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e check vs ach

Saturday, November 29, 2014

A guide for small businesses

You’ve probably encountered echecks and ACH transfers while running your business. These two methods of sending money between bank accounts is an important aspect of doing business. And as a small business owner, you should be aware of both. However, some intricacies separate them from each other. Knowing these intricacies can help you choose the right payment method for your business. So in this article, we’ll take a look at each and then discuss the differences between them. To start, let’s look at echecks.

What is an echeck?

Electronic payments are one of the common ways businesses pay each other. One of these ways is by electronic check (echeck). At its core, an echeck is a digital form of a traditional paper check. It is a way for a person or business to pay another person or business electronically. When you send an electronic check, you’re making a one-time payment to another business or individual, from your bank account to theirs.

As you may suspect, processing an echeck is faster than processing a paper check. You’re still utilizing the bank routing number, bank account information and authorization from the check owner. An echeck is a type of electronic funds transfer (EFT). An EFT is any request to credit or debit a consumer’s bank account. These requests can originate from the internet, ATMs or phone calls. An echeck is a specific type of EFT because it uses the ACH network to process the echeck.

There are four basic steps to echeck processing:

  1. Authorization request: A merchant gets authorization from the customer (which could be an individual or another company) to complete the transaction. This can happen in a few different ways, including a phone call, online payment form or a signed order form.
  2. Payment setup: Once you get the customer’s payment authorization, you’ll enter their payment information – including their checking account number and financial institution routing number into an online payment processing software.
  3. Complete and submit: Once you enter the customer’s payment information, you’ll complete the transaction and submit the payment to start the echeck transaction process.
  4. Confirm payment and deposit funds: Once the information gets to the ACH, the payment will automatically be withdrawn from the customer’s bank account. The merchant will get the amount in their bank account, which may take a few business days, usually 3-5 business days. The customer will then receive a confirmation that the payment has been processed.

As you can see, the general process for echeck payments is straightforward and similar to the process for traditional paper checks. One of the biggest benefits of echecks is that they are very affordable. Depending on the merchant helping you process the echeck, costs vary between $.10 and $1.50 per echeck. Considering the amount of money you can send, it’s one of the most affordable payment options available. Echecks are popular for high-cost or recurring purchases for your company, such as rent, equipment payments, etc. Now, let’s look at ACH payments.

What is ACH?

ACH payments (sometimes called ACH bank transfers) are among the most common forms of payment for businesses, both sending and receiving payments.

You’ve probably utilized ACH payment systems for bills or to transfer money from one bank or credit union to another in your finances.

ACH stands for Automated Clearing House. It’s a network that helps individuals and businesses move money between bank accounts throughout the United States, from one financial institution to another. The National Automated Clearing House Association (also known as NACHA) is the organization that runs the Automated Clearing House Network. ACH transfers can have a longer processing time than credit cards—but most transfers are completed in 3-5 business days.

ACH transactions typically involve four types of entities:

  • The banking institution that initiates the transaction, known as the Originating Depository Financial Institution (ODFI)
  • The banking institution that receives the ACH request, known as the Receiving Depository Financial Institution (RDFI)
  • The entity overseeing and facilitating the ACH network (NACHA)
  • The ACH operators, who process the transactions between the originators and receivers. Currently, there are two ACH operators – the Federal Reserve Bank and the Electronic Payments Network (EPN).

Each of these entities plays a crucial role in getting money from one bank account to another. There are two types of ACH transactions: direct deposits and direct payments.

Direct deposits (ACH credit)

This type of ACH transaction is probably the most familiar to you. It encompasses the many different deposit payments a business might make to consumers. Most common for small businesses like you, these are payroll payments or reimbursing employees for business expenses. Other direct deposit payments include tax and other refunds, government benefits like social security, or interest payments. Direct deposits are ACH credit payments because you are pushing money from your business bank account to another account.

Direct payments (ACH debit)

The other type of ACH transaction is direct payment. This type of payment is from a consumer to the business. These payments are often set up regularly—weekly, bi-weekly, or monthly. Examples of this type of payment include mortgages and utility bills. As a business, if you plan to accept recurring payments from customers, this is the best way to do so. Direct payments are ACH debit payments because you pull money from another account into your account on the specified billing cycle.

If your business decides to utilize ACH payments, be aware that there’s a small fee for each batch of transactions. These transaction fees can be 0.5% and 1.5% of the total amount of money in a single batch. That’s much lower than normal credit card processing fees. Pricing for credit card processing is usually between 1.5% to 3.5% of the total purchase price.

ACH payments and direct deposits are two payment solutions that can play a crucial role in your business. But how are they different from echecks? Let’s look in the next section.

Is echeck the same as ACH?

After reading the descriptions of echecks and ACH transactions, you may think they’re very similar. And that’s because these two transaction types are. The main difference between them is the party that keeps the payment information and sends the payments. In ACH transactions, specific entities use the banking information you put on the enrollment forms that help establish the recurring debit from the account you choose. These entities then process the transaction in your specified time period. ACH processing can also update payment amounts as needed, whereas echecks cannot.

For one time payments, echecks can be faster and more reliable than paper checks. But if you forecast your business working with a consistent partner or supplier over a period of time, a payment method able to handle recurring payments is the way to go. Therefore, you’d implement ACH transactions in your business in order to either receive payments from the consistent partner or to pay this partner for providing you with goods or services.

After reading this article, you should better grasp the differences between echecks and ACH transactions.As you can see, echecks and ACH transactions share more similarities than differences. While they require many of the same inputs, they have subtle differences. For those looking to deposit a paper check electronically or send one-time payments, echecks can do that. Remember, echecks utilize the ACH network to transfer money to the right accounts. However, if you’re looking for a way to send or receive frequent or recurring payments, look to ACH transactions. To further find the solution that works best for your business, talk with your payment processing provider.

Ready to work with a payment processor who can help you send and receive payments?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us..