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Why Are ACH Fees Lower Than Credit Card Transaction Costs?

waiter inserts the card into a computer terminalWhen it comes to financial transactions, especially of the sort that can occur at the business or individual level, money can move through many channels. The two most popular choices—especially for online purchases—are either credit cards, or ACH, an Automated Clearing House. However, transactions using these services don’t occur for free, and there is a cost to using both services. The ACH option however, is usually lower than the credit card transaction. But why does that happen, and does it mean that the ACH alternative is the preferred, superior method?

The truth is not quite so simple. The costs for ACH transactions can be lower than those for credit card transactions, but the reason for that are the ways in which credit card companies and the ACH handle risk management.

In a credit card situation, the credit card transaction means that certain financial guarantees are provided by the credit card company, regardless of unforeseen or negative outcomes for either of the parties involved. Essentially, credit card companies are offering a measure of safety or protection for the financial transaction. Once the transaction is completed, the vendor, merchant or other recipient is guaranteed the funds, as the financial responsibility now lies with the credit card company.

With an ACH, the cost is lower because the financial protection—and the immediacy of the transaction—are not present in this financial transaction. Transactions are subject to a technique known as “batch processing,” which simply means that, for the sake of efficiency, a transaction is not processed as it happens, but rather is stored until the end of the day—or other interval of time—and finally processed along in volume with others, all at once. ACH transactions are also direct, with the funds for the transaction being taken directly from the account of the party involved and sent to the recipient. This is a cash transaction in that sense, as the paying party must have the funds present to use this service.

The differences between the two kinds of transactions are simply a matter of speed and preference. For faster, but somewhat more expensive transactions, a credit card payment will suffice. Those that don’t require immediate transactions, especially if the volume of transactions is large, will benefit from the ACH method. It’s simply a matter of looking into the individual needs of a company or other organization to determine which method of transaction would be more efficient and optimal.

Posted in ACH on Aug 13, 2015