ACH vs. EFT Payments — What's the Difference?

As you’ve been learning about different transaction types and the pros and cons of each for your business, you’ve probably come across EFT and ACH. Some people use these interchangeably, some confuse them, and some use them without exactly knowing what they mean.

As a business owner, it’s advantageous for you to be informed. Different payment types dictate the flow and cost of money exchanges. Even a small percent change in fees or timing difference across types can make a world of difference. Taking the time to develop the most optimal payment system for your business will serve you for years to come and lay a proper foundation for growth and scaling.

With that in mind, let’s learn about EFT (electronic funds transfer) and ACH (automated clearing house).

What is EFT?

An electronic funds transfer (EFT) is any transfer by two corresponding banks or financial institutions that is strictly handled by computerized systems.

In other words, this is a broad term for modern transaction methods. As long as it doesn’t involve direct human contact and is facilitated through a computer, then it’s considered an EFT. You can think of it as an umbrella term of sorts, so EFTs can be wire transfers, direct debits, ACH payments, and more.

EFTs have exploded in popularity following the invention of the internet, eCommerce, and digital cash. Virtually all components of a traditional transaction are being digitized — invoices, receipts, payments, and EFT systems are an essential component of this.

So why accept electronic checks, digital debit transactions, etc. if credit cards are so popular these days? Cost and convenience.

EFTs are significantly cheaper than credit cards — averaging at around 1% in fees as opposed to 3% or so for cards. For businesses of all types and sizes, this offers a significant incentive to support and encourage customers to use EFT methods.

While features and specifics change payment type to payment type, there are some common characteristics across all EFT payment types.

  • Funds are typically transferred within 24-48 hours.
  • Fees typically hover around 1%.
  • EFTs are popular for recurring debits and credits.
  • Customers enjoy having the payment flexibility EFTs offer.

What is ACH?

ACH, or automated clearing house, is like a check without the paper.

ACH payments are a type of EFT. If EFT stood for electric cars, then ACH would be a Tesla or Nissan Leaf. So ACH can be a type of EFT but EFT can’t be a type of ACH.

It’s a computer-based clearing and settlement facility that exchanges funds between two depository institutions. ACH is most commonly used in recurring invoicing (monthly auto-drafts) and direct deposit programs. ACH is cheap to send money with and relatively easy to set up, making it an attractive option for businesses that conduct large, recurring bills (think B2B or consulting fees).

How ACH compares to other transaction methods

  • ACH batches transactions instead of processing them individually.
  • ACH isn’t as fast as a credit card transaction, but ACH and EFT move quickly. It takes between 24-48 hours for ACH to process, and the systems that process these payments are getting quicker every year.
  • There are two types of transactions available: direct deposits and direct payments.
  • Funds aren’t guaranteed, so withdrawals can “bounce” just like a check.
  • It is the cheapest transaction method.

Why you should support ACH payments

There is a multitude of benefits from a customer and employee convenience perspective, but the most tangible reason for supporting ACH is the cost-saving potential. Out of the types of EFTs, ACH is the cheapest.

Let’s walk through an example to demonstrate:

If you’re selling an item at a list price of $1,000, let’s consider the fees via each transaction method. It will never be uniform across the board, but let’s play along for this example.

Typical fees for each type are approximately:

  • Paper Check: $1.57
  • Credit/Debit Card: $19.10 (1.9% x $1,000 fee + $0.10 transaction fee)
  • ACH: $0.26 – $0.50 depending on assumed risk

ACH is about a third of the cost of a paper check (not including labor) and a fraction of the cost of credit cards — especially on high-ticket items.

Now imagine how much that would add up over a month, a year, or even five years of transactions.

Typical uses of ACH

  • Direct deposits: This is the most popular use of ACH payments. By paying employees with ACH employers drastically reduce fees and increase employee satisfaction and convenience.
  • Direct debits and credits: There’s widespread use of ACH payments in subscription/repeat billing situations. Think automatic drafts via gyms, utilities, insurance, etc. If you work in any sort of SaaS or retainer-based business, you need to support ACH.
  • Taxes: ACH is the most common form of tax payment.

How to accept EFT and/or ACH

EFT payments are generally cheaper — without the need for paper statements and direct human contact, you save labor, fees, and materials. Paper checks get lost and mailing letters is slow, making EFTs an obvious (and sometimes required) choice for businesses.

Accepting EFT and/or ACH requires two primary assets: a merchant account and a payment gateway, and most payment processing services (including Tidal Commerce) can help you get everything you need sorted out.

There are many options for payment processing, but many fail to facilitate proper PCI training and tools to help your business stay safe. Ask them specifically about how their payment gateway helps protect against fraud and how they can make being PCI compliant easier for you.

At the very least, the service you choose should have:

  • PCI compliant processing software. This includes their payment gateway, POS, and all network features.
  • A payment gateway that utilizes AVS (address verification system).
  • A proactive and proven system of checks and to-dos that ensures PCI compliance. This is typically a questionnaire or online dashboard of sorts that offers unlimited scans and walks you through it step-by-step.

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