Comparing Real-Time Payments and ACH: Which Is the Better Option?

May 15, 2023

Real-time payments and ACH are two of the most popular payment methods used today. While they share similarities, these payment systems have distinct features that could make one a better fit for your business than the other.

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Understanding Real-Time Payments and ACH

Electronic payments have become increasingly popular in recent years as more and more people turn to digital methods of managing their finances. Two of the most widely used payment systems are real-time payments and the Automated Clearing House (ACH). While both methods are used to facilitate electronic payments, some key differences between them make one method more suitable for specific use cases than the other.

What are Real-Time Payments?

Real-time payments are a relatively new payment method that allow for near-instantaneous transfer of funds between bank accounts 24/7/365.

The technology behind this method enables funds to move in less than 10 seconds, which is a significant improvement over traditional payment methods that could take several days. Real-time payments are particularly useful for businesses that need to make urgent payments, such as payroll or emergency expenses.

Real-time payments can be initiated through a variety of channels, including online banking, mobile banking, and payment apps. While real-time payments are generally more expensive than other payment methods, the speed and convenience they offer make them a popular choice for many businesses and individuals.

What is the Automated Clearing House (ACH)?

The Automated Clearing House, or ACH, is an electronic network that facilitates financial transactions, such as direct deposits, bill payments, and business-to-business payments. ACH payments are processed in batches and usually take anywhere from 1 to 3 business days to complete. Because of their slower processing time, ACH payments are generally less expensive than real-time payments.

ACH payments can be initiated through various channels, including online banking, mobile banking, and payment apps. ACH payments are particularly useful for businesses that need to make recurring payments, such as monthly bills or employee salaries.

Key Differences Between Real-Time Payments and ACH

While both payment systems are used to facilitate electronic payments, there are some key differences between real-time payments and ACH that make one method more suitable in certain situations.

These differences include:

  • Transaction Speed: Real-time payments are instant, while ACH payments can take hours or even days to arrive, depending on the banks involved. Real-time payments are ideal for urgent payments, while ACH payments are better suited for recurring payments or payments that can be scheduled in advance.
  • Cost: Real-time payments are generally more expensive than ACH transactions because of the technology required to allow for near-instantaneous movement of funds. Businesses that need to make urgent payments may be willing to pay the higher fees associated with real-time payments, while those that can wait a few days may prefer the lower cost of ACH payments.
  • Limitations: Real-time payments have stricter requirements around transaction size, while ACH transactions can be for larger amounts. Businesses that need to make large payments may be better off using ACH, while those that need to make smaller, urgent payments may prefer real-time payments.
  • Security: Because of its real-time nature, real-time payments may be subject to higher risk of fraud and cyber attacks than ACH payments. Businesses that use real-time payments should take extra precautions to ensure the security of their transactions.

Ultimately, the choice between real-time payments and ACH will depend on the specific needs of a business or individual. Both methods offer unique benefits and drawbacks, and it is essential to carefully consider these factors before deciding which payment method to use.

Advantages and Disadvantages of Real-Time Payments

Faster Transaction Speeds

One of the significant advantages of real-time payments is, as the name suggests, that transactions are processed in near-real-time, which ensures that funds are available immediately. This can help businesses streamline operations and improve cash flow.

Real-time payments also enable businesses to respond to customers’ needs faster. For instance, if a customer needs to pay for an urgent service, (like FedNow, for instance), the business can receive payment instantly, and the service can be provided immediately. This can help businesses gain a competitive advantage in the market.

Enhanced Security Features

Real-time payments offer several built-in fraud prevention measures to protect businesses and their clients. Some of these measures include two-factor authentication, end-to-end encryption, and tokenization.

Moreover, real-time payments reduce the risk of fraud by eliminating the need for paper checks and reducing the likelihood of errors in payment processing. This can save businesses time and money that would otherwise be spent on fraud detection and correction.

Improved Customer Experience

Real-time payments can improve customer satisfaction by offering instant gratification. For businesses that rely on high-volume, low-value transactions, real-time payments also eliminate the frustration and delays associated with waiting for payments to clear.

In addition, real-time payments enable businesses to provide better customer service. For example, if a customer has a question about a payment, the business can quickly access the payment information and provide a response instantly.

Potential Drawbacks and Limitations

Real-time payments are not without their drawbacks. One of the main limitations of real-time payments is that they require a significant investment in technology and infrastructure for businesses to participate in the network. Additionally, banks must be part of the real-time payments network for firms to leverage it effectively.

Another potential drawback is the lack of universal adoption of real-time payments. Not all banks and financial institutions have adopted real-time payments, which can limit the reach and effectiveness of the system. This can also create challenges for businesses that need to receive payments from customers who use banks that do not support real-time payments.

Finally, real-time payments can also increase the risk of payment errors due to the speed of the transaction. If a payment is made in error, it can be challenging to reverse the transaction, leading to additional costs and administrative burdens for businesses.

