It’s difficult to find a modern business or consumer that doesn’t transact funds electronically. For those transactions that don’t use a credit card, electronic payments likely include ACH or eCheck payments.
ACH and eChecks are both types of electronic fund transfers (EFT). EFT is simply a formal term for the exchange of money electronically.
Although ACH and eChecks have existed for decades, their popularity to both businesses and consumers have soared in recent years. Their speed and low transaction costs have led to their increased use. While ACH and eChecks are similar terms and can be used interchangeably in many circumstances, it’s helpful to understand their differences and how those differences may impact your business.
What is ACH?
ACH is short for Automated Clearing House. An automated clearing house is an electronic network that financial institutions use to transfer money without the use of physical checks, notes, or currency.
Clearinghouses have long played a crucial role in completing financial transactions by acting as an intermediary between two parties. When a party writes a check to pay another party for products or services, the clearinghouse acts on behalf of the opposing party by reviewing balances, transferring money, and settling accounts on the back end. The clearinghouse ensures that the process is done fairly and handles the behind the scene operations required to process the check. Automated Clearing Houses accelerate this clearinghouse process through technological advances.
Many ACH networks exist across the world. The most popular ACH network in the US is the Federal Reserve Bank’s FedACH, which utilizes the NAHCA ACH Network to facilitate electronic transactions. In 2018, the network facilitated 23 billion transactions, which transferred $51.2 trillion in funds.
ACH networks are governed by a combination of law and the financial institutions that both maintain and utilize the networks. The checks and balances that make up this governance system push networks to fairly manage the network in the most efficient manner possible.
ACH payments are increasingly secure and continue to improve transaction speed. Historically, ACH transactions have completed in 24 to 48 hours. This method is much faster than the manual clearing required by physical checks with physical clearing house settlements. In fact, if you write or deposit a physical check today, chances are the bank converts your check to an electronic version and speeds up the clearance process through ACH.
Although 24 to 48 hours is quick, many ACH networks have increased their speed to same day processing. The NACHA ACH Network reported a 24% year over year increase in same day transactions in Q1, 2019.
How does ACH work?
ACH automates the clearance process through a series of steps that do not require the interaction of humans. Because humans are left out of the process, financial institutions can process multiple payments in bulk, which results in faster processing.
To initiate ACH payments, transacting parties must consent to electronic transfer over an ACH network. Typically, basic bank account information (financial institution name, account number, and routing number) are the only information needed to set up ACH payments.
Once the ACH relationship is consented to between the parties, the parties then agree to the terms needed to transfer funds via ACH. For instance, if you pay your mortgage via auto withdrawal over ACH, you likely gave your mortgage company the right to initiate an ACH payment for a certain amount, on a certain day of each month. On that day each month, your mortgage company requests payment. The ACH network facilitates and settles the payment between your account and the mortgage company account.
ACH payments are not limited to debit transactions. If you receive your salary through direct deposit from your employer, an ACH credit transaction takes place. Your bank account initiates payment request on payday from your employer’s account. The ACH network facilitates the transaction.
ACH payments have relieved traditional burdens placed on both transacting parties and financial institutions when moving funds from one party to another.
What is an eCheck?
eCheck is short for electronic check. An eCheck is not exactly the same as an ACH payment, but the two are related. In fact, eChecks use ACH networks to complete electronic transactions between parties.
An eCheck is simply an electronic version of a paper check. A party who wants to send money to a receiving party via eCheck initiates a payment with account number, routing number, and the name on the account.
The sending party must consent to the electronic processing and movement of funds in order for the processor to complete the eCheck transaction over an ACH network. Once the sending party has consented to the electronic transmission, the ACH process described earlier completes the transaction. At this point, an eCheck transaction and an ACH transaction are essentially the same.
Similar to ACH, parties can agree to initiate eCheck payments at regular intervals for recurring payments like mortgages and direct deposits. Because of the many similarities between ACH payments and eChecks, the two terms are often used interchangeably. However, there are some differences.
How do ACH and eChecks differ?
The key difference between ACH and eChecks lie in the initiating party. In an ACH relationship, the receiving party can initiate the payment. In the mortgage payment scenario, the mortgage company initiates the ACH payment based on the agreement previously set up between the parties.
With an eCheck, the payment always initiates with the paying party. eChecks are regulated by the same set of laws that govern physical checks. A physical check always starts with the paying party filling out a check with the amount, recipient, signature, etc. The same applies to payment via eCheck.
Timing is the second difference between ACH and eChecks, and may or may not apply in all scenarios. As mentioned, ACH transfers typically complete in the 24 to 48 hour range. eChecks often go through a payment processor that utilizes an ACH network to conduct the transaction. Because of this extra step, some eCheck transactions can take 48 to 72 hours to complete.
The extra time does not hold true in all circumstances. Some payment processors name their electronic payment process eCheck, but the sign-up process actually requires the user to agree to an ACH payment process. If this is the case, eCheck probably means ACH in reality. Accordingly, you wouldn’t see any timing difference between eCheck and ACH payments when sending or receiving electronic payments.
How do ACH and eChecks benefit your business?
For many years, the only electronic method to accept payment was with credit cards. Businesses of all sizes dread the 3+% fee required to process credit card payments. Because of the steep fees associated with credit card payments, many businesses will charge extra for credit card payments, or offer discounts for cash payments.
ACH and eChecks process electronic payments at a much lower cost than credit cards. ACH and eCheck rates vary depending on the payment processor and ACH network used. However, most providers charge a per transaction fee in the range of 20 cents to $1.50, or a percentage rate of .5% to 1.5%. In either scenario, ACH and eChecks are much cheaper than credit card transactions.
Is ACH or eCheck better for your business?
As ACH and eChecks grow in both popularity and technology used to drive the transactions, the two terms become more and more interchangeable. Many payment processors make no difference between the two, even if there are some technical differences on the back end.
The benefit of one over the other depends on your bank and payment processor, and the fees they charge for electronic payments.
To determine whether ACH or eCheck is better for your business, ask two questions:
- How much will a transaction cost my business?
- How fast will the transaction complete?
If your bank or payment processor offers you the same rate from a cost and speed standpoint, ACH and eChecks are of equal value to your business. If there is a difference in the two through your financial institution or payment processor, the cheaper option is better for your business.
In most cases, if a difference in cost or speed between ACH and eCheck exists, ACH will be cheaper and faster. In that case, ACH benefits your business.
In some cases, payment processors implement additional steps on the backend to process eChecks. However, these processes are required less frequently, and many processors are treating the two as one and the same in their electronic payment offerings. Check transaction costs and clearance speeds to review whether ACH or eCheck is better for your business.
To get started accepting ACH and echecks check out QuickBooks Payments.