Most retail businesses deal almost entirely with either cash or debit/credit cards when taking payments. As the pandemic made more and more businesses turn to online sales for survival, that change came with a much more complex payment environment.
Instead of just cash, debit, or credit, businesses had to manage digital payment wallets, online-only payment services, and even automated clearing house or ACH payments. Are you asking yourself, “What is ACH?”
Keep reading. We’ll cover the ACH basics, how it works, and ACH benefits.
What is ACH?
Believe it or not, there is a good chance you do use or have used ACH in the past. Any time you send or receive direct deposits, that’s ACH in action. In essence, the automated clearing house provides a kind of centralized, electronic system for processing payments directly sent by or received from a bank account.
It goes by other names, such as:
- Direct debit
- Automated withdrawal
All of these are the same ACH process at work. Business owners often use this option for recurring or one-time payments from customers, and for paying vendors or suppliers. Consumers also make payments to the IRS using the ACH system.
How ACH Works?
When you open an account with a bank, you get an account number. The bank itself has something called a routing number, which is based on its location in the country. You can find both on your checks in the bottom left-hand corner.
During an ACH transaction, a payment processor uses those two numbers to initiate a funds transfer between accounts. It sends the request to the ACH system, which batch processes transactions several times a day. The ACH system passes on the transactions to receiving banks.
The banks credit or debit the accounts involved, but the Federal Reserve handles the actual funds transfer.
There are strict rules in place that govern ACH transactions and specific forms that people must fill out. Some businesses handle the forms themselves. It’s more common for businesses to use a third-party payment processor, such as Rotessa.com, to manage those forms.
Why Use ACH?
ACH payments offer businesses a number of benefits. Right off the top, they’re cheaper than processing fees for checks, debit cards, and credit cards. They offer better security than checks.
ACH payments are an ideal solution for subscription-based services with recurring payments. It also helps reduce the problem of human error in payment processing.
ACH and You
With the what is ACH question out of the way, you can move on to the bigger question of whether or not ACH is a payment option you want for your business.
If you run a business that relies heavily on subscriptions or recurring payments, ACH makes a lot of sense. It automates the process for you and your customers. It also reduces the fees you pay each month.
For businesses that deal with a lot of one-off transactions, it’s probably less useful.
Looking for more business tips? Check out the posts in our Business section.