Advantages and Disadvantages of ACH

Automated Clearing House (ACH) is an electronic network facilitating financial transactions in the United States. It is widely used by businesses and individuals to transfer funds between bank accounts. Here are some advantages and disadvantages of using ACH for your financial transactions:

Lower Transaction Costs

One of the significant advantages of ACH is that it is significantly cheaper than real-time payments, making it ideal for high-volume, low-value payments where the cost of each transaction is a factor. This means that businesses can save money on transaction fees and allocate those resources to other areas of their operations.

For example, a small business owner who needs to pay several vendors for their services can use ACH to make those payments instead of using a credit card or wire transfer. By doing so, they can save money on transaction fees and improve their cash flow.

Widespread Adoption and Acceptance

ACH is widely used, and many banks and financial institutions have built integrations that make it easy to leverage the network. This makes ACH an excellent choice for businesses that require seamless integration with their banking partners. Additionally, most consumers are familiar with ACH payments and have used them to pay bills or receive direct deposits.

For example, a company that sells products online can offer ACH as a payment option to their customers. By doing so, they can increase customer satisfaction and reduce the risk of credit card fraud.

Batch Processing Efficiency

One of the primary advantages of ACH is that it processes transactions in batches, which is highly efficient and can save businesses time and money, especially when making high-volume, low-value payments. This means that businesses can make multiple payments at once, rather than processing each payment individually.

For example, a payroll department can use ACH to pay their employees' salaries. By doing so, they can save time and reduce the risk of errors that may occur when processing payments manually.

Potential Drawbacks and Limitations

As stated, ACH transactions can take longer to complete than real-time payments. Additionally, ACH payment processing is not always immediate, and a batch of payments may be delayed causing payments to be processed together later. This means that businesses may need to plan ahead and ensure that they have enough funds in their accounts to cover the payments.

For example, a business owner who needs to pay their rent on the first of the month may need to initiate the ACH payment several days in advance to ensure that the payment is processed on time.

Also, recent data suggests that ACH fraud is on the rise. According to the 2022 AFP Payments Fraud and Control Survey, the number of respondents reporting payments fraud via ACH debits increased to 37%, up 12% from the prior year. As with any form of fraud, it takes practice and a little bit of trial and error to detect and prevent ACH fraud.

You’ll need a transaction monitoring software solution (like Unit21) and a strategy for testing and fine-tuning your process to catch fraudsters who are constantly changing their behaviors to avoid detection.

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Factors to Consider When Choosing Between Real-Time Payments and ACH

Choosing the right payment system for your business is crucial to ensure efficient and cost-effective transactions. While both real-time payments and ACH have their benefits, there are several factors to consider before making a decision.

Business Size and Transaction Volume

One of the most important factors to consider when choosing between real-time payments and ACH is the size of your business and the volume of transactions you process daily. If you have a high volume of transactions with lower transaction values, real-time payments may be more efficient for your business. On the other hand, if you have a lower volume of transactions with higher transaction values, ACH may be a more cost-effective option due to its lower processing fees.

Real-time payments are ideal for businesses that require immediate access to funds. For instance, eCommerce businesses that need to process low-value payments quickly can benefit from real-time payments.

However, if your business deals with high-value payments that require auditing and management processes, ACH may be a better option due to its processing delay.

Industry and Customer Demographics

The industry you operate in and the demographics of your customers can also influence your choice between real-time payments and ACH. For instance, some industries, such as real estate or healthcare, may require ACH due to the processing delay, which is helpful in the auditing and managing of processes. On the other hand, real-time payments are suitable for transactions with a more urgent timeline.

It's also essential to consider your customer demographics when choosing a payment system. If your customers prefer immediate access to funds, real-time payments may be the better option. However, if your customers prefer a more traditional payment method, ACH may be a better fit.

Integration with Existing Systems

When choosing a payment system, it's essential to look at how real-time payments and ACH networks integrate with your existing systems. Businesses that have invested heavily in a specific payment processing platform may find it challenging to switch to a new platform. It's important to choose a payment system that seamlessly integrates to reduce implementation risk.

Real-time payments and ACH have different integration requirements, and it's crucial to assess how each payment system will work with your existing systems. You may need to change your current system to accommodate the new payment system, so it's essential to factor in the cost and time required for implementation.

Cost and Budget Considerations

Cost is another critical factor to consider when choosing between real-time payments and ACH. Real-time payments tend to be more expensive than ACH payment processing, and it's essential to assess the overall cost and anticipated volume of transactions to understand which payment system is ideal for the business.

It's important to consider not only the processing fees but also any other associated costs, such as implementation and maintenance fees. You should also assess your budget and determine whether you can afford the cost of implementing a new payment system.

Real-Time Payments Vs. ACH: Final Thoughts

Real-time payments and ACH payments both offer unique advantages and disadvantages, depending on the needs of your business. When considering which option to choose, consider factors such as transaction volume, industry, and cost.

Ultimately the best option will come down to the business's goals, budget, and intended use for the system.

One final note: if you are considering adding either of these payment rails as products to your core business, our Modern Fraud Prevention Playbook will help you understand the rewards and risks associated with several product expansion scenarios to help you create a balanced pre-launch approach.

Get the details and reach out if you are interested in a payments fraud prevention consultation.

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