ACH Processing [Automated Clearing House] allows for electronic debiting [and crediting] of checking and savings accounts. The network currently operates in the US and Puerto Rico.
Originally created to reduce paper check processing the ACH network began in the 1970’s and was predominately used to collect insurance premiums and mortgage payments in an automated fashion. Payroll direct deposit was and is another strong driver of ACH transaction volume. Today the ACH network processes billions of transactions each year and streamlines payment processing for 1000’s of businesses.
The ACH network consists of more than 12,000 financial institutions, 650 industry councils, and a network of regional ACH associations, and is governed by NACHA – The Electronic Payments Association in Herndon, Virginia. The National Automated Clearing House Association was established in 1974 to coordinate efforts to develop a nationwide ACH network, ultimately succeeding in 1978, when all ACH networks nationwide were electronically linked.
The ACH Processing network is a batch environment meaning you don’t know at the time of the debit that the customer has the requisite funds in their account or even if the account # entered is valid. In contrast the credit card world has an authorization component-this offers confirmation you will be receiving the $ from that transaction.
There have been recent developments in improving the time it takes to move monies via the ACH network. See Same Day ACH
Here is how a typical ACH transaction is processed:
On the first of each month, your fitness club tells his biller (either using Integrated Payments offered by software platform or via ACH Virtual Terminal to send a request to your bank to transfer $50 from your bank account to the fitness clubs account, per your written payment agreement.
Note: Recurring payments mandate a signed agreement though rule changes will allow for telephone initiated recurring payments as well.
The next business morning that $50 is still technically in your account, but no longer available to you, and is typically flagged as a “pending ACH debit”. Essentially, it’s a hold on that $50.
At this point, no money has actually changed accounts-the ledgers show the $50 transaction but it’s all digital.
Until accounts are settled and the payment is “cleared” or settled the transactions is not official.
Role of the Third Party Processor:
Most banks do not have the tools resources to allow businesses to manage ACH transactions. That is where the Third Party Processor steps in.
The TPP you work with has a relationship with a bank to use their “Fedline”. This is the pipeline that carries transaction data to the Federal Reserve. The processor typically has a good amount of money on deposit with the bank to cover the bank’s risk. The advantage of working with a third party processor is that their front end tools e.g. software, Internet product or integration tools are much more user friendly than a bank.
What should you know?
1-Pricing is typically a function of volume but you shouldn’t have to pay much more than .35 per transaction and in cases of high volume this can drop considerably. You should not be paying a discount rate in most cases except in higher risk categories. Returns (NSF etc.) should not be costing more than $2.00. Higher risk may change this. Monthly fees no more than $20-25. Typically you will save 85-90%+ on fees as compared to credit card.
2- ACH Processing Payment decline rates are SIGNIFICANTLY less than credit cards. In the credit card world recurring payment transactions average over 10% with some industries well over 20%. In the ACH world decline rates are typically sub 2%. Major difference in both cash flow and workload trying to track down those declines.
Most importantly, be sure of the stability of your processor. Many processors have arrived on the scene, but few remain in a stable position. Often these new processors have to turn to processing transactions of high risk in order to stay afloat. Sponsor banks don’t like these high risk transactions and if the processor can’t offset these transactions with a substantial increase in low risk transactions, it’s only a matter of time before they are dropped from their sponsor bank. This leads to the processor having to jump from bank to bank, placing you and your transactions in a precarious position. All the while you know little of nothing until it’s too late.
Enhancements and integration of third party utilities that can benefit your operation should also be looked at. For example, it’s now possible to ascertain whether a checking account has funds in it. A well-positioned processor will be integrated with the ATM networks to provide your operation the ability to check accounts status live for balance. Tools for submitting and reporting should be thoroughly examined. Integration utilities should be available, and one spot that should be closely examined in area is security.
While the credit card networks have PCI compliance safeguards, the ACH network has been slow to adopt a similar approach. An ACH processor with your best interests in mind will provide methods to safeguard sensitive data for any integration technique.
Make sure your processor has been in business a few years and has some main-stream clients. A third party processor processing high risk transactions (telemarketing etc) can and has been be taken out of business by an unscrupulous company. Ask about some of their clients and front end tools.
The best ACH processors are always looking to make product improvements. Account verification is a major improvement. You can now ascertain if the check writer has a valid account with money in it before you take payment.
Coupled with a processor with a strong collection program and you can dramatically reduce your risk of accepting bad checks.
We hope you learned a little about the ACH processing world.
Please visit our site at http://www.ach-payments.com