In Simple Terms
ACH stands for Automated Clearing House. It’s a way to move money straight from one bank account to another. ACH is a term primarily used in the US banking system. It is a type of electronic funds transfer used for low value transactions. In this article we will discuss how ACH payments are used by SaaS companies.
Real-Life Example
You invoice a customer for $2,000. The customer visits their online banking portal and initiates a transfer to your account in the amount of $2,000. Additional Details
- Payment Value – Used primarily for low-value payments that can be transferred over 1-3 days
- Timing – Traditionally 1-2 days, but real-time payment options are emerging
- Primary Use Case – Supplier invoice payments, employee payroll, recurring bill payments
- Credit vs Debit – Classified as credits (customer-initiated) or debits (supplier-initiated)
- Alternatives – Lower cost than credit card payments, wire transfers, and checks
Advantages of ACH (Especially for SaaS)
ACH is a good alternative to credit cards for a subscription businesses because:
- It’s cheaper than credit card fees — often just a few cents as compared to 2-3% of GMV
- For autopay, it avoids the complexities of updating expired cards and retrying declined payments.
- It can handle higher value payments, like $10k+ invoices, no problem.
- It’s smoother for everyone — especially with auto-renewals or yearly deals.
Disadvantages of ACH
ACH introduces more friction in the autopay enrollment process
- Bank must verify for fraud using micropayments or Plaid
- Finance team must get involved to approve bank transfers
- Many unwilling to approve automatic debits without reviewing invoices first
How it Works
Here’s how it usually is set up:
- Customer opts in – when they initially buy or during an invoicing cycle.
- The customer’s bank checks for fraud using a microdeposit or Plaid verification.
- When an invoice is due your system (or payment tool) pulls the money using the ACH network.
- The cash shows up in your account in 1 to 3 business days.
Platforms like Ordway help enroll customers in automated ACH payments for recurring billing.
Comparison to other Payment Types
- Wire Transfers – Are more expensive than ACH, but move money faster.
- Paper Checks – Are more expensive than ACH. Take longer to clear and settle.
- Credit Cards – Are more convenient for customers, but more expensive to process.
Alternatives to ACH Outside the US
- Canada – Pre-Authorized Debits (PADs) are processed through the Electronic Funds Transfer system operated by the ACSS in 1-2 days.
- United Kingdom – Direct credit and direct debit payments are processed by BACS in 3 days.
- France, Germany, and EU – SEPA credit transfers and SEPA direct debits are processed in 1 business day, same day, or real-time.
- Australia – The BECS system processes EFTs overnight and in real time
Bottom Line
ACH is a cost-effective, alternative to credit cards for subscription and SaaS businesses. Fewer card expirations and declines.
Finance Takeaway
Switching your big customers from credit cards to ACH can cut your fees by up to 90%. That means more profit and fewer payment headaches.
Quick Q&A
What are the differences between ACH and credit card payments for recurring billing?
ACH payments typically feature lower processing fees and higher retention rates for recurring billing due to fewer expiration issues compared to credit cards. While credit cards offer instant authorization, they often come with higher transaction costs and can lead to involuntary churn from expired cards. Businesses using Ordway can strategically leverage both methods to optimize their billing operations and improve revenue stability.
How long dHow can businesses implement ACH payments for subscription services?oes it take?
Implementing ACH payments for subscription services involves integrating with a robust billing platform that supports ACH processing. Businesses need to secure proper authorization from customers, typically via a digital consent form or e-signature, establishing a clear recurring debit agreement. An advanced system like Ordway automates the entire collection process, from authorization management to scheduled debits, streamlining subscription billing.
What are the benefits of using ACH for B2B recurring revenue?
Using ACH for B2B recurring revenue offers significant advantages, including substantially lower transaction fees compared to credit cards, which directly boosts profitability. It also leads to higher payment retention rates as ACH payments are not subject to card expiration or fraud holds, improving cash flow predictability. Automating ACH collections through a platform like Ordway further reduces administrative overhead, allowing businesses to focus on growth.
What are the processing speed and settlement times for ACH payments?
ACH payment processing for debits typically takes 1 to 2 business days for initiation, with settlement times usually ranging from 2 to 3 business days for funds to become available in the recipient’s account. While not instantaneous, the predictability and lower cost of ACH often outweigh the speed differences for recurring transactions. Modern billing platforms like Ordway streamline the entire cycle, ensuring efficient processing and clear visibility into settlement status.
What are the common reasons for ACH payment returns or failures?
Common reasons for ACH payment returns or failures include insufficient funds (NSF), incorrect or invalid account numbers, the customer’s account being closed, or the customer revoking authorization. Returns can also occur due to “stop payment” orders or unauthorized debits. A sophisticated billing platform like Ordway helps businesses track these returns, automate re-attempts when appropriate, and manage customer communications to resolve issues efficiently.
How can ACH collections be automated for subscription billing?
Automating ACH collections for subscription billing involves leveraging a comprehensive financial automation platform designed for recurring revenue. This typically means integrating the platform with your banking or payment processing services to initiate scheduled debits based on subscription terms. A system like Ordway allows businesses to define billing cycles, automatically generate invoices, trigger ACH collections, and manage retries or exceptions without manual intervention, significantly reducing operational costs.
How secure are ACH payments for business transactions?
ACH payments are highly secure for business transactions, regulated by Nacha operating rules which mandate strict data protection and operational standards. Security measures include robust data encryption, tokenization of sensitive bank account information, and comprehensive fraud detection systems. Utilizing a compliant billing platform like Ordway further enhances security by ensuring all transactions adhere to these standards, protecting both businesses and their customers.
