man at desk reviewing merchant services account.If you’ve ever bought a product with a credit card or received your paycheck through direct deposit, you’ve engaged in the booming electronic payment industry.  And you’re in good company. Worldwide, 37205.2 million consumers engage in electronic or digital transactions, a six percent increase from 2018. The total transaction value of digital purchases is expected to hit US$4,144,965 million in 2019, eventually reaching US$6,686,650 million worldwide.

Consumers now rarely write checks or have cash in their wallet. Payments are easier when they’re automatically deducted from your checking account or paid for with a wave of a credit card or even your Apple watch. But how do electronic payments work?

Two forms of digital payments are Automated Clearing House (ACH) or Electronic Funds Transfers (EFT).  But what do these mean? And how do these two forms of electronic payment affect your business?

Let’s dig in.

ACH payments explained.

ACH and EFT payments are similar in that they are both forms of electronic payments. However, EFT refers to all digital payments, whereas an ACH is a specific type of EFT. An ACH payment occurs when money moves from one bank to another bank. This money moves electronically, through the Automated Clearing House Network. This network connects all U.S. financial institutions, allowing them to transfer money from one bank to another quickly and safely.

woman working on laptop and calculator reviewing electronic invoicesThe ACH Network “batches” payments during the day, eventually sending money to the appropriate bank of the payee, though it does not send payments instantaneously. Instead, payments may take up to 1-2 business days for processing and receipt by the payee. Even though ACH requires a little processing time, it’s still faster than processing a paper check.

ACH payments are divided into direct deposits and direct payments.  A direct deposit through ACH includes employees’ paychecks, tax refunds, government benefits, and interest payments. For the accountants and bookkeepers out there, this is an ACH credit, coming directly from a company or governmental entity to a consumer.

Direct payment through ACH is when funds are used to make a payment by either an individual or an organization. For example, when a consumer pays his or her electric or cable bill automatically out of a personal checking account, this is a direct payment. Additionally, when a business pays for services or goods, and the funds are electronically deducted from the operating account, this is also a direct payment. Depending on if you’re paying the invoice or receiving funds from a consumer, direct payment through ACH can be categorized as either an ACH credit or a debit.

How are ACH payments different from credit card payments?

ACH payments differ from credit card payments in that ACH payments don’t receive an immediate authorization of funds like when you run a credit card. The ACH payment will not tell you it’s declined. Instead, the ACH payment (whether money is transferred the same day or within a couple of days, will either go through or get returned) based upon the payee’s bank account balance.

What are the benefits of ACH Payments?

Businesses offering ACH payments to their customers can reap many benefits. For example, as a business, you’re providing your customers with an alternative form of payment, making your payment options more flexible. Further, ACH payments are faster and more cost efficient than processing paper check or credit cards.

How can businesses comply with ACH best practices?

Even with the transaction time of up to 1-2 business days, ACH payments are among the safest transactions. Although there is no mandatory certification program for ACH payments, the National Automated Clearinghouse Association (Nacha) offers voluntary security requirements for all ACH transfers. Nacha administers the operating rules for any private organization, defining the roles and duties of each ACH Network participating, ensuring governance and compliance.

What are EFT payments?

EFT is an Electronic Funds Transfer, encompassing all electronic payments and including ACH payments. EFT transactions transfer money among banks or between banks, giving businesses and consumers flexibility when making or receiving payments.

EFTs include credit card, online, and mobile payments in addition to direct deposits and wire transfers. ETFs also include PIN transactions, such as using your check card at the grocery store or withdrawing money from an ATM. Additionally, through EFT, businesses can send electronic billing statements as opposed to sending paper statements through the mail, creating efficiency while being environmentally conscious.

EFT payments have exploded in recent years with the continual growth of online shopping. Approximately eight out of ten people shop online, with a growing number as repetitive online shoppers. With the advancement of smartphones, it’s easier to shop through mobile platforms, adding to the increase in internet-based EFT transactions.

What benefits do EFT payments offer?

Like ACH payments, other forms of EFT transactions provide a faster and cheaper method for transferring money than checks, while making the whole process easier on businesses and consumers alike. Say goodbye to writing, printing, and mailing checks, followed by the last-minute dash to the bank to make a deposit. This efficient and safe system of moving money decreases administrative hassles and reduces labor costs. Finally, businesses can increase their cash flow since the payments are electronic.  No more, “The check is in the mail.”

How can businesses comply with ACH best practices?

In 1978, the Electronic Funds Transfer Act was signed into law by the U.S. President. This federal law protected consumers engaged in electronic transactions, such as credit and debit cards. It also limits consumer liability from a lost or stolen card.

In 2006, the Payment Card Industry Data Security Standards Council was launched to manage and oversee the security standards for credit card use. The rule — called the Payment Card Industry Data Security Standard (PCI DSS) — applies to any business that accepts, stores, or processes credit card information. These security standards were jointly created by the large credit card providers, including Visa, Mastercard, American Express, and Discover.

What are the differences between ACH vs. EFT?

Although ACH transactions are a type of EFT, they have their differences, especially when it comes to security. For example, ACH transfers undergo a rigorous verification process before and during the transfer of money. Credit and debit cards don’t go through a similar process when used. It’s easier to breach a credit card, for example, than it is an ACH transaction.

Another difference is that EFTs are digital transfers of money between banks or within a bank; an ATM transaction for instance. For ACH payments, the payments are transferred between two banks; however, the money makes a pit stop in the Automated Clearing House Network first, where it is further processed.

On the other hand, EFT payments are typically faster than ACH transactions, in some cases occurring instantaneously in real-time. This can serve as a significant benefit to a business, especially when all eyes should be on cashflow.

When determining what payment options to offer your customers, you should weigh the costs associated with implementing the technology, any ongoing fees for transactions, and whether the electronic payment technology can integrate with your current accounting program, whether it’s QuickBooks or something else. Additionally, you want to be sure you and your team get trained on the payment platform, so your transition is smooth and easy.

Whether you’re looking to accept credit card payments, ACH transactions, or both, we have the technology you need to accept electronic payments in the modern world. We’ll help you tailor your payment processing to your specific business while following the necessary compliance steps, giving you peace of mind. To set up a consultation, contact us here or give us a call at 877.840.1952.

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