Will That Be Credit, Debit…Or ACH?

Historically, ACH processing hasn’t been a big item on most merchants’ wish lists. That could change soon as efforts to make it more merchant-friendly intensify.

With all the discussion of faster payments and real-time payments, often synonymous but not always, one payments network continues to attract merchants. The automated clearing house has been around since the 1970s, but lately its transaction volume has consistently grown at high rates (“Behind the ACH’s Sizzling Growth,” April). And recently, the ACH has added same-day processing.

ACH transactions also may have lower costs for merchants—paid as a flat fee ranging from typically 20 cents to $1.50 or a percentage ranging from 0.5% to 1.5%, according to Merchant Maverick, an online comparison site for merchant services—than comparable credit card transactions, which may range from 1.7% to 3.5%.

Now consider that same-day ACH processing and real-time, or faster, payments are commercially available, and the prospects for selling ACH processing services are many.

While there are potent alternatives to ACH transactions—think credit and debit cards—the potential is vast. “It has plenty of potential for replacing bills that consumers have traditionally paid by paper checks, such as utilities, rent, insurance payments, and similar,” says Amad Ebrahimi, founder and chief executive of Orange, Calif.-based Merchant Maverick.

The lower cost of ACH acceptance, the increasingly faster funding time, and the finality of the payment—it can be more difficult to dispute transactions—can make ACH acceptance more attractive to merchants, Ebrahimi says. “Here, education is the key,” he says. “Merchants must first know about the advantages of ACH payments so that they can, in turn, educate their customers on the convenience of ACH payments and encourage them to use ACH more often.”

Generally, there are two types of ACH payments many merchants might use. ACH credits enable merchants to send and receive payments. A credit is commonly called a push payment because the payor initiates the payment process and pushes the money out, Ebrahimi says.

“ACH credit payments tend to be one-time payments or payments where the payor wants to control the timing, the recipient, and the amount,” he says. It might be a payment for supplies from a vendor or a direct-deposit payroll transaction.

By contrast, merchants use ACH debits more often to receive payments. It is usually thought of as a pull payment because the payor gives the account permission to pay and the merchant pulls the payment on an appointed date, Ebrahimi says.

“ACH debit is especially suited for recurring payment, such as utility payments, rent, insurance payments, and similar,” he says. “The payor usually sets up the payment schedule and gives the authorization through a Web site under the merchant’s control. It’s a one-time process, so once the payor sets the permissions, they only need to make sure there are sufficient funds in the account on the date of the payment.”

To receive ACH credit payments, the merchant must provide the payor its bank routing number, account number, and the name on the account. To accept an ACH debit transaction, the merchant must have an account with a bank or payment processor that can process these transactions.

“Typically, this involves using a software setup called a payment gateway where the payor can enter the bank routing number, account number, account name, payment date, and give their authorization,” Ebrahimi says. A preauthorization is sent to the payor’s bank and the various account-identifying indicators are securely stored by the merchant and sent to the processor or bank when payment is due.

Many providers’ Web sites explain what ACH payments are, their costs, and how they differ from card payments. Still, merchants often have questions about the transaction type, how it works, and when they get their funds.

Common questions that Fattmerchant Inc. hears center on security, funds availability, costs, and disputes, says Suneera Madhani, chief executive and founder of the Orlando, Fla.-based independent sales organization.

Fattmerchant sales reps explain that the ISO encrypts ACH transactions just as it does for card-based payments. They also explain that the cost of an ACH transaction may be 25 cents instead of 2.5% for a credit-card transaction.

And the settlement timeframe gets its own explanation. “ACH transactions settle in four business days and fund on the fifth,” Madhani says. Same-day ACH transactions, however, settle on the same day if they make it under the settlement window.

“We help [merchants] understand how ACH clearing works,” Jeff Thorness, president of Allen, Texas-based Forte Payment Systems, which started in 1998 as an ACH-services provider. Clearing is particularly important for merchants who are unfamiliar with how returns work for ACH transactions, he says.

