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How Is Credit Card Processing Different From ACH Processing?

March 10, 2022 • by shall

“Credit card processing” and “Automated Clearing House (ACH) processing” are often used interchangeably when talking about payment processing. Although both are ways things get paid for, they are fundamentally different. Having both at your disposal can make your payment processing more robust and provide more options to your customers.

Automated Clearing House processing electronically exchanges funds between two financial institutions through various payment options. When an ACH payment occurs, the customer is instantly paying a bill. Credit card payments are promissory notes to pay later.

Here are more differences between ACH and credit card processing, as well as the advantages and disadvantages of both:

The Basics of ACH and Credit Card Processing

Credit card processing acts as a promissory note at the point of sale. Instead of paying immediately, the customer agrees to pay later. 

ACH processing — which includes direct deposit, direct pay, and electronic check — provides a more direct way of paying than credit. ACH, or automated clearing house, is used to make electronic payments and money transfers. Simply put, ACH payments are used to move money from one financial institution to another without having to write a paper check, use a credit card, or make a wire transfer. 

If a vendor wants to process payments in batches, they use ACH processing. For example, a property management company may use ACH processing to collect monthly homeowner or rental fees. Processing these payments once a month makes for easier administration and greater convenience.

Note that ACH credit is not the same as ACH debit, and understanding the differences is essential. With ACH credit, the payer authorizes that payment will be directed to the payee. If you order a pizza online and enter card info into the website to pay, ACH credit makes the transaction happen. Although the purchase may be instantaneous, the transfer of funds to the payee can take a few days.

With ACH debit, the payee already has the payer’s banking information and draws funds as needed. This could be used to, for example, automatically pay a utility bill. With ACH debit, the organization receiving funds makes the request, as opposed to ACH credit, in which the person or bank sending the funds initiates the transfer.

Advantages and Disadvantages of ACH and Credit Card Processing

Both ACH and credit card processing come with pros and cons. Knowing the advantages and possible pitfalls of each option is essential to choosing the best one for you.

  • ACH transactions can be rejected due to insufficient funds or account closings. As the merchant, you may not know about the rejection for several days. 
  • ACH transactions typically have the lowest fees of all payment options — ranging from $.20 to $1.50 per transaction, while credit card payments can have fees from 1.5 to 3.5 percent. This disparity is why many stores have minimum purchase amounts to use a credit card.
  • Chargebacks (i.e., disputes in which payment might be returned) and the cost of credit card terminals should be considered when choosing a processing option. With credit card transactions, funds are guaranteed. As long as the network approves the transaction, the merchant will receive payment.
  • Accepting credit cards allows merchants to reach a wider customer base because most people use debit or credit cards instead of cash. Having ACH as an option will make your payment processing more complete.

This post is a great place to start understanding your payment processing options. To learn more, check out our eBook, Merchant Services 101.

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