As your business develops, it’s always essential to add new ways to get paid by your customers. At first, you may have started your payment process by accepting cash and checks exclusively. However, when your customer base grows, you will start offering other means of payment, such as ACH payments and processing credit/debit cards.
At the same time, your business can also benefit from setting up ACH (automated clearing house) payments. This method is especially effective when your business is accepting subscription plans and other recurring transactions. With that said, this article will discuss the basics of ACH payment and walk you through the basics of getting started with this type of payment method.
First, let’s define what ACH is and what it can offer to your business.
What is ACH Payment?
ACH payments are electronic payments sent from one bank to another through an ‘automated clearing house’ network (hence, ACH). This method is also called an electronic funds transfer or EFT.
ACH payments allow your customers to transfer money directly from their personal bank account to yours in its simplest form. In most cases, this process is done using an eCheck – a transaction that also utilizes an ACH network. Other transactions associated with ACH include direct deposits, electronic benefits payments, ACH disbursements, and wire transfers.
If this is the first time you’ve ever heard about ACH payments, you might assume that it functions similarly to a debit card payment. However, ACH and debit are two very different payment transactions. Not only do they differ in terms of transaction fees and processing times, but they’re also processed through different providers and merchant accounts. In addition, both payment methods also have their respective chargeback policies and dispute resolution strategies.
How Does ACH Payment Work?
In most cases, the ACH payment method goes through four integral steps when processing transactions:
- Customer Authorization: A customer will authorize direct payments from their bank account at a particular company’s website.
- Transaction Initiated: The business will send the payment details to its bank – the ACH provider. This process is known as the ‘Originating Depository Financial Institution (ODFI).’
- Payment Requested: The ODFI will request payment, which will be routed to the customer’s bank. This process is known as the ‘Receiving Depository Financial Institution (RFDI).’
- Payment Processed: The RFDI will then check for sufficient funds in the account to make payment and process it if allowed.
Once a transaction goes through this four-step process, the ACH payment will then be complete. If there are any errors along the way, the system will notify you to fix the issue right away.
Difference Between ACH Payments Vs. Wire Transfers
ACH is a subset of EFT (electronic fund transfers). The latter covers a wide range of financial processes that transfer money directly from one bank account. These transactions include the following:
- ATMs
- Electronic checks
- Wire transfers
- Pay-by-pay phone transaction systems
Despite both falling under EFT payments, both ACH transactions and wire transfers are quite different from each other. For example, while ACH transactions apply to sending and receiving money, wire transfers are only limited to sending funds. Furthermore, ACH payments don’t require human intervention, while wire transfers usually require bank employees to complete the transaction manually. In addition, ACH payments usually process transactions that are under $5,000. On the other hand, wire transfers can be used to process any amount.
Benefits of Using ACH Payments
Improving and expanding the payment options your business offers will aid greatly with customer acquisition and retention. At the same time, it will also incorporate a pricing strategy that will offer discounts for every payment done via the ACH system. You can even increase your profits by lowering fees and saving time. Apart from the ones already mentioned, here are some other benefits of using ACH payments:
Faster and More Efficient Processing Times
Choosing the hands-free approach of ACH payments over paper checks to mean you will have faster processing time. You’ll never have to go to the bank to make a deposit again. Plus, the turnaround time for payment is usually three to five days – only a day slower than credit card transactions.
Less Expensive Processing Cost
While it may be a tad bit slower to process compared to credit cards, ACH transactions are also much cheaper when it comes to processing costs. Credit card transactions come with two fees: a percentage fee and a processing fee. On the other hand, ACH payments will only involve one of two fees: a flat fee or a percentage fee.
Better, More Predictable Cash Flow
Another notable benefit that ACH payments bring to the table is predictable revenue thanks to its recurring payment feature. With this payment structure in place, you won’t have to worry about when your customers will send you money. Your sales forecasting will be better and more accurate, based exclusively on when each ACH transfer will be deposited into your account. However, you should remember that PCI compliance will be crucial to prevent running into unnecessary processing fees.
In addition, some ACH providers will have a cash advance option, which will allow your business to receive a cash advance without needing a loan application. Through this manner, you get access to money during slow seasons and then repay it when business profits pick up again.
How to Accept ACH Payments for Your Small Business
Before you can start accepting ACH payments, you will need to be familiar with the requirements that come with incorporating it into your business sales management. This section will share five essential steps when setting up ACH payments for your small business.
