Payments 101: Credit Card Processing vs. ACH Transfers

Credit cards are an intrinsic part of modern life. If you’re running a business that doesn’t accept them, you’re going to encounter pushback from customers.

Handling different methods of payment is simply a better way of connecting with more people. If you’re a business owner, it’s important to consider your options (of which credit card processing is just one).

For instance, Automated Clearing House (ACH) processing has exploded in popularity recently. Understanding what ACH is, and how it compares to credit card payments will help you save money and run your company more efficiently. In this guide, we’ll examine recent trends in merchant services, how credit card and ACH processing work, plus the pros and cons of both.

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Trends in Payment Processing

Upon cursory inspection, it’s easy to understand the importance of accepting both ACH and credit card payments. Here are a few payment industry stats for you to chew on:

• Credit card processing is only growing, witnessing a 10.2% growth in 2017 alone
• 83% of merchants use ACH across the United States (2016)
• There are 14.4 billion credit cards in the world as of 2017
• Online payments grew 64% from 2013-2017

The 2018 Federal Reserve Payments Study (FRPS) determined credit card processing had a growth rate higher than all other payments. As online ordering continues to explode, credit cards will remain the world’s preferred method of making purchases.

ACH transfers are also booming. The number of ACH payments being processed increases every year, with a reported 1.3 billion transaction increase in 2017. As shoppers rely more on digital funds, it’s in your best interest to facilitate both types of payment processing.

How Does Credit Card Processing Work?

Credit cards payments can be found everywhere today, but they’ve become particularly useful for those operating in the world of ecommerce. If you accept credit cards, then transactions end up looking something like this:

1. The cardholder uses their credit card at the point of sale, and your system begins processing it.
2. A third party service (your “merchant service provider”) securely sends the information to the acquiring bank.
3. The acquiring bank approves (or rejects) the request, and sends the information to the corresponding credit card’s issuing bank.
4. Once the issuing bank receives a request for funds, they make the transfer to the merchant bank account (if approved).
5. The credit card company registers this payment to the cardholder’s account, and authorizes the transaction.

How Do ACH Transfers Work?

ACH transfers occur every time you utilize direct deposit, process a scheduled bill pay, make an automated bank payment, or handle any payment being pulled from a real bank account (i.e. something not involving your line of credit). Here is an overview of the ACH payment process:

1. Your customer begins transferring funds by swiping their debit card
2. All ACH entries are transmitted electronically to the originating bank
3. Originating bank transfers funds to an ACH operator (either the Federal Reserve or the Clearing House)
4. Operator sorts all transactions, and makes them available for receiving institutions (your merchant service provider / bank).
5. Your bank (“the receiving bank”) receives funds from the operator.

Pros and Cons of Credit Card Processing

Pros

Consumers enjoy most of the benefits associated with credit card transactions. There are benefits for business owners as well, though.

1. Credit Cards Save Time – They’re quick, secure, and convenient for both parties. You (the merchant) receive payment immediately, and the entire process happens in seconds (technology is pretty handy).

2. They’re Consumer Friendly – Your clients get many perks from credit card companies by simply using their card. Plus, accepting credit cards will expand your customer base by facilitating online sales.

3. They Help Mitigate Risk – With credit cards, both the merchant and consumer face less risk. As the merchant, you receive payment directly to your account, without fear of theft. For customers, it’s simply safer to carry around plastic than cash.

Cons

Despite these advantages, there are two main drawbacks to credit card processing.

1. There Are Higher Fees – As the merchant, you will bear the brunt of credit card processing fees. According to a study by the Association of Financial Professionals, these fees can range from 2.5% to 3.2% per transaction.

2. You’ll Need to Deal With Chargebacks – Credit card companies tend to side with cardholders in most charge disputes, plus too many chargebacks can result in your account being closed (a common struggle for companies operating in high risk industries).

Pros and Cons of ACH Payment Processing

ACH is all about trust. Transactions are not processed instantaneously, so if you don’t fully trust (or simply don’t know) the person to whom you are selling, ACH may not be the best method.

Pros

The biggest advantages to using ACH are:

1. ACH Saves You Money – ACH transfer fees are much smaller (usually around $0.50 per transaction) than credit card fees. Here’s a brief example to highlight that difference:

If your customer purchases an $100 item and pays with a credit card, you’ll be charged $1.50 to $2.00 for this single transaction. Instead, if that customer chose to use a bank card and you processed their swipe via ACH processing, you’d owe something in the ballpark of  $0.50. Over the years, this discrepancy adds up big time.

2. It’s Great for B2B – If you’re running a business that needs to move money around to other businesses, ACH is an excellent option because of that cost difference. Plus, the system is built for handling recurring billing – making it a secure, efficient way to facilitate such payments.

Cons

The biggest liabilities about using ACH are that:

1. Payments Aren’t Automatic – Customer transactions won’t be taken care of until NACHA processes that batch of payments (usually 1-3 day intervals). There’s a price to pay for getting better rates. Most businesses mitigate this risk by only using the ACH network with trusted partners (like law firms, other businesses, and customers that are paying for something on a recurring basis).

2. Possibility of Getting Scammed – Following up on the last point: when your customer swipes their card, you won’t immediately be notified if the customer happens to have “insufficient funds.” If you sold them a big ticket item, it’s possible they scam you out of your purchase.

While most people wouldn’t do this, it is a legitimate risk. ACH payments rely on mutual trust (the merchant gets the user’s bank account information, and the user’s payment isn’t transferred until the batch has been processed).

Final Thoughts

If you want to operate an online business these days, it’s imperative that you accept credit cards. When you sign up for credit card processing with a provider like Motile, you can also get robust ACH support for your business as well. Then you’ll be able to enjoy the best of both worlds.

There are pros and cons to both credit card processing and ACH transactions, yet both fulfill certain needs for business owners. Speak with a Motile representative today to discuss how we can diversify the payment options for your business.