ACH vs. Credit Card Processing: A Cost Analysis for the Finance Industry

When it comes to electronic payments, finance institutions juggle speed, security, and cost. To keep up with the digital age, businesses in the finance industry constantly seek the most efficient and cost-effective payment processing methods. Automated Clearing House (ACH) and credit card processing have facilitated countless transactions in this sector.

Why is this?

These two payment processing options are popular among consumers and the finance sector because they are fast and convenient. Statistics show that by mid-2023, credit card users in the U.S. had reached 167.2 million, an increase from previous years. In addition, the ACH Network handled 8.2 billion payments in the first quarter of 2024, thanks to an increase in Same Day ACH payments.

While both options offer unique advantages, you must consider the cost structures since they can significantly impact businesses. While payment processors like iCG Pay, formerly iCheckGateway.com, provide technologies to process both options, you still have to decide on the most cost-effective solution.

This blog post will dive into a cost analysis of ACH and credit card processing, examining the fees associated with each option to help you make an informed decision.

What Is ACH Processing?

ACH processing is an electronic payment method that facilitates funds transfer between bank accounts. It operates as a batch processing system, enabling businesses and individuals to debit or credit funds to and from bank accounts electronically. Financial institutions process these transactions as direct electronic funds transfer (EFT).

They involve a wide range of payments, including:

• Direct deposits
• Bill payments
• Business-to-business transactions
• Person-to-person payments

Unlike credit card transactions, which involve card networks and issuers, ACH transactions bypass these intermediaries, resulting in lower processing fees for businesses. ACH processing offers advantages such as faster settlement times, typically within one to two business days, reduced transaction costs compared to traditional paper-based methods, and enhanced efficiency in managing recurring payments.

What Is Credit Card Processing?

On the other hand, credit card processing involves electronically handling credit card transactions between merchants and financial institutions. When a customer purchases using a credit card, the merchant submits the transaction information to a payment processor to forward it to the card network.

The card network then communicates with the customer's issuing bank to authorize the transaction and transfer funds to the merchant's account. These transactions involve various parties, including merchants, payment processors, card networks, and issuing banks, each playing a role in ensuring the secure and timely completion of transactions.

What Are the Cost Differences between ACH and Credit Card Payments?

Before implementing ACH and credit card processing systems in your financial business, you should know the costs. This enables you to determine whether these costs align with your goals and offer convenience and flexibility to both consumers and the business.

Costs of Credit Card Processing

While credit card processing offers convenience, it typically incurs different types of processing fees compared to alternative payment methods like ACH processing due to fees and other associated costs.

The average credit card processing fee is about 1.5 to 3.3% of the total transaction amount.

Here are the costs you need to know:

1. Interchange Fees

Credit card transactions come with interchange fees imposed by card networks and issuing banks. This risk management fee can vary based on factors such as card type, transaction volume, and industry.

These interchange fees typically range from around 1% to 3% of the transaction amount, making them a significant cost component for financial institutions. Additionally, the complexity and variability of interchange rates can make it tough for businesses to predict and manage their processing expenses accurately.

2. Discount Rates

In addition to interchange fees, merchants must pay discount rates for each credit card transaction, typically ranging from 1.5% to 3% of the transaction value These percentage-based fees directly impact transaction costs and profit margins, particularly for businesses with high-value transactions or low-profit margins.

3. Chargeback Fees and Fraud Protection

With credit card processing, you also incur additional costs related to chargebacks and fraud protection services. Chargeback fees can range from $20 to $100 per occurrence, which can be costly for your financial business, especially in cases of fraudulent or disputed transactions.

Costs of ACH Processing

Nacha has modernized ACH transactions, making them more affordable than credit card transactions.

However, transaction fees vary among ACH payment providers. While some offer a low flat fee per transaction, others charge a percentage per transaction below the credit card processing rates. The flat fee option will be more affordable if your financial organization processes large volumes of ACH transactions.

The other fees may include:

1. One-Time Setup Fees

To start accepting ACH payments, you have to establish an ACH processing account with a provider like iCG Pay. These setup fees typically cover administrative costs associated with account activation, configuration, and integration of ACH processing services into existing payment systems. While the amount of one-time setup fees can vary depending on the provider and the complexity of the integration process, they are generally a one-time investment.

2. Monthly Account Fees

While ACH processing generally boasts lower transaction fees, some providers may charge monthly account maintenance fees or subscription charges. However, these fees are typically nominal compared to the savings generated from lower transaction costs. Additionally, many ACH processing services will offer flexible pricing plans tailored to the businesses’ needs.

3. Returned Payment Fees

If an ACH transfer fails due to insufficient funds, your financial institution may incur a returned payment fee. Rejected ACH payments also occur when:

• Your financial organization fails to verify customer bank account information
• An account has been closed
• The account number is invalid
• The account name does not match bank records

How to Find the Right Processing Option for Your Financial Business

Once you understand the cost structures of ACH and credit card processing, you can make an informed decision. Here are the key factors to consider:

Choose a Reliable Payment Processing Partner

A dependable payment processor like iCG Pay is important. As long as you invest in the right provider, you can accept both ACH and credit card processing. As you pick a partner, research the processor's reputation, track record, Nacha compliance, and experience serving financial institutions. Look for companies with robust security measures, a proven uptime history, and excellent customer support.

Identify Your Transaction Needs

You need to understand your transaction volume, average transaction size, and the recurring nature of payments. For high-volume, recurring payments like salaries or bill payments, ACH's flat fees might be ideal. On the other hand, if you handle larger, one-time transactions or require immediate settlements, credit card processing might be more suitable.

Consider Customer Preferences

The ability to offer diverse payment options can enhance customer satisfaction and attract a wider clientele. Analyze your target audience and their preferred payment methods. Your customers might be looking for a business that provides ACH and credit card processing.

Explore Integration Capabilities

Seamless integration with your existing financial technology infrastructure is essential. Ensure the chosen payment processor integrates smoothly with your accounting software, online banking platform, or other relevant systems. This minimizes manual data entry errors and streamlines your overall payment processing workflow.

How Can iCG Pay Help?

Although payment technologies have advanced, credit card fraud remains the most popular type of identity theft, with 426,000 reports in 2023. Therefore, your business needs a system that protects electronic payments, including ACH and credit card transactions.

iCG Pay is the ideal payment gateway provider if your financial institution accepts credit card and ACH payments. You can offer multiple payment methods to reduce transaction costs. Our systems align with Nacha security guidelines, keeping your transactions safe.

Speak with one of our experts today to start your payment processing journey.