Step 1: Identify the Feasibility of this Payment Strategy
ACH payments are not for everybody. That’s why it’s important for you to determine if this payment strategy is feasible for your business. For example, ACH payments are only viable within the United States. If the majority of your business is done overseas, you may not be able to use this process to its maximum effectiveness.
Here’s how you can determine the feasibility of ACH payment for your business:
- Look at your customer base: do you have customers you’re already billing on a recurring basis? Can they be set up that way? Are you serving a demographic that doesn’t use credit card payments?
- Determine the types of transactions you’re offering: Are you currently handling a lot of paper checks? Do you accept B2B (business-to-business) transactions? Are you processing credit card payments that can be converted to ACH check payments with lower fees?
Step 2: Choose an Ideal ACH Provider
Before shopping for potential providers:
- Check with your bank to see if they provide ACH transaction support.
- If they do, start comparing their rates to that of third-party providers for credit card processing.
- Make other inquiries such as if they can process these transactions, as well as what other rates and fees you should be mindful of when you choose them.
Here are other tips to follow when choosing an ACH provider:
- Know their fees: keep in mind that your ACH fees will be separate from credit card processing. Determine what the chargebacks and non-sufficient funds fees will be and if you’ll have to pay extra for any transactions that are over a certain amount.
- Ease and simplicity: make sure the ACH provider you choose is easy for both you and your customers. Check and review the amount of documentation and customer support that they provide.
Step 3: Establish an ACH Merchant Account
Even if your business already has a merchant account for credit card sales, you will need to set up a different merchant account that exclusively accepts ACH payments. While it may not be a burdensome task to keep track of, it is yet another financial asset that you will need to monitor regularly.
Here are some tips that you should follow when setting up an ACH merchant account:
- Obtain the correct documentation: You’ll need to provide the following:
- A certificate of incorporation;
- Other local documents required by your jurisdiction that will identify company; owners and directors;
- Lease agreement;
- Utility bill;
- Bank statement that contains your business’s corporate name, as well as the company’s location; and
- Copies of valid documents for identification of company owners and directors.
- Recurring billing: Many ACH providers and other billing applications offer recurring billing as either a free or a premium option. However, some applications don’t have this feature at all. Make sure the one you choose because this is one of the most important features for any ACH payment system.
ReliaBills, for example, is an excellent billing system that also offers recurring billing. In addition, it offers tools that let you set up automated payments for your business. That way, you can incorporate ACH payments without having to invest in expensive software.
Reliable recurring billing is available if you upgrade to ReliaBills PLUS for $24.95 per month. Cancel any time!
Step 4: Choose the Ideal ACH Payment Methods
In most cases, the usual ACH withdrawal method will be set up and executed online. However, this isn’t always the case. That’s why you should know all the available payment options and how to incorporate these methods into your payment strategy.
Here are some useful tips on how to choose ACH payment methods:
- Check scanners having POS hardware will allow you to process checks without having to deposit them manually.
- Virtual payment terminal place and store mail order and telephone order payment information on your computer.
- Website payments offer ACH transactions straight from your website for even on-off sales. Yes, you will have to convince customers to look up their account and routing information; however, it’s a better and more effective option for you, and here’s why: let’s say a PayPal payment that’s worth, say, $100, costs around $3 to process. However, an ACH electronic debit can cost as little as $0.20 per transaction. That difference is more than enough to encourage customers to try ACH payments on your website.
Step 5: Avoid Unnecessary Costs
It’s always important to avoid any unnecessary costs as much as possible. That’s why you need to make sure that you and your customers aren’t paying any extra fees.
Here are some tips on how you can prevent paying any unwanted payments:
- Check guarantee or verification topline: this service will cost some extra cash; however, it will pay for itself over time once you manage to set up your ACH payment system completely.
- Chargeback protection: chargebacks are there to protect consumers. However, that doesn’t eliminate the possibility of you being the victim of fraud. That’s why you should make sure your ACH provider is following the payment card industry data security standard (PCI DSS), along with having a PCI DSS certificate. At the same time, your provider should also offer both chargeback and fraud prevention services.
Wrapping Up
ACH payments are a great addition to your sales management operations. However, it’s only as good as how you set it up. Hopefully, this article gave you an idea of how you should set up ACH payments the right way. For more information about ACH, check out the ReliaBills blog page.
