ACH vs credit card: How each payment method works

ACH transfers and credit cards are two popular B2B payment options, each with unique benefits and drawbacks. ACH transfers, which accounted for nearly 31.5 billion transactions in 2023, are known for their low fees and security, making them ideal for recurring or high-volume transactions. Credit cards, while offering instant processing and rewards, often come with higher costs and fraud risks.

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Let’s compare these two methods to help you pick the best payment solution for your business needs.

ACH vs. credit card payments: A complete comparison

ACH payments and credit card transactions serve the same purpose—transferring money—but operate differently and cater to distinct needs.

An ACH payment, or Automated Clearing House payment, is an electronic funds transfer that moves money between US banks over the ACH network. These transactions are known for their lower fees, making them ideal for recurring payments or high-value B2B transactions.

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Credit cards allow businesses to accept payments through card networks like Visa or Mastercard. These payments are quick and convenient but come with higher fees and increased fraud risks.

Understanding the mechanics behind these methods is key to choosing the best fit for your business. Let’s explore how ACH and credit card payments actually work.

How do ACH and credit card payments work?

When moving money electronically, ACH payments and credit card payments take different paths. Here’s a step-by-step look at how each process works:

ACH payment process

1. Authorization: The payer (you) gives permission for the business or organization to withdraw funds, whether through an online form, a signed agreement, or other means of consent for an ACH debit or ACH credit transaction
2. Payment initiation: The business sends the payment request to their bank, the Originating Depository Financial Institution (ODFI)
3. Batching: ACH transactions aren’t processed individually. Instead, multiple payment requests are grouped into batches for efficiency. This step reduces costs and streamlines processing.
4. Clearing through the ACH network: The batches are sent to the Automated Clearing House network, which acts as a middleman, moving payments between the payer’s and the recipient’s banks. These transfers adhere to strict compliance regulations set by Nacha, the body that oversees the ACH network.
5. Daily processing: ACH payments are processed throughout the day in specific timeframes, known as settlement windows. Unlike credit card transactions, they aren’t instantaneous and can take 1–2 business days to clear; they can also be rejected due to insufficient funds.
6. Funds deposit: After clearing, the receiving bank, or Receiving Depository Financial Institution (RDFI), deposits the funds into the recipient’s account. The transaction is complete.

Credit card payment process

1. Payment authorization: When you make a purchase, your card details are sent to the business’s payment gateway. This includes your card number, expiration date, and CVV code.
2. Verification and approval: The payment gateway communicates with the card network (Visa, Mastercard, etc.) and your issuing bank to confirm you have enough credit or funds for the transaction. If approved, an authorization code is sent back to the merchant.
3. Transaction capture: Once approved, the transaction is captured, meaning the amount is “held” in your credit line or account
4. Batch submission: Like ACH payments, credit card transactions are grouped into batches by the merchant and submitted to the payment processor at the end of the business day
5. Settlement: The payment processor sends the batch to the card network, then routes the payment to your bank. Your bank releases the funds to the card network, which passes them to the merchant’s acquiring bank.
6. Posting to the merchant’s account: Once the funds are settled, they’re deposited into the merchant’s account. Depending on the payment processor, this can take 1–2 days.

Pros and cons of ACH and credit card payments 

Should your business accept ACH or credit cards?

Deciding between accepting ACH or credit cards depends on your business needs and what’s most convenient for your customers. If you make frequent recurring payments like payroll or larger transactions, ACH offers significant savings on transaction fees. On the other hand, credit cards provide speed and flexibility, making them ideal for one-time purchases.

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Offering both options ensures customer satisfaction and keeps your business adaptable.

Business use cases for ACH and credit card payments

When to use ACH payments

• Payroll processing: ACH payments are a reliable and cost-effective choice for recurring employee payments. This method is especially useful for direct deposits.
• Vendor payments: For supplier transactions, ACH minimizes fees and efficiently handles larger electronic payments
• Subscriptions and memberships: Automating recurring billing through ACH simplifies processes and keeps fees manageable
• Utility bills: ACH payments ensure timely, hassle-free payments for regular business expenses
• Loan payments: Businesses that manage loans benefit from the consistency and affordability of ACH transfers

When to use credit card payments

• Travel costs: Booking flights, hotels, or car rentals is easier and more secure with credit cards
• Emergency expenses: Credit cards provide instant purchasing power for unexpected costs like equipment repairs
• Client entertainment: Use credit cards for meals, events, or gifts, earning rewards in the process
• Online transactions: Credit cards offer fraud protection and chargeback options, reassuring customers during e-commerce purchases
• Daily expenses: Quickly cover office supplies or small services without disrupting your operations

Automate ACH payments with Ramp

Managing accounts payable for a small business can get overwhelming fast. While ACH debit transactions can automate vendor payments, many providers fail to integrate them seamlessly into your overall AP workflow.

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‍Ramp’s corporate cards with accounts payable software provide:

• Smart approvals: Customize approval flows and set alerts for errors or overbilling. Ramp ensures accuracy at every step.
• Unified payment platform: Manage all your payment methods ACH, credit cards, and more in one place, with complete visibility
• Seamless integration: Sync with your ERP for real-time updates on bills, vendor information, and purchase orders
• Automated recurring payments: Let Ramp handle recurring bills, batch payments, and vendor onboarding without manual effort

Make managing ACH payments easier. Start automating your AP with Ramp.