If you’ve spent any time reading about payment processing, you’ve surely noticed an abundance of acronyms and payment types that seem all too similar. Deciphering the alphabet soup and understanding the nuances of payment processing can be complex and time-consuming. This can be especially taxing for small business owners who have other priorities to focus on. At Stax, we’re committed to sharing information to help you understand the payment processing landscape. In this post, we’ll discuss electronic funds transfer (EFT) and automated clearing house (ACH) payments to give you a better understanding of EFT vs ACH.
TL;DR
- An EFT transfer is any time money is transferred between financial institutions or within bank accounts. So, EFT payments include ATM withdrawals, debit card with PIN transactions, credit card payments, mobile payments, bank transfers, direct deposit, wire transfers, and of course, ACH transfers.
- ACH payments are a type of EFT payment. They are essentially electronic checks, also known as e-checks, that use the routing and account number of both parties to facilitate an electronic transfer between bank accounts.
- The key difference between EFT and ACH payments is a matter of semantics. Electronic Funds Transfer is the overarching term, and Automated Clearing House transfers are just one of many electronic payments that are considered an EFT.
What is an Electronic Funds Transfer Payment?
The natural place to start describing the differences is with EFT transactions because this is an umbrella term that covers every type of electronic payment. An EFT transfer is any time money is transferred between financial institutions or within bank accounts. So, EFT payments include ATM withdrawals, debit card with PIN transactions, credit card payments, mobile payments, bank transfers, direct deposit, wire transfers, and of course, ACH transfers.
Essentially, EFT accounts for most types of transactions with the common exceptions of cash or paper checks. Because EFT transactions encompass many transaction types, including credit card processing and ACH payment processing, there are several steps and involved parties to process the transaction.
Each type of EFT transaction will process slightly differently, so it’s important for business owners to be versed in how each electronic transaction works at a high level and to partner with a payment processor that can handle these while maintaining security and compliance.
Pros and cons of EFT payments
Because most consumers today use some form of electronic payment, one of the most obvious benefits of EFT transactions is the variety of payment methods your business can accept. More and more, customers are using mobile wallets, looking for contactless payment options, and using peer-to-peer payment apps such as PayPal to complete their purchases. All of these types of transactions is an EFT.
Another benefit is that many EFT payments, such as credit card transactions, happen in real-time for the customer. Customers seek payment options that are both convenient and secure, and the payments landscape is predominantly digital.
The main downside of an EFT transaction is the cost of payment processing, which can vary significantly depending on your payment processing and transaction type. However, while cash payments do not come with processing fees, only accepting cash makes eCommerce impossible and is limiting for brick-and-mortar businesses.
What are ACH Payments?
Simply put, ACH payments are a type of EFT payment. The automated clearing house network is widely used and processed over 29 billion in payments in 2021. Commonly, people use the ACH network for direct deposit, making automatic bill payments, receiving their tax refunds, and making other online payments. In short, many electronic transactions we use are through the ACH network.
ACH payments are essentially electronic checks, also known as e-checks, that use the routing and account number of both parties to facilitate an electronic transfer between bank accounts. The ACH Network is governed by the National Automated Clearing House Association (NACHA) which sets rigorous standards for security and is the middle step of the transfer of funds.
Most consumers are familiar with ACH payments in some way, typically for receiving their direct deposit or setting up automatic bill pay. But this form of EFT is one of many payment options businesses can use for recurring transactions in lieu of wire transfers, and often at a lower processing fee than credit and debit card transactions.
Pros and cons of ACH transfers
One benefit of an ACH payment is the cost is often much lower than the credit and debit card processing fees—making this ideal for larger and recurring transactions as they typically cost just 1% of the transaction amount with a cap of $10. Another benefit of ACH over debit and credit card transactions is the security of the transactions. We’ve all seen credit card fraud in the news; however, ACH payments have the lowest fraud rate, with fraudulent transactions representing only a fraction of 1 percent of the total value or number of payments.
However, ACH transfers take additional processing time as the transactions are processed in batches and stop at the clearing house between the banks for further processing, meaning they can take one-to-three business days to complete. Further, ACH transactions may not always be the appropriate method of payment for your business—for example, if the transactions are smaller in retail scenarios or not likely to be recurring. That said, even a small retailer can still use ACH transfers for direct deposit payroll and vendor payments.
What about wire transfers?
Wire transfers and ACH transfers are sometimes used interchangeably, but they are actually two different transaction types. Wire transfers operate like electronic cashier’s checks, so the funds are immediately pulled from the sender’s account and cannot usually be reversed. Wire transfers also cost more than ACH transfers, with an average charge of $10-$35 per transaction. They also usually process same day, whereas ACH transfers take longer.
Key Differences Between EFT and ACH Payment Methods
In summary, the key difference between EFT and ACH payments is a matter of semantics. Electronic Funds Transfer is the overarching term, and Automated Clearing House transfers are just one of many electronic payments that are considered an EFT.
However, a noteworthy difference between the umbrella of EFT and ACH payments being a subset is payment security. ACH transfers must contend with the clearing house and maintain rigorous security standards. Debit and credit card transactions must also adhere to PCI compliance standards, but the rate of fraud is much higher than ACH transactions.
Another difference is that ACH transactions take the longest process compared to other EFT payments. However, it’s worth emphasizing that most use cases of ACH transactions do not require immediate processing is necessary.
For example, an SMB may use ACH payments to purchase from suppliers and pay bills and employees—all of which do not necessarily require the real-time payment processing that other EFT transactions offer.
Final Words when it comes to EFT vs ACH
Business owners have many options available for payment processing. There is no singular answer to which payment methods to accept will work best. Small businesses benefit from accepting several payment methods, including credit and debit cards, text-to-pay, contactless payments, mobile wallets, and ACH payments.
Determining which of the many payment options to accept is an important choice. Business owners should consider the costs associated, including the hardware, software, and processing fees. Most of the variables for this important consideration come from your payment processor—and choosing one that can accept all forms of payment and scale to your business needs is a top priority.
Another important consideration is to choose a payment processor that can integrate with your other business tools. Data is power, and when payment processing is integrated with accounting software, CRM tools, and websites, it is easier to gain a holistic view of the health of your business.
So, which payment methods should your business accept? Ultimately, the payment methods your business needs to accept are driven by customer demand. At Stax, our goal is to simplify payment processing. We can accept all forms of payment, offer flat subscription pricing, and are available 24/7 to support your business.
