In the modern financial landscape, how suppliers and employees are paid can feel just as important as making the payment itself. Electronic funds transfer (EFT) forms of payment have introduced a modern pool of options while traditional methods provide a sense of familiarity. The two most commonly used payment methods in business commerce today are ACH and check. Learn more about what each payment is, the similarities between the two methods, and what sets them apart.
What is a check?
One of the earliest payment methods to develop in the modern era is the use of a check. Early checks resembled something akin to an IOU note humorously displayed in Saturday morning cartoons. The first checks were handwritten and directed a bank to draw the indicated funds immediately. The first pre-printed checks were made in the UK in 1717 followed by the first check clearings conducted in the 1770s at a tavern called the Five Bells.
The sophistication and use of printed checks has—thankfully—significantly increased over time. Today, printed checks include security features like watermarks, protective layers, special patterning, chemically and heat reactive elements, even fluorescent fibers revealed through the use of a black light.
Despite the modernization of physical checks, they remain in essence, an IOU. A check includes a routing number and bank account number of the initiating payer, the name of the business or individual who is the payee to receive the funds, the amount for which the check is valid, and the date the check was written. Some checks even include a PO or invoice number on a memo line: The key is to make the check as specific as possible to a clearly identified recipient to prevent fraud or error.
What is ACH?
ACH payments are a type of EFT payment. Use of pre-printed checks grew exponentially since it was introduced, and by the 1970s the encroaching problem of how to process so many checks in a timely manner was becoming evident. In its early stages, ACH payments were made using computers provided by the Federal Reserve and were physically transported on magnetic tapes and diskettes. By the early 1990s, the Federal Reserve mandated that all ACH files were to be handled electronically. While federal payments are still overseen by the Federal Reserve, commercial ACH payments are controlled by the National Automated Clearing House Association (NACHA).
Digital payments made using the Automated Clearing House Network are known as ACH payments. To make an ACH payment, the payer provides a bank account number and routing number of their bank as well as the bank account number and routing number of the payee. ACH payments are made in batches with clearly defined cutoff times through the business day. ACH direct deposits made to Social Security beneficiaries, tax refunds, and B2B or B2C payments are all examples of ACH payments.
How ACH payments and checks are similar
ACH and checks developed at different times throughout commerce history, but they both remain primary methods of payment and are similarly beneficial for business needs.
For both ACH and check payments, the fees associated remain relatively low; far lower than the interest and fees associated with using credit cards and even debit cards for business payments.
For checks, the largest fee will be the cost of the paper good itself which will vary depending on the kind of check. On the lower end, checks cost $4 but can go up to $20. It is important to also factor in the labor costs associated with AR and AP who produce each check and payment which is on average an additional labor cost of $3 per check.
ACH fees vary depending on the choice of payment processor. Many banks do not charge any fees for standard ACH transfers, however, some will charge a fee between $3-$6 for expedited transfers or transfers from different banks.
For ACH transactions, some processors charge fees based on a percentage of total funds paid (.5%-1.5%) and some charge flat rates ($.20-$1.20).
Great for domestic payments
If you are conducting business solely in the US, both ACH and checks can be used for payments with ease. Some ACH payments can now be made with same-day direct deposit of funds. For businesses that work directly with contractors, and can write a check on the spot, payments are made in real time.
Both payment methods still have processing windows that vary depending on the merchant’s financial institution. Many ACH payments require 3-5 business days for funds to deposit. With checks, there may also be a 3-5 business day processing time, but this is in addition to snail-mail lag. However, whereas a check can still be sent overseas for international payments, ACH can only be used in the United States at this time.
The differences between checks and ACH payments
While ACH and checks do have some similarities, they are more different than they are alike. These differences highlight the efficiency of electronic payments.
Checks can be exchanged for cash
Probably the biggest benefit to using checks for payment is that a recipient can use the check to immediately withdraw cash. If the check is taken to the issuer's bank, there may not even be a processing fee, though the amount that can be withdrawn same-day may be limited. Cashing a check in this way does not require the recipient to have a bank account, and while this is seen as a low-barrier payment method, it also makes it susceptible to fraud. Once a check has been cashed, recovering lost funds requires legal action and does not guarantee you will get your money back.
Checks can be lost preventing you from getting your money
Another drawback from using checks for payments is that they can get lost. While a check can be stopped by contacting the issuing bank to prevent fraud, the time delays of stopping a check and reissuing a check can take weeks depending on bank policies and AP/AR procedures.
ACH payments are more secure
Each paper check that is issued has sensitive bank account information including account numbers and routing numbers. For payments made through the ACH network, that sensitive information only needs to be provided on the first instance at which time the information is encrypted and stored. This makes ACH a beneficial option for recurring bill payments like utility bills, rent or mortgage, and payroll—even suppliers that are being used frequently with multiple invoices processing regularly.
ACH payments are direct deposit and fully electronic
ACH payments do not require a clerk or manual handling to process which significantly reduces processing times and minimizes errors. The reduction in processing time means that businesses can process payments at a much higher volume, at the same time, making direct payments to employees and vendors with a few clicks.
Any purchase made using ACH is conducted completely within a digital matrix: Funds are withdrawn directly from an issuing payer, known as an ACH debit, they are then held by the automated clearing house network for batch processing, and then finally deposited into the recipient's bank account as an ACH credit.
ACH payments leave a paper trail for easy audits
Being able to track payments is essential to accounting best practices to complete audits and correct errors. A paper check may change hands a number of times before it ever becomes a deposit. These touch points introduce human error at each occurrence without any real ability to backtrack.
With ACH payments, however, this important data is captured and can be tracked in real time. Timestamps, party identifying information, physical location--these are all aspects of the “paper trail” that ACH payments offer businesses without the need for manual data entry. Learn more about setting up ACH payments for your business.
Make easy ACH payments with Routable
Routable understands the ease of ACH payments as an efficient and secure payment option. With a proven 40% reduction in the cost of bill payment and a 70% reduction in AP manual tasks, Routable is designed to provide the best possible solutions for business payment methods, including a variety of check delivery options. To learn more, schedule a demo with us.
A diverse landscape of payment options for vendors, suppliers, and consumers opens up opportunity and accessibility to businesses. For now, paper checks are still a large part of commerce, being sent and accepted despite the long windows of processing. ACH payments, however, offer a more secure, faster, and cost effective option that appeals to buyers and suppliers alike. Understanding both options helps you make the most strategic choices for your business.