Ebrahimi says other common questions are about configuration for acceptance and settlement times.

Other than these, “… we typically see a lot of technical-support questions,” he says. “Usually, there’s a glitch somewhere in the payment process, and the merchant gets charged a somewhat mysterious fee. Often, merchants are pretty angry because either they could not reach a live person for help or the help wasn’t helpful.”

That’s why Merchant Maverick considers customer complaint and customer support when it makes recommendations, he says.

Selling It

There are various approaches to selling ACH services. At Forte, the bulk of sales are through its independent software vendor or ISO channels. And, many times, the agent is not selling solely ACH processing, but also associated products, he says.

“One of the pain points with ACH is you don’t really have the real-time intelligence on account information,” Thorness says. “With card payments, you can get real-time authorization to get approval. With ACH, you really don’t have that type of interaction with the account issuer for those bank accounts.”

That can make it challenging to verify funds are in the account and that the account is open and valid, he says.

Forte sells products that can help solve these issues, he says. One such service can verify that the account is open and valid and not currently returning because of nonsufficient funds, he says. That service covers approximately 95% of the accounts nationwide.

Another can verify if the bank account belongs to the individual or company presenting the payments. Forte has data on approximately 45% of bank accounts for this service. Each is priced on a per-transaction basis.

Fattmerchant sells ACH processing as a value-add service, Madhani says. “ACH allows our customers to reliably receive recurring payments for their customers at a fraction of the cost,” she says. “Because the payments are linked to the customer’s bank account, merchants don’t have to worry about credit cards expiring and it’s more convenient for their customers.”

It’s not just ISOs that want more merchants to accept ACH payments. Nacha, the rule-making body for ACH transactions, developed the same-day ACH rules with an eye to expanding the volume of transactions. The Federal Reserve operates another ACH switch, FedACH.

Though same-day ACH transaction are relatively new—the idea was suggested in 2009 and implemented in 2016—refinements continue to emerge. In March, the dollar limit of same-day ACH payments will increase to $100,000 from $25,000. And same-day ACH windows will be extended beginning in 2021, with three same-day ACH processing windows in a day.

“The availability of same-day ACH enables merchants to collect funds faster, reduces the likelihood of NSFs, and shortens the time period in which payments could be returned,” says Michael Herd, Nacha senior vice president of ACH network administration.

‘Minor’ Interest

Thorness, like many, is paying attention to same-day ACH and related faster payments products. He has yet, however, to see much merchant interest, despite the various advantages. “It’s relatively minor,” he notes.

The issue, he says, is that it may take three to four days for the merchant to know for sure that the ACH payment is valid.

“Same-day ACH doesn’t solve that problem because the return windows are still the same timeframe,” Thorness says. Same-day ACH transactions only knock one day off the return timeframe, he says.

“Send it on Monday, it hits on Monday and the merchant will know by Wednesday or Thursday if the transaction is good or not,” he says. “For same-day ACH to take off, the return window needs to narrow.”

“By accelerating the payment collection by a day, the return deadline also shortens by a day,” Herd says by email. “For example, a same-day ACH payment initiated on a Monday has a return deadline of the opening of business on Wednesday, instead of Thursday as with a next-day ACH payment. We are encouraging all banks and credit unions to use the same-day ACH capabilities when returning payments to shorten the return timeframe even further.”

This issue is always important for merchants, says Ebrahimi. “Getting paid faster is always a good thing,” he says. “Just a few years ago, ACH payments were batched and settled once every 24 hours on business days. Now, there are two settlement times in a 24-hour period.”

Nacha’s plan to add a third settlement window will allow event faster settlements, he says. “After the banks or processors settle the payments, they may hold it for an additional period before releasing funds to the merchant. It can take a day or two for the funds to be released.”

Merchants are very much aware of the benefits of ACH transactions, Herd says, adding that Nacha received more merchant feedback on the two sets of rules for same-day ACH than any other Nacha rules proposals.