With so many acronyms in the banking industry, keeping them all straight can be a tedious process. But when it comes to business banking, it’s important to know the difference between certain products and services, as choosing the right tool for the right transaction can not only save you money, but can also save you time spent accounting and managing your business finances.
EFT (Electronic Funds Transfer) and ACH (Automated Clearing House) payments are two of the most commonly conflated financial terms. Knowing what sets apart ACH banking from other forms of electronic payment is important, especially for small businesses who not only need to send many payments each month, but also receive them. In this post we’ll define each term, discuss how to make an ACH payment, and when using ACH transactions—over other forms of EFT payments—makes the most sense. Keep reading to learn more!
What is an EFT payment?
First, let’s start with EFT, which stands for Electronic Fund Transfer. EFT is an umbrella term, and EFTs are any transfers of money that are authorized electronically—i.e., not initiated in person, manually, like withdrawals at the bank counter. If you initiate and/or approve of the transaction using technology, it’s an EFT. This includes all online bill payments and purchases, direct deposit, ATM withdrawals, credit and debit cards, eWallet payments, and payments through apps like Venmo.
Benefits of Using EFTs
The main benefits of using EFT payments are convenience and security. Whether it’s paying for an online purchase using your credit card, or getting your biweekly paycheck directly deposited, EFTs eliminate the hassles of cash and checks. Plus, they’re safer: you never have to worry about your funds being physically lost or stolen. There are additional specific benefits for individual types of EFTs, which vary based on the product. For example, Venmo payments allow you to easily pay back friends without worrying about having the right amount of cash. ATM transactions allow you to access your bank account funds from anywhere in the world. And credit cards let you pay for your purchases without having to handle cash, while protecting your purchases from fraud.
What is an ACH payment?
ACH stands for Automated Clearing House, and these forms of payment are a type of EFT that are processed by Automated Clearing House Network of financial institutions, managed by Nacha. ACH payments are often offered as one of the many treasury products in banks (more on these below). These payments always involve two bank accounts, one that sends the money, and one that receives it. You can initiate ACH transactions through online banking portals of ACH bank accounts (many common banking accounts are ACH compatible), but also through places like PayPal, Venmo, Zelle, as well as other payment portals online when you set up automatic payments or one-time payments using your bank account. Not sure if it’s an ACH payment? If you provided your routing number, chances are you are initiating one.
Be on the lookout for potential scammers requesting to change payment information via fraudulent email addresses. Always check to ensure that any email address is coming from an official domain and secure website. For additional security, make it a habit to confirm the recipient of any ACH payment you are sending with a phone call to verify you have the correct routing information.
One important thing to note is that ACH payments are not processed instantly—instead they are sent out in batches by your bank, which are processed by the Clearinghouse four times a day. How fast your payment is completed depends on whether it is a same day, next-day, or two-day payment. Two-day payments are the most affordable, and therefore the most common. ACH fees vary by bank but are typically cheaper than credit card payments.
Benefits of ACH
ACH payments are most often used as an alternative to checks, wire transfers, and credit card payments and using ACH has clear benefits over these methods. Firstly, direct ACH payments and deposits are more secure than checks—they can’t be lost, stolen, or forged. In fact, there is a very low risk of fraud with ACH payments. When using ACH, payments are quicker and simpler, too. Instead of writing and mailing checks, or depositing them and waiting for them to clear, you just need to wait for the ACH payment to be completed. Scheduling automatic direct deposit payments over printing physical checks to your employees can also save you time and money, and makes payroll easier, as well. And while ACH transfers aren't entirely free, they can save you a lot of money over wire transfers and credit card payments.
What is the difference between EFT and ACH?
ACH payments are one of many types of electronic funds transfer. However, there are times when ACH makes more sense, and times when other EFT payments are a better choice. Here are a few ways that ACH payments differ from other electronic payments:
- Security. All EFT payments, including ACH payments, are designed to be secure. However, since the Automated Clearing House transactions are so strictly regulated, ACH payments are especially resistant to fraud.
- Speed. Many EFTs, including ATM withdrawals and credit card payments are more or less instant, while others, like wire transfers, may take a few days to clear. ACH payments are not instant either, but can clear in as little as a few hours, or up to two days, according to the kind of payment.
- Cost. For businesses, ACH payments are typically more inexpensive to run compared to other types of EFT payments like credit cards and wire transfers.
- Uses. Consumers may use ACH payments less frequently—perhaps when they get paid, receive their tax refund, or make an auto payment. Other EFTs, like debit and credit card use, are likely more common. However, ACH payments are very frequent in the business world. Not only are they useful for payroll, but also for payments to vendors, as well as to tax collection agencies.
- International Payments. ACH is only for US payments. If you need to make an international payment, you may need to use a credit card or wire transfer instead.
Which Type of Payment is Best for Your Business?
Nearly all businesses employ ACH transfers, as well as other kinds of electronic fund transfers. Whether an ACH payment makes more sense than another form of EFT will depend on its intended use. Many of these money management tools for businesses are offered through the Treasury Management Services through your bank.
ACH is best used for: Accepting from or sending payments to vendors, paying employees, sending payments to government agencies, moving money between bank accounts at different financial institutions, accepting payments—particularly recurring payments—from customers.
Other EFTs may be better when: You accept payments or make payments at POS systems, like at stores, restaurants, or suppliers, it might make more sense to use other EFTs, like credit and debit cards. And when you need to send large payments, or international payments, wire transfers might make the most sense, as ACH payment sizes are often capped by financial institutions and limited to American banks.
Get Started with Moody Bank
Moody Bank is here for all your business banking needs, whether it’s navigating market volatility or securing small business financing. We offer a number of Business Treasury Services to support your small business, including Autobooks, for easy online accounting, Business Bill Pay, allowing you to send paychecks and bill payments through the convenience of one online portal, and Merchant Card Services to accept digital and card payments directly through your own POS system, saving you and your customers time. No matter what your unique business needs are, we are here to meet them.