What Does 2023 Have in Store for Banks and Fintechs?
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Money movement is the backbone of the economy but in a lot of cases, making and accepting payments can cut into the profit margins for merchants who must pay processing fees up to 3.5% on each transaction for credit cards.
A cheaper option is paper checks but they’re the most vulnerable to fraud and, quite literally, could mean accepting checks that can’t be cashed. And, while paper checks have the lowest transaction cost, they end up costing more in time and labor.
But there is another way. The Automated Clearing House Network (ACH) allows for moving money between bank accounts across the United States much more cheaply than credit card payments and more securely than paper checks.
While some businesses are still hesitant to adopt ACH, it is quickly growing. More than $72.6 trillion worth of funds was transferred as ACH transactions in 2021. The biggest use case for ACH today is direct deposit for employee paychecks, followed by online and peer-to-peer (P2P) payments.
For those wondering if ACH is a good idea, here’s the bottom line:
ACH is more cost-effective. ACH transactions work much the same as credit card transactions with no set fee. However, the costs tend to be significantly less. For instance, even if the credit card transaction fee is just 1%, ACH tends to be only 0.5%. On a $500 transaction, this is the difference between $5 and $2.50, which adds up over time.
ACH is longer lasting. With recurring payments on credit cards, consumers have to update their information every time they get a new credit card, which is typically every 3 years. This is more annoying for the consumer and leads to a high number of credit card failures for the business. With ACH, recurring payments last as long as the bank account remains active and there’s no risk of a failed payment due to outdated information.
ACH forces better fraud controls. A new rule from NACHA went into effect on March 19, 2022, that requires originators to establish account validation and routing number verification methods as part of their fraudulent transactions detection systems. With ACH payments growing exponentially, so does the risk of fraudulent activity. This new requirement helps combat fraudulent activity by requiring originators to validate consumers’ account information before a debit transaction occurs.
ACH is also simpler for recurring payments. Auto-pay using ACH direct debit is a great solution for recurring payments so that businesses aren’t paying high processing fees every month. It’s cost-effective for the business and simple for the consumer to set up.
ACH isn’t as slow as people assume. The general assumption is that ACH payments take 3-5 days to process. But, the reality is the modern ACH Network offers choices in how fast things are processed. For ACH credits, options are either “same-day,” “next-day,” or “2-day” payments. For ACH debits, the options are either “same-day” or “next-day” payments.
The challenge for most businesses will be convincing consumers to switch from paying by credit card to paying with ACH. As digital experiences make it easier for consumers to use ACH, this switch may become easier. And, businesses can sweeten the deal with discounts, bonuses, or other incentives to take the place of those credit card reward points that consumers relied on in the past.
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