Automated Clearing House (ACH) Network and other ACH Operators. Because it is automated and far more reliable than sending other forms of electronic payment, many people prefer to use ACH payment as the primary form of sending money in the United States, either for business or for a personal transaction. 

ACH payments can minimize the cost associated with making a financial transaction but can they be used by every business? 

Based on the cost comparison, an ACH makes sense for electronic transactions. 

To give you a better understanding of what an ACH payment is and how it can be beneficial, this article will compare ACH payments and credit cards:

  • Pros and cons of using ACH payments
  • Pros and cons of using credit cards
  • Cost comparisons between ACH payments and credit card payments
  • How to choose between ACH payments and credit cards for your business

Pros and Cons of Using ACH Payments

An ACH payment is the transfer of funds electronically from one bank account to another. This type of electronic payment can generally only be sent in USD as it moves through the Automated Clearing House (ACH) Network. ACH payments are considered to be either an ACH debit (to pull money out of the account) or an ACH credit (to put money back in). 

There are many benefits to using ACH payments when sending money electronically. Here are a few:

Low cost: While not free, an ACH payment has an extremely affordable transaction fee. An ACH payment costs banks about $0.29 for ACH processing. Most banks will only charge $1 to $1.50 in order for an ACH transaction to occur. 

ACH Payment Processing: A third party payment processor, such as a digital wallet or ACH API, like Sila, can securely connect a user’s checking account to the TPPP in order to facilitate ACH payments with merchants or friends. 

Secure: While ACH fraud is still possible. ACH payment transfers are one of the most secure ways to send money. This is because the payment is automated, so there is less chance for actors facilitating the transaction to commit fraud, and because it moves through the ACH Network for verification and validity. 

ACH Billing: When working with someone with whom you trust, you can sign on for an ACH billing method like direct deposit or EFT. ACH billing is automated bill pay where the payments can be scheduled. This can diminish the cost of payment processing with a large business and provide reliable and on-time payments for employees. 

While there are many benefits to sending money as an ACH transfer, there are also some disadvantages. For example, for many transactions, you must provide your sensitive banking information. 

You also cannot simply plug in someone’s banking information into your online bank. Banks usually only have a bill payment section for those who have been approved. Anyone else that you would want to send to must find a TPPP in order to facilitate this or bank service. 

Lastly, ACH funds aren’t immediately available. An ACH transfer processing times are at least 1 business day, but most take 3-4 business days for the entire process to be completed. Therefore, if you are looking to transfer funds immediately, you either have to search for a service that will front the cost in order to facilitate funds being immediately available or find another method. 

Pros and Cons of Using Credit Cards

Another common payment method is a credit card. A credit card is usually a Visa or MasterCard branded card that allows for the card owner to pay for something in advance. The credit card charges compound daily interest which is charged monthly. 

While credit cards are extremely convenient and provide people with a lot of versatility, credit card debt is the largest contributor to debt in the United States. 

Here are some reasons why you should use a credit card:

Very fast: So long as the credit limit and currency (or currency conversion) is accepted, a credit card can facilitate that a payment is completed in that instant. Therefore, the funds are immediately sent to the merchant account and the transaction is completed. 

Convenient: In addition to the speed, credit cards offer users a lot of convenience. The credit card payment is usually protected by the credit card network, which protects companies in disputes and settlements and protects people against credit card fraud. 

International Payments: Since the card operates based on credit not necessarily a debit transaction, credit cards usually offer either free or affordable currency conversion. This is great for travelers so that they can save money on currency conversions or as a convenience when they need the money and they cannot find a location to perform the currency conversion. 

Large Credit Limits: In the case of emergencies or when the adequate amount of funds is not available in a given account, you can use a credit card and then pay back the credit at a later time. This lets you continue living even when big and unexpected expenses pop up. 

Unfortunately, there are some trade-offs when it comes to credit card processing. 

One of the biggest disadvantages of using a credit card is the accumulation of fees that are associated with the cost of using a credit card. Credit card companies will charge a compounding daily interest on all transactions, an increased percentage rate for an advance or balance transfer, an annual fee, and other penalty fees for late-payments or overdraft fees, which leads to credit card debt and a lower credit score.

Additionally, if credit card expenses mount up, then it can be difficult to get out from under unmanageable debt as fees add on to the expenses. Often, users might have to go into debt consolidation, a consumer agreement, or go bankrupt.

Cost Comparisons Between ACH Payments and Credit Card Payments

One of the biggest differences between accepting ACH payments and credit card payments it the cost of accepting them. In sum, ACH payments are far more affordable than credit cards for both the business and for the consumer. 

With this cost comparison, also consider the costs associated with having a merchant account. 

Here is the cost comparison of ACH payments and credit card payments:

Cost of ACH Payments

Sending a payment through the ACH Network is very affordable. It is estimated by the NACHA to cost a financial institution about $0.29.

Here’s a break down of the estimated ways an ACH transfer fee can be charged:

  • Flat fee, charged for each transaction: $0.20 – $1.50
  • Percentage fee, charged for each transaction: 0.5% – 1.5%
  • Monthly fee: $5 – $30
  • Batch fee, charged for each batch of payments sent: << $1
  • A return fee, charged for only when an ACH is returned: $2 – $5
  • A reversal fee, charged for only when an ACH chargeback is required: $5 – $35

Cost of Credit Card Payments

While each credit card transaction is not necessarily charged a fee, charges add up based on compounding daily interest rates (for users) and transaction fees (for merchants).

  • Credit card processing per transaction: 2-5%
  • Daily compound interest rates: 19.99%-24.99%
  • Annual fee ranges: $20 – $120
  • Penalty rate: $25 to $35, additional late fees, or an increased interest rate
  • Annual Percentage Rate: 24% per year, 2% per month, 0.065 per day (daily periodic rate)

How to Choose Between ACH payments and Credit Cards for Your Business

If you are deciding on whether or not your business should accept ACH payments or credit cards for your transactions, know that you do not have to choose either or. Most payment gateways allow a business to facilitate payment processing into a bank account or merchant account for both types of transactions. 

While credit card processing costs can add up, the convenience of having the credit card option is a bonus for many consumers. Many major businesses have a store credit card as well, which allows them to offset the cost of credit card transactions while taking a cut of the percentage. 

When choosing an ACH payment, make sure that whatever option you choose to process the payment has the ability to process multiple transaction types. Some payment gateways can process an ACH debit transaction, debit card transaction, credit card transaction, and check. 

When considering a payment processor for ACH payments or credit cards, make sure you fully understand the cost of processing each transaction. Be sure to consider the cost of the transaction during pricing. 

Move money faster along the ACH Network with Sila, an ACH app that can minimize processing fees associated with payment transactions. It also securely facilitates that transfer of funds into and out of American dollars. Contact us today to see how Sila can support your business.