ACH Payments Versus Credit Cards

Sending payments online makes paying bills, shopping online, and buying necessary goods faster and easier. But when the majority of your payments are sent electronically, you want to be sure that your banking information is secure and that you are not spending too much on additional banking fees.

Paying by credit card is a common way to send money to someone else electronically. Most of the time it is a convenient payment method. However, with the Automated Clearing House (ACH) transaction method, you have options.

To give you a better understanding of your payment option for online payments, this article will go over:

  • The pros and cons of taking ACH payments
  • The pros and cons of taking payment by credit card
  • Differences in policy disputes between the two payment methods
  • And security differences between the two transaction types

Pros and Cons of Payment Processing With ACH Payments

An ACH transaction is when an electronic payment is sent through the ACH Network and deposited or withdrawn from a bank account. There are two types of ACH transfers: ACH debit and ACH credit. The ACH debit is much more common, with typical examples being a direct deposit and bill pay.

Pros of Payment Processing With ACH Payments

An ACH payment is typically more secure than sending money by other means. This is because the ACH Network that this transaction passes through is completely automated and in order for the transaction to be processed, all of the banking information has to be completely verified and authorized, and they need to abide by the Operating Rules.

ACH processing with a third party payment processing (TPPP) is virtually free (only $0.29 USD). This is far more affordable when compared to the average price for a wire transfer (around $30 USD for domestic wires) and the average price using a credit card (1.65% to 2.71%). With same day ACH transactions, the turn around time can be 1-2 business days.

ACH payment processing can also be integrated into a payment processor, payment gateway, or digital wallet. A payment gateway can allow secure payment transactions as well as the security of a trusted third-party payment processor.  

ACH billing is relatively easy to set up. ACH billing allows for the automatic transfer of funds to pay a bill, deposit into a savings account, or deposit into a retirement account.

Cons of Payment Processing With ACH Payments

ACH payment processing is generally only allowed for certain types of payments. When you set up an ACH transfer, the financial institutions involved need to know the banking information (i.e., account number, routing number, transit number, financial institution name, and the bank account holder name) of both parties in order for the transaction to be processed.

Therefore, an ACH transaction is usually set up for long-term payment plans and not a one-off transaction. In order to use the ACH debit for one-off payments, you need to use a payment gateway.

Additionally, paying by ACH debit is not immediately. It takes time for the ACH Network to process this payment, and then usually the funds are held until all the account information has been verified. However, when sending a transaction with a credit card, wire transfer, or sending money directly to a debit card, the funds are immediately available for the receiver.

It can be difficult in order to process an ACH transaction made with international funds. The ACH Network is a US-only network. In order to use this network, the funds must be first be converted into USD.

Pros and Cons of Payment Processing With Credit Card

Paying by credit card payment is a common way that online merchants can accept money. However, credit card processing is not always affordable or secure. Here are our pros and cons of accepting credit card payments.

Pros of Payment Processing With Credit Card

By and large, the biggest pro of processing a credit card transaction is that credit cards are largely accepted by most outlets, even small businesses. This means that no matter who you are shopping with or where in the world you want to shop, you are likely to be able to use a credit card.

Card card payments are great for international payments. Credit cards charge a small fee in order to process international transactions, however, they do save you the effort and inconvenience of trying to get money converted into the proper currency.

A credit card payment also allows an individual to pay for an item when the funds are not available in their checking account. The interest that credit card charges is like a fee for allowing that transaction to occur. Then, you owe the credit card company for the funds that were advanced, and the interest fee for those funds.

You can use a credit card for both a one-time payment and for recurring charges.

Cons of Payment Processing With Credit Card

Credit card processing will take anywhere from 24 hours to three days in order to show up in a merchant account. This timeframe is similar to an ACH payment but slower than accepting a debit card, for example.

Credit cards usually pose a higher risk due to things like credit card fraud. Credit card fraud is an extremely common type of fraud, especially when compared to other types of financial fraud such as ACH fraud or wire transfer fraud. Since more merchants accept credit cards as valid payment methods, there are more opportunities for malicious actors to manipulate a weak network and gain access to private credit card information.

