Explore

ACH or Direct Debit: Choosing the Right Payment Method for Your Business

This blog explores the pros and cons of both payment methods and highlights the advantages for businesses. The verdict will reveal which method works better for your business and how it can benefit you.

Fintech Press

Last edited 18 hours ago by Fintech Press

Accepting payments is as crucial for a business as oxygen is for us. There are many ways to accept payments including cash, checks, and credit cards, but today's businesses are looking beyond credit card payments to ensure frictionless payment experiences for customers. ACH and direct debit are other common electronic payment methods that allow businesses to seamlessly collect payments. But the question arises: which method is cheaper and faster to process for businesses?

What is the ACH Payment Method?

Automated Clearing House or ACH is an electronic network based in the US for financial transactions. When any transaction between banks and credit unions takes place through the ACH network, it is referred to as an ACH payment. Instead of relying on card networks like Visa, MasterCard, or American Express, funds are transferred through the ACH network in large volumes of transactions in batches. Many businesses use ACH transactions for customer bills, payroll, tax payments, tax refunds, and other purposes.

What is the Direct Deposit Payment Method?

Direct deposit is an electronic payment method that allows the transfer of funds directly into the recipient’s bank account through the ACH network in the case of the US. In the case of Canada, direct deposit uses the Automated Clearing Settlement System (ACSS) and it uses the Bulk Electronic Clearing System in Australia. The common uses of direct debit include payroll, taxes, and social security benefits among others.

Exploring Similarities between ACH and Direct Deposit Payment Methods

While both payment methods are processed electronically, they have many other similarities. This section will understand the key similarities between the two methods.

Electronic Fund Transfers: ACH and direct deposit are both secure and efficient electronic payment processing methods. With the rise of these methods, many businesses have transformed their paper-based checks with these electronic methods.

Convenience and Efficiency: Electronic payment methods, such as ACH and direct debit, allow businesses to streamline their payment processing by integrating these methods with their payment platforms. This approach helps businesses in streamlining

accounts receivable collections⁠

, reducing financial administration and accelerating cash flow.

Bank Account Information: To initiate a direct deposit or an ACH payment, requires a receiver’s bank account information which includes account and routing numbers. With this information, the transfer is deposited correctly into the designated account.

Use of Network to Process Transactions: Both payment methods process transactions relying on the ACH network. This allows the transaction of funds between a payer and the receiver’s financial institutions to make it a reliable and secure method.

Recurring Payments: Direct deposits and ACH payments allow businesses to collect recurring business payments, saving time and accelerating collection rates. Apart from business purposes, these methods are used for payroll, taxes, and government benefits among other payments.

Low-Cost Transactions: Compared to traditional check-based payments, ACH and direct deposit transactions not only are faster but also cheaper. This saves costs associated with mailing, printing, and manual check processing which often increases the cost of operations.

Exploring Differences between ACH and Direct Deposit

Though the payment methods have similarities, they are very distinct when it comes to scope and function. By understanding these differences, we can establish which method to choose for your business transactions.

1. Usage and Scope

ACH has a wider scope in comparison to the direct deposit method as it encompasses debit and credit payments. ACH is often used for vendor payments, bill payments, mortgage payments, purchases, and more.

Direct deposit is used for depositing funds into the recipient’s bank account and is often used to pay taxes, payroll, and make regular payments.

2. Transaction Types

ACH covers debit transactions which means withdrawing money from a customer account, and credit transactions which allow transferring money into an account. For instance, in the case of making vendor payments. This way, ACH is used to pay bills and pull payments from customer accounts for recurring payments,

However, the direct deposit method only allows pushing payments to the recipient’s account which involves sending payments to customers.

3. Payment Applications

Due to its broad scope of financial transactions, ACH can be used for person-to-person transfers, person-to-business transfers, and business-to-business transfers. This versatility is a common reason why many businesses prefer to

accept ACH payments⁠

from their customers.

With the direct deposit method, businesses can make regular payments, such as settling payroll into employee accounts, without the need for paper cheques.

4. Payment Processing Time

ACH is quicker and may take between 1 and 3 days to process. ACH debit transactions that are deposited into the recipient account may take just one day to process, whereas it may take up to three days for ACH credit transaction that involves withdrawals.

Though direct debit uses the same network for payment transfer into the US, they may take up to 7 days depending on the amount and verification processes between banks.

5. Transaction Costs

The best option depends on your transaction size and business model, but the ACH method is more economical for large transactions. This is why many businesses consider ACH for larger payments.

Direct debit is economical for smaller transactions, but the processing charges can vary depending on the service provider. However, it is a convenient method for customers to pay businesses because of the lower transaction costs for small amounts.

6. Initiating Payments

To initiate a payment, ACH can be started by the customer to send payment to a vendor, or a vendor can withdraw funds from the customer’s account for bill payment, such as in the case of a utility company.

Direct deposit, on the other hand, is initiated by the payer for business payments, such as depositing an employee’s salary into their bank account or disbursing government benefits.

Our Verdict

Relying on cheques for payments in today’s business landscape is an obsolete practice. It is costly and inefficient which can affect a business’s cash flow. Many small and medium businesses are shifting to electronic methods to facilitate customers and accelerate their cash flow, making payment collection more efficient.

So, which method to choose for your business, the answer is both because convenience is key. By offering both ACH and direct debit, you empower your customers to choose their preferred payment method, fostering a smoother buying experience. This not only accelerates your payment collection but also reduces the administrative burden associated with manual processes.

For instance, with ACH, your business can benefit from recurring payments by withdrawing cash from customers' accounts. On the other hand, direct debit is useful for collecting smaller customer payments. By using both methods, you can reduce the cost of payments, achieve faster processing, and offer customers multiple options to make payments.

Therefore, equipping your business with both ACH and direct debit processing demonstrates your commitment to efficient and customer-centric payment options. These electronic methods improve your collection rate while ensuring robust security protocols to secure your funds.