ACH vs. Credit Card: Which One Is Best and How to Choose

In the world of payment methods, automated clearing house (ACH) transactions and credit cards stand out as popular choices. While both enable you to receive payment quickly, they have other advantages—and disadvantages—that may make one a better fit for your business.

We’ll help you understand these pros and cons so you can make the best choice for your business. Plus, we’ll explain how you can use Podium as a cost-effective tool to manage payments.

What Is ACH?

ACH transactions are essentially bank-to-bank transfers made through a secure electronic network governed by the National Automated Clearing House Association.

There are two types of ACH transactions:

• ACH credit: In this type of transaction, the payer initiates the transaction, and funds are transferred or “pushed” from one account to another. For example, a business may set up a one-time payment through their bank to pay a freelancer for a one-off assignment.
• ACH debit: In this type of transaction, the recipient initiates the transaction, and funds are withdrawn or “pulled” from one account and put into another. For example, an individual may set up a recurring payment for a utility bill. In that case, the customer gives the utility provider permission to take that payment from their account every month.

What Is a Credit Card Transaction?

Credit card transactions involve using a card issued by a financial institution to make purchases in person, online, or over the phone.

The process is more complicated than swiping a card. When the card is presented to the merchant at the time of sale, a payment authorization request is sent to a payment processor. The payment processor then sends the details of the transaction to the card association, such as Visa, to clear the payment.

The card association then sends an authorization request to the issuing bank to approve or decline the request. The issuing bank finally sends its decision back down the line, until it reaches the merchant.

If approved, the merchant’s point of sale terminal will process the transaction successfully and the issuing bank will place a hold for the amount of purchase on the cardmember’s account. These funds will be transferred to the merchant bank, typically within 24 to 48 hours of the transaction.

ACH Pros and Cons

Offering lower transaction fees, robust security and fraud protections, and reduced payment failure risks, ACH transactions can be a cost-effective and reliable payment solution for various business needs. However, they do have drawbacks, including longer processing times and limited consumer protections. We’ll take a closer look at the pros and cons below.

Benefits of ACH

1. Lower Transaction Fees

A significant advantage of ACH transactions is their cost-effectiveness. Typically, ACH transfers involve lower fees than credit card transactions. This cost efficiency benefits businesses, especially those dealing with high transaction volumes or regular payments. For instance, businesses that handle payroll processing can save substantially on transaction fees by using ACH.

2. Security and Fraud Protection

ACH transactions offer robust security and fraud protection measures. These bank-to-bank transfers are made via the ACH network, minimizing the exposure of sensitive information during transactions. Additionally, ACH transactions adhere to strict security protocols and authentication processes, reducing the likelihood of fraudulent activities. This heightened security provides peace of mind to businesses and customers alike, ensuring safe and secure fund transfers.

3. Automatic and Scheduled Payments

ACH transactions enable businesses to automate payments and schedule transactions in advance. This feature is particularly advantageous for businesses that rely on recurring payments such as subscriptions, monthly billings, or installment payments. For example, utility companies can use ACH to automatically deduct monthly bills from customers’ bank accounts, ensuring timely payments without manual intervention.

4. Efficient for Large Transactions

ACH transactions are well-suited for handling large-value transactions efficiently. Unlike credit card transactions that often involve percentage-based fees, ACH fees are usually fixed or significantly lower, regardless of the transaction amount. This cost structure makes ACH an attractive option for businesses dealing with substantial transactions, such as real estate transactions, B2B payments, or large-scale supplier payments.

Drawbacks of ACH

1. Processing Time

A notable drawback of ACH transactions is the time it takes for funds to be processed and transferred between bank accounts. ACH doesn’t offer real-time processing so transactions can take a few business days to complete, which affects the availability of funds. For businesses requiring immediate access to funds, this delay poses a challenge.

2. Non-immediate Confirmation

Unlike credit card transactions, ACH transactions do not offer immediate authorization or confirmation of payment. Meaning, the status of the transaction is uncertain until it is reflected in the respective accounts. This delay might affect businesses requiring instant verification or confirmation of transactions.

3. Limited Consumer Protections

Compared to credit cards, ACH transactions provide relatively limited consumer protection. Disputes and recourse mechanisms for unauthorized transactions or errors are typically less comprehensive than those offered by credit card issuers, which can potentially expose consumers to risks in case of disputes or fraudulent activities.

4. Payment Rejection Risk

ACH transactions are susceptible to payment failures or rejections due to various reasons such as insufficient funds, closed accounts, or input errors in account information. When a payment is rejected, manual intervention is required to rectify the issue and initiate the transaction again. This can be inconvenient for both businesses and customers and lead to disruptions in payment schedules or cash flow.

Credit Card Pros and Cons

Offering instant transactions, robust consumer protections, and attractive rewards and benefits, credit cards remain popular among consumers and businesses alike. However, there are disadvantages, including higher transaction fees for merchants and the administrative hurdles of setting up merchant accounts. Let’s take a closer look at these pros and cons.

Benefits of Credit Card

1. Instant Transactions

Credit card transactions provide immediate authorization and payment confirmation at the point of sale. This is particularly advantageous for consumers and businesses seeking prompt transactions without delays. Retail businesses in particular benefit from the swift processing of credit card payments since it enables them to provide a seamless shopping experience to customers.

