Outlining Check vs ACH Payment Costs
At times, a business can rely on petty cash for small purchases. However, larger amounts, and those with multiple payees, require a safer and more traceable means of payment. This is also true for funds traveling long-distance or overseas.
In this case, transactions can be performed using a variety of methods that include:
- ACH transactions
- Wire transfers
- Electronic Funds Transfer (EFT)
Each of these payment options has different costs, timeframes, and ways of handling funds.
The most traditional form of payment processing, small business checking accounts are free with some financial institutions if you maintain a certain balance. If the cost of checks is also included and there are low monthly fees, then this is still the cheapest financial method of doing business.
That being said, it’s also incredibly time-consuming. This is not a practice for online payments or to establish recurring payments. A check must be physically sent to the recipient, which is deposited into a bank account.
The ACH intermediary then presents the check to the sender’s bank for verification. It’s a slow and archaic payment system that can take several business days to move funds.
If funds are not available in the paying account when the check is presented, you could be charged an overdraft fee or the check could bounce. In this case, payment is denied.
What is an ACH Payment?
Automated Clearing House (ACH) payments–or ACH checks– are essentially electronic checks that pull funds directly from a checking account, saving the hassle of writing a paper check or making a debit or credit card transaction to pay a bill. The ACH network is also responsible for transactions such as direct deposits from your employer to your bank account.
The National Automated Clearing House Association (NACHA) develops, administers, and governs the ACH network. This forms the infrastructure for the electronic movement of data and money in the United States. All ACH processing is handled by NACHA. They are the intermediary that manages bank transactions and processes all the credits and debits in one batch.
ACH is more suitable for a merchant account because you are sending and receiving funds to and from multiple locations. There’s a lot going on and NACHA is the middleman that handles things.
An ACH transfer requires an initial set up. Then, each batch transaction takes about a day or two. An ACH debit is cheaper than a wire transfer and on some larger accounts, it can cost only a few pennies per transaction. It’s one of the fastest ways to pay business-to-business.
Subsequently, you must have funds available throughout the entire process. If your account dips during the run of the ACH, you could be assessed overdraft fees.
Checks vs. ACH Costs
While comparing the two forms of payment, there are a lot of factors to consider, like timing, convenience, security, and costs. When is the last time you wrote a check?
Using paper checks (or accepting them) is an expensive form of doing business. According to the Payments Cost Benchmarking survey by the Association for Finance Professionals, the median cost of a check transaction is $3.00, whereas an ACH (automatic clearing house) can range anywhere from $0.26 to $0.50.
ACH also runs cheaper than credit card processing. The estimated median cost with credit card payments and debit card payments is $1.50. This is why successful online service providers like PayPal use ACH for their operations. Once the company stores your bank account information and routing number, funds can be moved within just one business day. Even when it’s international.
Unlike a check, ACH credit systems can also be automated. According to Ardent Partners, 51% of today’s AP organizations are prioritizing automated systems with their procure-to-pay processes. When it comes to ACH vs. check, the state of payables clearly points to automation.
Lengthy check processing cycles are one of the prime reasons a business misses out on early payment discounts. ACH enables organizations to compress the processing cycle and capture more discounts available. This helps to optimize working capital.
ACH is less subject to fraud than a check system. 75% of organizations that were victims of fraud attempts/attacks in 2016 experienced check fraud. On the other hand, fraud via ACH was only at 22%.
These are transactions between two banks responsible for verification on each end. Wire transfers move money from one bank account to another. If it is done within the same financial institution (sending money from savings to checking account) the process is instantaneous. As long as the bank has an account number, the entire event only takes a few minutes.
In some instances, a wire transfer can take a few days. This happens when you are making or receiving a transfer from an international bank with less developed financial systems.
Wire transfers are one of the fastest ways to send and receive money but they are also on the costlier side. Transfers are typically more suitable for large, one-time transactions. According to the North Carolina State Controller, the average cost of a wire transfer is $20 to $35 for sending money and $10 to $20 for receiving it.
When it comes to a check vs. ACH vs. wire costs, the first things to consider are price and time. If you have more time to spare, a check can save on costs. Keep in mind, however, you could be losing money somewhere else while you wait for funds to come in. If you need immediate cash flow, a wire transfer is the best option. Use ACH is you are ok waiting a day or two. Security is also something to think about.
The last method of payment is called an electronic funds transfer (EFT). It is a form of an echeck or direct deposit that most companies use to stay on top of bills. An EFT is an electronic check. However, there is no paper or time-consuming process to deal with. Instead of credit card transactions and debit transactions, payments are initiated digitally.
The ACH must still process an EFT, so it still takes longer than a wire transfer. However, making echeck payments is much faster than the old fashioned way of paying bills. No stamp necessary.
It should be noted, some companies can save on checking account fees by setting up just one monthly EFT payment in their account.
Pros and Cons of Electronic Payments
When it comes to e-pay vs. real-world payments, there are still some advantages and disadvantages to going digital.
- Increases speed and convenience.
- It drives productivity and sales with easy online payments.
- Reduces transaction costs and is cheaper than a check.
- It leads to fewer supplier inquiries with real-time visibility.
- Transactions are easier to dispute and put on hold.
- Increased business costs. Payment security technology may need to be purchased.
- Security concerns. Electronic payments are vulnerable to hacking.
The bottomline is that you probably shouldn’t get comfortable with checks. Eventually, everything will be too costly to run on the ground. The future is digital. Thankfully, a business still has many options to choose from for processing payments. Ultimately, it will boil down to convenience, cost, and security when making the smartest financial decision.