Should your business start accepting ACH? And . . . are paper checks the dinosaurs of payment?

A very old form of payment . . . updated?

For centuries, paper checks were the go-to method for businesses to pay other businesses. Printed checks have been used in the United States since the 1700s. In 2003, federal legislation was finally passed allowing financial institutions to transmit check data via images instead of physically transporting the piece of paper. But even with updates, the core premise remains the same: a customer writes out a piece of paper authorizing their bank to pay your invoice on their behalf. But should this payment method be considered as outdated as powdered wigs?

“ACH” stands for “automated clearing house.” It’s named after the process by which paper checks used to be cleared by “houses” that were geographically closer—and therefore faster—than the check writer’s (drawer’s) issuing bank. ACH, also sometimes called “direct payments,” uses a financial network that connects all U.S. banks to each other. ACH transfers electronic payments, but is not related to other electronic payment methods like credit cards or wire transfers.

You may be asking yourself, “Are paper-based transactions the best fit for my business, or should we move to a newer technology?” We’ll provide some comparison to help you decide.

What would ACH look like for my business?

You have probably already encountered ACH without knowing the name. This process is used by electric companies, phone companies, direct payroll deposit providers, and many others. They can be thought of as either pulling money out (like the utilities your household pays), or pushing it in (like direct deposit).

Let’s say, hypothetically, that you run a landscaping service that charges its customers the same recurring amount each month. Your customer, Ms. Johnson, is a property manager who signs up for auto-pay. Ms. Johnson gives you the routing and account number to her checking account, and signs a recurring payment authorization. On a certain day of each month, your company’s bank sends a request to Ms. Johnson’s bank asking that they transfer the appropriate amount. Both banks exchange data, and—if Ms. Johnson has sufficient funds in her account—the transaction goes through. The payment arrives in your company’s account automatically.

Paper checks cannot be set up to recur automatically. They also require customers to spend administrative time dealing with invoices, writing checks, and mailing them out. ACH is convenient for recurring payments, but it can easily be used for one-time purchases, as well.

Some benefits of ACH

Reduced Processing Time

On the front end, the process of printing/filling out a check, putting it in the mail, and waiting for it to arrive and process is significantly reduced. Whether your business is receiving a single payment or a recurring payment, the process of verifying “how much is the amount in question,” “does the drawer have it in their account,” and “what account will it ultimately go to” gets underway more quickly.

Faster Deposits

ACH is also faster on the back end. The two financial institutions involved in approving and settling your payment are dealing with each other directly, which removes a lot of variables like miscommunication.

Increased Data Security

Although some individuals’ initial response to providing routing information may be “I’m not comfortable giving that to a vendor,” that objection is completely illogical given that all paper checks have the same information printed right in the corners.

Checks can be stolen, lost, or forged. Every check sitting in an unsecured mailbox is an opportunity for someone to commit theft and, consequently, acquire sensitive bank account information. Checks in envelopes might also be handled by multiple parties along the way while passing through building mail rooms or elsewhere. Additionally, inputting data from paper by hand makes it more susceptible to keystroke error. With ACH, a customer only needs to expose their payment information to their service provider one time, instead of transmitting it multiple times per year.

Payment Convenience

ACH payments are convenient for your business and for the people you serve. Customers will appreciate that less effort is required on their end. And the folks who process your Accounts Receivable will enjoy no longer having to match up invoices with paper checks or make time-consuming trips to drop them off at the bank.

Are checks going the way of the dinosaur?

Although the potential benefits of ACH transactions outweigh those of paper checks, some businesses are clinging to the habit. As of 2019, plenty of businesses were still using paper checks to pay some invoices . . . but only 51.3% said they were satisfied with them.[1] Clearly, there is a better, more up-to-date method: ACH transactions are generally much faster, more secure, and more efficient. Offering your customers this or some other electronic payment option is likely to be beneficial to everyone involved.

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[1] https://www.pymnts.com/study/payables-friction-index-may-2019/

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