How a Paper Check Becomes an Electronic Check
ACH (automated clearing house) transactions are electronic check transactions that leverage an existing, inter-bank, network between financial institutions to remit payment. Referencing the image below of a traditional ACH workflow, transactions are initiated from the software the Merchant is using (becoming the originator of the ACH file in the process), routed to the Merchant’s underwriting bank (an ODFI- Originating Depository Financial Institution), then transmitted over the ACH network to the customer’s bank (the RDFI- Receiving Depository Financial Institution). Funds are then released to the Merchant’s Bank. To complicate matters, as more third party senders and receivers of ACH files grow, there is the ability for those services to replace the traditional financial institutions in the workflow. That is why it’s important to work with a partner that understands these nuances when selecting a Payment API.
Example of a Traditional ACH Transaction Workflow
Timing is Everything
ACH or electronic check acceptance is a driver for businesses that want to expedite their cash flow from the traditional paper processing of checks. Business that receive a lot of checks for their business including accounts receivable entries, back office conversion, point of purchase, pre-authorized bill payment, check payment over phone and over the web – can be converted to ACH. The time saved by processing the checks electronically via ACH expedites the movement of funds rather than waiting for ‘checks to clear’. Without the extended time gap waiting on a check to clear, merchant businesses can improve their cash flow position.
What will ACH Cost My Merchant Customer?
In our experience we’ve found that ACH is considerably less expensive to process (subject to the Merchant business profile) when compared to credit card transactions. ACH transaction fees generally consist of just a few pennies per transaction OR a low monthly fee tiered by volume. This is considerably less than the cost to process credit card transactions which typically include a charge equal to a low percentage of the charged amount PLUS a per transaction fee.
Why You Should Add ACH to a Payments Mix
According to a 2007 Federal Reserve Study (PDF will open), between 2003 and 2006, ACH payments increased 18.6% per year (greater than debit and credit payments). And, although ACH payments accounted for only 15.6% of all non-cash payments, they represented 40.8% by value. Adding ACH to your software’s payments acceptance mix can help you expand your Merchant customer base and add value for existing customers by enabling them to offer an additional, lower cost, payment choice at the point of sale (in-person, web, phone, or mail).
Additional services you may hear of that leverage ACH to process include: Check Conversion, Check Guarantee, Remote Deposit Capture or Point-of-Purchase. All are options that can make check information electronic that the merchant or business may benefit from.
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