ACH vs. Credit Card Payments: Key Differences To Know

What is an ACH payment?

Simply put, an ACH payment is a bank-to-bank exchange that directly transfers funds between two parties’ financial accounts. These transactions—also known as direct debits, electronic funds transfers (EFTs), or eChecks—are typically completed within one business day and can support transaction values up to $1 million.

There are two ACH payment types — ACH credits that push funds to another party and ACH debits that pull funds from a pre-authorized account. Nacha (previously the National Automated Clearing House Association), a non-profit organization, maintains the infrastructure that supports these incoming and outgoing payments.

Pros of ACH payments 

• Efficient for large transactions: ACH payment pricing increases at a slower rate compared to other methods. So, it’s a smart move to use the ACH network when sending or receiving higher-value transactions.
• Automatic and scheduled payments: By leveraging ACH debits, you can easily set up scheduled and automated payments for your customers with limited paperwork — useful for subscriptions and other recurring costs.
• Increased security: The ACH network offers a much more secure transaction method as every payment is routed through a clearing house — either the Federal Reserve or The Clearing House Payments Company LLC — that complies with strict regulations and limits the exposure of sensitive information like account numbers.
• Fewer data errors: Given that businesses rarely change bank account numbers, the likelihood of a transaction being rejected due to outdated or inaccurate information (e.g., a credit card expiration date or new debit card number) is significantly lower with ACH. Plus, with much of the process being automated, there are fewer chances for manual errors to disrupt operations.

Cons of ACH payments

• Limited location: Unfortunately, ACH transactions can only be conducted between financial institutions within the United States and its territories. So if you support international purchases, you must offer alternatives or employ supplemental payment processing solutions.
• Batch processing: Unlike wire transfers and other real-time channels, ACH payments are only processed four times each business day. So if a transaction occurs towards the end of the day, after normal banking hours, on a weekend, or during a holiday, you can expect to wait longer for that payment.
• Spending limits: While the ACH network can support rather large transaction sizes, many banks, credit unions, and other financial institutions limit the amount that can be transferred at any given time to mitigate fraud risks. So, you may need to take extra measures to support a large transaction.
• Delayed confirmation: ACH transactions do not immediately recognize that a payment has been accepted within the ACH network. Instead, you will often have to wait a few business days to determine whether the transaction was successful or failed.

What is a credit card payment?

In its simplest, most traditional format, a credit card is a thin, rectangular piece of plastic issued by a bank or other financial institution. It provides users with a line of credit to make purchases or obtain cash advances. The cardholder, in turn, agrees to repay those borrowed funds to the card issuer along with potential interest.

These transactions require cooperation from multiple parties, including the card issuer, the receiving bank, the credit card processor, and the relevant credit card network.

Pros of credit card payments 

• Guaranteed payment: While the actual transaction can take up to a couple of days to process fully, most credit card transactions include a near-instant authorization at the point of sale. This step essentially confirms that the cardholder has sufficient funds available to make the purchase and temporarily holds those funds to ensure that they will be available when the transaction is finalized.
• Widely accepted: Given the near-universal presence of credit cards, your business can cater to a broader customer base, as most suppliers and customers are comfortable with credit card transactions. 
• Consumer protection: Most credit card providers have safeguards in place that prevent users from fraudulent purchases. So, if your card number is stolen, your associated risk is negligible.
• Cost distribution: Since credit cards operate as a line of credit, buyers can space out payments for purchases, offering flexibility and eliminating the need for immediate cash during transactions. 

Cons of credit card payments

• Transaction fees: To help offset some of the increased risk associated with credit card transactions, there are quite a few underlying fees tied to the exchange that the seller predominately needs to cover. Some common types include assessment, authorization, processor, equipment, interchange, markup, payment gateway, and swipe fees.
• Chargeback risk: While credit cards offer buyers the ability rather easily to return and refund purchases, this convenience tends to increase the financial burden for sellers. Beyond the increased risk of “reversed” sales, merchants might also face additional processing fees for a heightened level of chargebacks.
• Credit rating: When using credit cards for day-to-day business transactions, you are more likely to forget or make late payments, which can directly affect your credit rating. This could limit your fundraising efforts for future growth or impact your financial interactions with other businesses.
• Debt accumulation: Credit cards don’t require cardholders to have the funds upfront for payments, so debt can quickly become a problem if payments aren’t made. If payments are delayed, high interest rates will also accumulate. 

Credit card vs. ACH compared

When evaluating ACH vs. credit cards, some key differences exist. 

Processing times

There can be a stark difference between ACH and credit card processing timelines. While either transaction type can — and often is — completed within 24 hours, ACH payments run a much greater risk of dragging on for longer periods. So, while Nacha reports that 80% of ACH transactions are settled within one business day, the upper end of common payment timelines can be as long as seven business days.

Meanwhile, credit card transactions are frequently completed within a handful of hours and rarely take more than three business days at most.

Fees

Regarding ACH vs. credit card fees, ACH transactions have a clear advantage. Based on data analysis from Forbes Media LLC, the average credit card payment can cost your business between 1.5% and 3.5% of the total transaction value just for processing fees — not to mention any additional charges, as we previously mentioned. 

By contrast, the 2022 AFP Payments Cost Benchmarking Survey placed the average cost for an ACH transaction somewhere between $0.26 and $0.50 — at least if your business is making less than $4.9 billion in annual revenue. But again, that average doesn’t account for any other fees — e.g., monthly, percentage, reversal — that you’d also likely need to pay.

Ultimately, the aggregate per transaction cost tends to be much lower for ACH payments than credit card payments.

Guarantee of payment

As previously outlined, a credit card transaction engages in an up-front authorization process that ties up the relevant funds, essentially “guaranteeing” that they will be available to the seller once the transaction closes, unlike an ACH payment. With this increased confidence in receiving funds, the business benefits from a more predictable cash flow and simplified planning efforts.

ACH transactions, however, offer no such guarantee and can potentially fail to close out for several reasons. For instance, while the buyer may have had sufficient funds in their account at the time of purchase, during the intervening business days, that total may have been reduced by other transactions, leaving insufficient money to cover the purchase at closing.

ACH payments vs. credit cards: Which one is better for businesses?

Now that we explained how ACH transactions differ from credit card transactions, you may still wonder which option is better for your business. While accepting various payment methods is important, as everyone has different payment preferences, ACH payments are one of the most cost-effective options for businesses. ACH payments can be the most beneficial for businesses accepting larger-scale payments or setting up automatic payments for subscription models and other recurring charges with lower processing fees. 

However, it’s advisable to accept both transaction types. After all, the more payment methods you support, the more flexibility and access your business will have to potential customers and suppliers. The optimal choice is to utilize payment processing software that accepts all types of payments. 

Improve payment processing and cut down on fees with Invoiced 

Ultimately, you’ll need to have the right platform in place to manage whatever payment methods you choose to support. Our Accounts Receivable Automation software can work with multiple types—including ACH, direct debit, credit card, virtual cards, PayPal, cash applications, and more—and it also offers integrated AutoPay support and a self-service payment portal that lets your customers control when and how they pay.

For businesses offering ACH transactions, our built-in Vendor Pay feature can simplify overall management and processing. It is one of the most cost-effective options on the market, requiring a mere $1 flat fee per transaction. 

If you’re ready to improve your payment processes and cut down on fees, schedule your demo of Invoiced today.