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Outlining Check vs ACH Payment Costs


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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, including paper checks and ACH electronic bank-to-bank money transfers in the United States. 

Other payment methods include wire transfers and global ACH (eCheck), which are also types of electronic funds transfer (EFT payments). Each of these payment options has different costs, timeframes, and ways of handling funds. This article will only focus on ACH and check, explaining the benefits of ACH over paper check.

ACH vs Check: Main Differences

The main differences between ACH vs check payments are cost, security, and speed of delivery. ACH transfers are electronic whereas checks are physical documents that are manually sent – making ACH transfers a safer and more efficient payment method. 

And according to Nacha and AFP, ACH transfers typically cost $0.40, whereas checks cost between $2.01 and $4.00–making ACH transfers a less expensive option as well.

Checks

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 a financial method of doing business to consider when small businesses compare using checks to other payment methods. 

That being said, it’s also incredibly time-consuming, with a significant labor cost. 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 Check?

An ACH check is a type of electronic funds transfer, also known as an e-check. It’s not to be confused with a paper check, because an ACH check is not a physical check but a digital transaction between banks or financial institutions over the ACH network. An ACH check does not include wire transfers or credit card transactions.

Security of Check Payments

Check payments are not as secure as other payment methods. Bad actors can change payees or amounts on original checks to defraud. When a check payment is issued, the routing number and bank account number is disclosed to employees and check recipients. If blank checks aren’t locked up for internal control, fraudsters can steal these paper checks and use them for fraudulent purposes. 

According to the 2022 AFP Payments Fraud and Control Survey, 66% of organizations were victims of check fraud. Only 37% of these organizations experienced ACH debit fraud, in comparison. 

Speed of Check Payments

The speed of check payments begins with in-house processing time, including printing, review, approval, signature, envelope stuffing, and mailing. It takes one to two business days to clear checks in the banking system. Checks are sometimes put on hold in recipients’ bank accounts, according to a receiving bank’s policy, for more time until the funds are available for use.

Cost of Check Payments

According to the AFP 2022 Payments Cost Benchmarking Survey cited by Nacha, besides the $2.01 to $4.00 median cost of issuing paper check payments, the recipients of those checks incur a median cost of $1.01 to $2.00 to process and deposit them. Privately-held companies receiving checks may have a lower cost.  

Example of Check Payment

If they’re not using electronic payments like ACH, most businesses use accounting software to generate and print checks instead of handwriting paper checks. Business checks may be used to pay supplier invoices and employee payroll. 

To complete the check for a specific purpose, fields to insert include date, payee, amount in both numbers and words, purpose of the payment, and authorized signature. Businesses issuing checks may use an official stamp to affix the signature(s) of authorized check signers. 

The payer company’s accounts payable balance and cash balances are reduced in their accounting software to record check payments to vendors. Early payment discounts are also recorded by this customer company. 

A physical business check is generally perforated, with the check stub on the bottom portion showing details of invoices paid. The check stub functions as a remittance advice for the receiving vendor. That vendor can use the detailed invoice payment data to record the amount of cash received and any early payment discount taken and reduce the customer’s accounts receivable balance.

What is an ACH Payment?

Automated Clearing House or 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 can be used either with a checking account or savings account.

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. Nacha is the middleman that handles things for ACH direct payments and direct deposits through the Automated Clearing House Network. 

An ACH transfer requires an initial set up. Then, each batch of ACH transactions 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, resulting in insufficient funds during the run of the ACH, you could be assessed overdraft fees.

Security of ACH Payments

ACH payments have a high level of security if processed safely, using data encryption and secured third-party servers providing enterprise-level security for data storage and data transfer. When vendors enter their contact and payment information through a self-service supplier portal, the data is entered accurately and confidentially. 

AP automation software linked to your ERP system provides the functionality required to handle ACH payments securely. 

Speed of ACH Payments

ACH payments speed makes ACH processing possible the same business day, next business day, or with 2-day payment processing, according to Nacha. Senders choose Same Day ACH or Next Day ACH. Nacha provides multiple time windows in a schedule for submitting ACH transactions.

Cost of ACH Payments

Nacha reports the median costs for ACH payments is $0.40, including $0.15 internal costs like personnel and $0.25 external costs like financial institution fees, according to AFP’s 2022 Payments Cost Benchmarking survey. 

ACH costs include processing fees; each payment processor determines pricing. 

Examples of ACH Payment

Examples of how ACH payment transactions are typically used are listed below.

ACH payments are used to electronically transfer funds to:

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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 same Payments Cost Benchmarking survey by the Association for Finance Professionals (AFP), the median cost of a check transaction is $3.00, whereas an ACH (Automated 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.

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. For all of these payment advantages, ACH is superior to paper checks. 

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