What Is ACH Credit Card Processing and How Does It Work?

Have you ever wondered how money is transferred to a friend’s account? What happens behind the scenes, exactly? You’ve probably utilized ACH payments before but aren’t comfortable with the terminology. The following are some examples of ACH transactions:

• Make online bill payments using your bank account.
• Using direct deposit to pay vendors or receive money from clients
• Using direct deposit to deposit payroll into an employee’s checking account

Let’s take a closer look at ACH payment processing. 

What are ACH (Automated Clearing House) Payments?

ACH payments (sometimes known as “direct payments”) are electronic transactions between accounts that are processed through the Automated Clearing House (ACH) Network. The National Automated Clearing House Association manages the ACH network of financial institutions (banks and credit unions) that facilitates transactions in the United States (NACHA).

In February 2019, ACH payments per day surpassed 100 million, according to NACHA. According to NACHA’s latest numbers, ACH transaction volume increased by 7.1 percent in the first quarter of 2020, with B2B payments increasing by 11.7 percent and accounting for 1 billion transactions.

 The ACH services for small business is a central clearing mechanism. You transfer money from your Bank of America account to a Silicon Valley Bank account, for example. Also, someone performs an inverse transaction. The accounts of both banks must be credited and debited. An instant credit/debit process for each transaction may appear to be speedier, but it has a number of disadvantages.

What is the solution? A central clearing system maintains track of how much each bank owes each other and processes transactions in batches at the end of each day.

The fund transfer will only happen once this way. The Automated Clearing House (ACH) is one such central clearing mechanism for banks in the United States. The Federal Reserve banks and The Clearing House are the two clearing facilities that it uses.

Payments using ACH for SaaS Companies

For SaaS organizations, ACH payments can be a terrific choice. When choosing ACH payment services for your SaaS, bear the following considerations in mind:

Designed to Accept Recurring Payments

Despite the fact that the use of paper checks has decreased significantly, many enterprise organizations still use checks to pay every month in order to avoid paying a large portion of the processing fees. To alleviate the expense of managing paper checks, ACH, a computerized form of a check, was introduced. 

You wouldn’t have to wait for a paper check to come with ACH services for small business because transaction processing is recurring and automatic. Customers have also given you permission to collect payments on their behalf, therefore the flexibility allows you to collect one-time payments as well. There will be no more embarrassing emails requesting payment from customers.

Involuntary Churn Should Be Reduced

One of the most common causes of churn is failed payments. 

Payments by credit card fail for a variety of reasons, including expired cards, blocked cards, transactional issues, and so on. It’s possible that the customer exceeded his or her credit limit, resulting in a denial.

A bank transfer via ACH uses the customer’s bank account number and an authorization to charge them, and unlike card transactions, the chances of a bank transfer failing are extremely minimal. Checking accounts, unlike debit and credit cards, do not ‘expire.’

Account numbers are rarely modified. Furthermore, unlike card transactions, bank transfers fail for a limited number of reasons, including insufficient cash, incorrect bank account information, and so on.

The two-level verification method for ACH payments also ensures that you keep in touch with your consumers. This is taken into account when there is churn for unclear causes. 

Credit Card vs. ACH Payments During the Checkout Process

When making an online payment with a credit card, the checkout process differs slightly from when making an ACH payment.

When a customer pays by ACH, there is usually a double-check process in place. The customer makes a request to pay by ACH, and after the customer is verified, ACH as a payment option is enabled for that account. 

After that, a customer can make an ACH direct debit payment. This verification entails checking the bank account’s legality and legitimacy. This reduces the risk of scammers and eliminates ACH returns. Because of this safe method, ACH is a reliable solution. 

Transaction Fees and the Economy

A percentage of the money involved in each credit card transaction is distributed among the numerous businesses that authorized the payment. The Interchange fee accounts for a significant portion of this price.

The credit card networks, such as Visa and Mastercard, decide the interchange cost, which is normally up to 2% of the total transaction fee.

The interchange cost for a transaction routed through the ACH network is typically 0.5-1 percent of the whole transaction because it deals directly with the banking network.