The Ironic Truth: ACH Payments Are Keeping Businesses Mired in Paper

Everyone knows about the high cost of processing paper checks, yet companies large and small continue to do it. Despite the fact that 70% of vendors accept some form of electronic payment, most companies make only 30% of their payments electronically - most of these by ACH.

ACH is the entrenched standard for electronic payments, but ironically, the slow and expensive manual processes required to make ACH payments are actually holding companies back from achieving 100% electronic payments. There are now better ways to pay that bring this goal within reach.

The ACH network was a breakthrough - in 1978. Back then, it was the first electronic network for financial institutions to transfer money among themselves, saving the U.S. government and other organizations from hauling truckloads of paper checks all over the place. Today the network moves close to $40 trillion worth of transactions, about 20% of all electronic payments in the U.S. Social Security and other government benefits, payroll direct deposit and pre-authorized consumer debits.

ACH is still not only cheaper, it’s usually faster and definitely more secure than a paper check. According to recent industry research, it costs $3 to produce a paper check, and somewhere between 25 cents and one dollar for an ACH payment.

Not strategic

But ACH payments don’t support modern finance’s mandate to become more strategic because even though they have an electronic component, there is still too much manual work required on both the front and back ends of the process.

On the front end, there’s already lot of back-office labor to keep your vendor database up to date even to write paper checks. ACH adds the need to track bank account information and make sure it is secure. With supplier information constantly changing, the amount of work required just to maintain accurate bank information makes it hard to increase the number of suppliers that can be paid via ACH. In fact, without proactive management, the percent of suppliers that can be paid through ACH will diminish over time.

Then there’s the ongoing task of batching payments and preparing files to transmit to the bank. It’s a rigid process; if there is an error in a single line of the payment file, the entire batch could fail.

On the back end, there are always payments that don’t go through for one reason or another, and a lot of cost in chasing down information and getting the payment completed. When you get right down to it, the only piece of the ACH process that’s automated is the electronic pipe, and it’s a dumb pipe at that.

Because of all this manual effort, ACH is only a viable solution for companies with the staff and infrastructure to handle the workload. Even for big companies, it only makes sense to do this much work for suppliers whose information is relatively stable and whose number and frequency of invoices warrants the effort. That’s why even though we’ve had this automated solution for almost 40 years, companies are still stuck making a lot of paper payments.

Hidden costs

Not only that, hidden costs make ACH payments not as cheap as most people think they are.

People tell me all the time their bank is charging $.15, or even nothing, for processing an ACH payment. That might be what they’re charging for pushing the information through the pipe, but depending on your bank, there are a whole bunch of hidden fees that jack up the real cost. These are banks we’re talking about! There’s no free lunch.

There are one-time setup fees. There are monthly service fees. There are annual service fees. There are fees for submitting files. There are reporting fees. There are minimum deposit requirements and fees for dropping below them.

In the customer’s defense, I would say that banks make this intentionally confusing. It’s called unbundled pricing – every charge appears as a separate line item so it’s not easy to just say, “Here are my total fees for the month and here’s the number of payments I processed. I’m going to divide it out, and see how much it actually costs me.”

It’s hard to do the math, and a lot of people don’t even try because they don’t think there’s any alternative. They think that’s just what they have to pay, so why bother?

It reminds me of what banks do with ATMs. Remember when an ATM transaction was $1, and then they were all $2, and now some of them are even $3? One bank raises their prices and they all do it. People assume they have to put up with it when really, they don’t. ACH users don’t have to either.

Money left on the table

Most companies are leaving a lot of money on the table with ACH payments, both because of the true cost of the transaction and because it’s not a solution that can scale to the majority of your vendors.

Paying by credit card can actually earn rebates on electronic payments. Better yet, paying with new solutions that wrap all types of payment processing – check, ACH and card - into a single workflow and automatically make the payment by the lowest cost method can dramatically reduce the cost and manual labor associated with B2B payments, while extending payment automation to a larger range of vendors.

It’s time to start paying attention to how you’re making your payments. How many are by printed check? How many are by ACH? How many are by card? Is the percentage of payments you make electronically growing, holding steady or shrinking?

Look at your bank statement and put a pencil to it. How much does it cost you to do check, ACH and card payments?

Once you’ve added up all your payments and what they cost, figure out if you move from 35% electronic payments to 50%, what’s that going to save you? How much will it add to your bottom-line?

Then set a benchmark and try to move toward it. Making at least 70% of your payments electronically should be achievable. It stands to reason that if more than 70% of vendors accept electronic payments, any company out there should eventually be able to pay 70% of their vendors electronically with the right tools and processes in place.

Tana Law, Co-Founder and Senior Vice President of Sales at Nvoicepay
Tana Law is Co-Founder and SVP of Sales of Nvoicepay. Law has more than 25 years of experience in the payments industry. Prior to Nvoicepay, Law was VP Sales at Zevez and spent 18 years in various roles at Discover Card Services including Regional Director, Senior National Accounts Manager, Business Development Manager, Director of Support Services, District Manager, and Account Executive. On behalf of Discover Card, she established contractual policies and procedures for the then emerging payment industry group of “transaction aggregators.” As Regional Director, Law established many of the sales performance policies and metrics still in place at Discover.