2. Robust Consumer Protections

Credit cards offer extensive consumer protections compared to ACH transactions and many other payment methods. Various regulations and policies that safeguard against unauthorized transactions, billing errors, or fraudulent activities, including the Fair Credit Billing Act (FCBA) and the card issuer’s liability policies. These provide consumers with avenues for dispute resolution and refunds in case of issues.

3. Rewards and Benefits

Credit cards often come with robust rewards and benefits programs. Cardholders can usually earn rewards points or cashback on purchases, access exclusive discounts, receive travel insurance, or enjoy other perks based on their card usage. For instance, credit cards may offer frequent flier miles or a cashback reward to incentivize card usage.

4. Convenient and Widely Accepted

Credit cards are widely accepted at retail outlets, online stores, restaurants, hotels, and various businesses worldwide. This allows consumers to make purchases or payments conveniently without the need to carry large amounts of cash. It also facilitates international transactions and online purchases across borders, enhancing overall convenience for users.

Drawbacks of Credit Card

1. Higher Transaction Fees

Credit card transactions often come with higher processing fees for merchants compared to other payment methods like ACH. Merchants are typically charged a percentage of the transaction amount along with a flat fee for each transaction. These fees can cut into profit margins for businesses, particularly for small businesses or those with tight profit margins.

2. Chargeback Risk

Credit card transactions are susceptible to chargebacks, where customers dispute transactions with their card issuer. Chargebacks can occur due to various reasons such as unauthorized transactions, product dissatisfaction, or delivery issues. Merchants facing chargebacks not only lose the transaction amount but might also incur additional fees or penalties, impacting their revenue and potentially harming their reputation.

3. Credit Card Debt Accumulation

The ease of using credit cards for purchases can lead to overspending and the accumulation of debt if not managed responsibly. Consumers might be tempted to spend beyond their means or carry balances from month to month, accruing interest on unpaid balances. This debt accumulation can lead to financial stress, higher interest payments, and potential credit score drops for individuals.

4. Merchant Account Setup

Setting up a merchant account to accept credit card payments involves some administrative hassles. Businesses need to apply for a merchant account with a payment processor or acquiring bank, which includes application processes, credit checks, and adherence to compliance and security standards. This setup process might be time-consuming and involve complex paperwork for businesses.

ACH vs. Credit Card: Which Is Best?

Due to their ability to provide predictable cash flow, handle recurring payments effectively, offer heightened security with fewer disputes, and significantly reduce the risk of credit card fraud, ACH transactions are the preferred payment processing option for businesses looking for consistency, security, and efficiency in their financial operations.

Let’s take a closer look at why ACH transactions are a better payment processing option than credit cards.

1. Predictable cash flow.

ACH transactions are ideal for managing cash flow. Companies relying on regular income streams or subscription-based services greatly benefit from scheduled ACH transfers. For instance, a software subscription company using ACH for monthly payments can forecast revenue with higher accuracy, which can help improve budgeting and financial planning.

2. More suitable for recurring payments.

ACH transactions are also ideal for facilitating recurring payments. That’s why utility companies, membership-based organizations, and businesses providing subscription services often use ACH to automate billings. Consider a gym that uses ACH for monthly membership fees. The automated nature of ACH transactions ensures the gym receives prompt payments without customers having to initiate each transaction manually.

3. Enhanced security and fewer disputes.

ACH transactions generally encounter fewer disputes and offer enhanced security compared to credit cards. Due to the direct bank-to-bank transfer mechanism, ACH payments have lower instances of fraudulent activity or unauthorized charges. For instance, a business utilizing ACH for B2B transactions experiences fewer disputes and a reduced likelihood of chargebacks, ensuring smooth operations and less administrative hassle.

4. Reduced risk of credit card fraud.

A significant advantage of ACH transactions is the diminished risk of credit card fraud. Unlike credit card transactions, during which sensitive card information is exchanged, ACH relies on bank account details, which are typically more secure and less prone to data breaches. For example, an e-commerce business implementing ACH payments for customers minimizes the exposure of sensitive financial information, thereby reducing the likelihood of data theft or fraudulent activities.

Improve Payment Processing With Podium

Podium’s payment processing solution offers a comprehensive approach, streamlining payments for small and local businesses. Its unique features not only ensure effective payment processing but also aid in business growth.

Podium Payments is an easy-to-use and cost-effective option for accepting and managing all major payment options. With this solution, small businesses can:

• Offer financing, subscriptions, Buy Now Pay Later, and send out estimates to make the payment experience easy and convenient for everyone.
• Handle payment transactions in the same channel as all other customer messages.
• Ensure transactions are secure and accurate thanks to Podium’s advanced fraud protection and automatic reconciliation.
• Transform their phones into card readers so customers enjoy a fast and secure payment option.

This is just one of many solutions that Podium offers to help small businesses gather more reviews, generate higher quality leads, and centralize customer data to better market and communicate with customers.

ACH vs. Credit Card FAQs

Q: What is the difference between ACH and credit card?

A: ACH transactions involve directly transferring money between bank accounts, while credit card transactions involve borrowing funds from a financial institution.

Q: ​​What is considered an ACH transfer?

A: An ACH transfer is an electronic transfer of funds from one bank account to another over an electronic network governed by the National Automated Clearing House Association, also known as the ACH network.

Q: Is a credit card safer than ACH?

A: Both credit cards and ACH transactions face security risks, ACH payments are generally considered safer. ACH transactions have a lengthy authorization process and banks have fraud detection measures in place, so these payments are less likely to go through unauthorized.