As well, owning a credit card, in general, poses a higher risk because the owner of the card could potentially owe the creditor and be delinquent. Additionally, credit card payments will usually cost the receiver more, as there is a higher risk when accepting credit card payments as opposed to other payment methods.

In general, credit cards end up costing both the user and the receiver more money as the credit card company charges a percentage of each sale to each stakeholder involved in the transaction.

Differences in Dispute Policies Between ACH Payments and Credit Cards

Dispute Policies for ACH Payments

Dispute policies for ACH payments operate on two types of ACH returns; ACH disputes and ACH chargebacks.

What is most misleading about the terminology of a “dispute” or “chargeback” is that there is a third-party arbiter determining the outcome of the return. However, this is not the case.

The ACH payment process works on an automated payment process (hence the term the Automated Clearing House). Therefore, if the transaction attempts to go through but it fails, then the payment will be charged back.

This does not mean that a mediator was involved at all. Instead, the bank who received the ACH entry (referred to as the Receiving Depository Financial Institution or RDFI) will receive those funds and it will then determine if there is an issue with the ACH entry request.

To determine an ACH return, the Originating Depository Financial Institution (ODFI) will receive a return code. Common return codes are:

  • ACH Return Code R01 – Insufficient funds
  • ACH Return Code R02 – Account Closed
  • ACH Return Code R03 – No Account/Unable to Locate Account

An ACH payment is usually simply returned based on either erroneous information, a wrongful charge, or as part of a standard return.

Dispute Policies for Credit Cards

Dispute policies for credit cards might reflect a payment that was posted to a credit card account and the payment was not authorized by the account holder (or some other suspicious activity), a return that was to be issued but never posted, or the removal of a pending payment.

Your credit card company will typically assess things like:

  • The merchant’s name
  • The date
  • The location of the purchase
  • Whether or not the user has shopped with the merchant before

They will also ask that you consider all of these options when the dispute is in process. Often times, users can forget about another authorized user on the account. In a case of multiple authorized users, then the user would have to address the other user personally and resolve the secondary authorized user with the credit card.

Other times, users forget about starting a free trial and they are charged for the service or product once the free trial period has ended.

A credit card dispute process will usually take several weeks for an investigation to occur. So cardholders are encouraged to pay so that interest doesn’t accrue. If in the case that the amount is determined to be fraudulent, then the credit card will issue the relevant payment back to the issuer.

Additionally, credit cardholders are encouraged to document their interaction with the merchant (and the credit card company), including details like dates, times, subject of conversations, reference numbers, and email correspondence. This will help the cardholder keep clear records of the interaction and help the credit card company with the investigation.

Security Differences Between ACH Payment and Credit Card Transactions

The biggest security difference between an ACH payment and a credit card transaction is the guarantee of payment.

While an ACH transaction is guaranteed to go through once the process is completed, it will take days before the transaction is approved. An ACH transaction is only a request.

A credit card, on the other hand, is approved by the credit card network (such as Visa and Mastercard), which verifies the credit card limit. Once this is approved (which is nearly immediately), then the funds are released as a “guaranteed funds” transaction.

On the flip side, paying by ACH payment presents less security risk as it is much harder to acquire the ACH banking information compared to credit card numbers.

ACH fraud can occur, but the rates of ACH fraud are extremely low. This is largely because the ACH network goes through a lengthy authorization process. If the request is made erroneously or the banking information is not accurate, then the request is rejected with a return code.

Credit card fraud is one of the most prevalent types of financial fraud and it impacts both the credit card holder, the creditor, and the other parties involved. Most credit card companies will be protected by a “credit card purchase protection agreement” agreement.

This protection is offered for both buyers and merchants and is typically paid for by annual fees and high-interest rates. Because of this agreement, credit card companies can work hard to protect a credit card from being compromised, to resolve the compromised funds, and to reissue a new credit card.

ACH Payments vs. Credit Cards

Both ACH payments and credit cards facilitate the transfer of funds electronically and they both come with their pros and cons. Determining whether to pay or accept payment with ACH payment or a credit card will be based on the type of features that you are interested in.  

When choosing a payment method, consider the cost of the transaction and if it saves to make more transactions, the speed, security, and the accessibility of the payment method. If you are using a payment gateway, then look into whether and ACH payment can be accepted. As well, consider insurance when accepting credit card payments.