FX International Payments
By Bill Camarda
In a new analysis of data compiled in 2015, the Fed says businesses are averaging nearly 30 ACH payments per month, compared with only 24.1 checks. That represents a big shift towards ACH transfers since the Fed’s 2000 survey, in which businesses averaged 66 checks and 13.4 ACH payments monthly.
Another recent survey, by National Automated Clearing House Association (NACHA) and the Credit Research Foundation (CRF), found businesses moving in the same direction, but not quite as rapidly.2 The NACHA/CRF survey finds checks still outpacing ACH transfers, but projects that by 2020, ACH will account for 45 percent of payments as checks drop to 34 percent. NACHA found that almost 80 percent of credit and account receivables professionals want to be paid via ACH. Those who’ve made the shift were driven above all by internal factors such as process improvement (29 percent); the availability of better technology (28 percent); and customer pressure (23 percent).3
ACH payments are electronic transfers between bank accounts,4 processed through an automated clearinghouse such as the Federal Reserve’s FedACH or the Electronic Payments Network (EPN),5 rather than a check clearing system. An ACH transfer is, in essence, an electronic dance between two banks: the “originating” bank (that initiates the transaction) and the “receiving” bank (which receives the request for the transaction).
One commonly used example: paying employees via direct deposit. The employee provides her account and routing number; on payday, the company’s and employer’s banks electronically coordinate to ensure that sufficient funds are available in the employer’s account; and the transfer is made.6 Things get more complex when a transaction is rejected (“returned”) -- for example, due to non-sufficient funds, an invalid account number, or a payer’s claim that a transaction was unauthorized. ACH payments aren’t immediately irrevocable like wire transfers: they are only locked in after the two banks have settled between them.7,8
As the Fed notes, there have long been compelling reasons for large businesses to use ACH. For one, ACH eliminates paper checks (and the associated costs of physically handling them). Additionally, “Direct control afforded by ACH credit transfers fits well with [corporate] payment practices… as credit transfers are often tailored to manage large amounts of funds and complex relationships, while controlling both internal and external risks.” As the Business Payments Coalition points out, ACH transactions are typically seen by fewer people than are checks, potentially reducing fraud. Moreover, they typically continue processing even if a major disaster or disruption prevents checks from being delivered on time, or at all.9 These benefits can be equally compelling to businesses of nearly any size.
ACH transaction costs can often be far lower than those for credit or debit cards: according to NACHA, they average roughly 11 cents per transaction. However, as TheBalance notes, “For small businesses, service providers might charge three to five times that much (some only charge per-transaction, while others include a monthly fee or take a percentage of each payment). Depending on your average ticket size, those costs might still be competitive with the costs of processing debit card payments.”10 In a competitive market, small-to-midsized businesses may benefit from comparison shopping between service providers, The Balance says.11
Despite ACH’s advantages, many firms continue to use checks due to historical practices, processes, and systems still widespread in their industries. Improvements in check clearing speed may also have made it less urgent for some of them to shift.12 Among credit and receivables professionals surveyed by NACHA, 45 percent say they still have customers who can’t handle ACH transfers, and 34 percent have customers who are capable of sending ACH transfers, but don’t do so properly.13
One historic problem with domestic ACH transactions -- delays in funds availability of up to several days -- is rapidly being ameliorated. Many transactions now settle on the same day, according to NACHA.14 With the planned extension of that capability to debit entries on September 15, 2017, NACHA says that same-day processing will be available for virtually any ACH transfer.15
Traditionally, some small businesses have also avoided ACH transfers due to their greater complexity. As the Business Payments Coalition notes, initial setup can be technically challenging, and payees need the bank routing/transit number and account information of those they’re paying -- making ACH more valuable when companies are paying the same suppliers regularly.16,17 Some (but not all) of these issues are being ameliorated as ACH support is added to commonly used financial software and services such as QuickBooks and Stripe.
As ACH transfers become simpler and faster, more companies are moving towards ACH and away from checks, leveraging potential benefits that can include reduced paperwork, improved control, and better security and risk management.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. “Fed Finds ACH Surpasses Checks In Corporate Payments,” PYMNTS.COM; http://www.pymnts.com/news/b2b-payments/2017/federal-reserve-corporate-ach-check-payments/
2. “ACH Transactions to Top Checks as Top Form of B2B Payment by 2020: New Survey,” NACHA; https://www.nacha.org/news/ach-transactions-top-checks-top-form-b2b-payment-2020-new-survey
4. “How ACH Payments Work,” The Balance; https://www.thebalance.com/how-ach-payments-work-315441
5. “Automated Clearing House,” Wikipedia; https://en.wikipedia.org/wiki/Automated_Clearing_House
6. “Beginner’s Guide: How Do ACH Payments Work?” Dwolla; https://www.dwolla.com/updates/for-beginners-how-do-ach-payments-work/
7. Small Business Payments Toolkit, Business Payments Coalition; https://fedpaymentsimprovement.org/wp-content/uploads/small-business-toolkit.pdf
8. “How ACH Works: A Developer Perspective,” Gusto; http://engineering.gusto.com/how-ach-works-a-developer-perspective-part-1/
9. “Small Business Payments Toolkit,” Business Payments Coalition; https://fedpaymentsimprovement.org/wp-content/uploads/small-business-toolkit.pdf
10. “How ACH Payments Work,” The Balance; https://www.thebalance.com/how-ach-payments-work-315441
12. TheFederal Reserve Payments Study 2016: Recent Developments in Consumer and Business Payment Choices, Federal Reserve; https://www.federalreserve.gov/newsevents/pressreleases/files/2016-payments-study-recent-developments-20170630.pdf
13. “ACH Transactions to Top Checks as Top Form of B2B Payment by 2020: New Survey,” NACHA; https://www.nacha.org/news/ach-transactions-top-checks-top-form-b2b-payment-2020-new-survey
14. “Same Day ACH: Moving Payments Faster,” NACHA; https://www.nacha.org/rules/same-day-ach-moving-payments-faster
15. “Same Day ACH: Moving Payments Faster (Phase 2),” NACHA; https://www.nacha.org/rules/same-day-ach-moving-payments-faster-phase-2
16. Small Business Payments Toolkit, Business Payments Coalition; https://fedpaymentsimprovement.org/wp-content/uploads/small-business-toolkit.pdf
17. “The Five Ways to Receive and Make B2B Payments,” Due; https://due.com/payments