Recurring Billing

ACH Payments and Recurring Billing: 5 Things You Need to Know

Adolphus McKoy

If you’re running a subscription business, you’d typically accept payment by credit and debit cards. After all, many people are used to paying with plastic, whether for offline or online purchases.

However, it can sometimes be easier for customers to have monthly payments automatically taken from their bank accounts, without having to think about it or worry about their cards expiring.

This is facilitated by a process called “ACH”, an acronym that may sound unfamiliar, but if you have a U.S. bank account, then chances are that you’ve made at least one ACH payment in your life. Let’s take a look at five things you should know about how ACH payments work, including their pros and cons if you’re thinking of offering this payment mode for your subscription business.

What is ACH and how does it work?

ACH stands for Automated Clearing House and refers to the financial network used to transfer funds between entities (whether individuals or organizations) in the United States. The National Automated Clearing House Association (Nacha) oversees the ACH network, which facilitates B2B and C2C payments, and even payments to the government.

Here’s what happens behind the scenes when you initiate an ACH payment from a customer:

  1. Your bank (known as the Originating Depository Financial Institution, or ODFI) makes a payment request to the customer’s bank (known as the Receiving Depository Financial Institution, or RDFI).
  2. The customer’s bank checks whether the account contains enough funds for the ACH transfer. If it does, your bank “pulls” or withdraws the payment amount from the customer’s bank account, and deposits it into your own. This is also known as an ACH debit payment.

Customers can also initiate ACH payments to vendors. If so, the customer’s bank will do an ACH credit transaction, and “push” the payment to the vendor instead.

In either case, the end result is the same: the vendor—that’s you—gets paid!

Why use recurring ACH in your subscription business?

From credit cards to checks and even cold hard cash, businesses have no shortage of methods of getting paid. So why use ACH? Here are three reasons:

1. ACH payments are convenient

With ACH, collecting recurring payments is a breeze. Your customers will provide you with their bank account details for verification. Once you’ve successfully verified them, your customers’ bank accounts will be set up for ACH payments.

From then on, whenever the customer owes your business a payment, the payment will be automatically deducted from their bank account like clockwork. There’s no need to chase customers for payment or wait days for a customer’s check to arrive in the mail. Since subscription businesses get paid on a recurring basis, the ability to automate the collections process is a major boon.

Of course, businesses can set up a similar automated recurring payment system for customers that pay by credit card. However, ACH payments win out because…

2. ACH payments are cheaper

While there’s a cost involved in accepting ACH transactions, this fee is generally much lower than the same for getting paid by credit cards. As an example, businesses using our native gateway pay a mere 1% on every ACH payment received. For payments equal to or more than $1,000, the fee is capped at $10.

On the other hand, most of the other well-known payment gateways will charge almost triple that—something like 2.9% + $0.30—for credit card payments. There is no fee cap either.

A fee rate of 2.9% might not sound very high. But when your business is collecting thousands of payments every year, all the revenue you’re losing to fees can really add up. So why not opt for a cheaper payment method, if you can?

3. ACH payments are highly secure

The ACH network is highly regulated, with strict compliance requirements in place to ensure the security of money transfers. Under the Nacha Operating Rules, for instance, businesses are required to:

  • conduct due diligence on customers making ACH payments to ensure the validity of transactions,
  • put in place “commercially reasonable” security measures to detect and prevent fraud, and
  • render bank account numbers used for ACH payments unreadable when electronically storing such information.

When shortlisting ACH payment gateway providers for your business, look out for one that provides the necessary features for meeting these requirements.

In addition, ACH payments aren’t made immediately but are sent in batches throughout the day.

This means that if a bad actor compromises a customer’s information and makes a fraudulent ACH transaction, the customer has a good chance of reversing it before the payment goes through. With scammers constantly on the prowl, the security of the ACH network should boost customer confidence in making payment via ACH.

What are some drawbacks?

Despite the advantages of collecting ACH payments, there are some cons as well. Be aware that:

4. ACH payments take longer to process

ACH payments are made out in batches, with banks setting their own daily cut-off times for receiving payment requests. If you initiate a request outside of a particular cut-off time, you’ll have to wait until the next processing window—which could happen only the next day.

As a result, it can take up to three business days for your business to be paid via ACH. However, if your bank offers same-day ACH payment processing, you may be able to receive an ACH payment within, well, the same day.

Same-day ACH payment processing is available for “virtually all types of ACH payments,” subject to certain transaction limits and bank participation. That said, try to ensure your business has sufficient cash flow to be able to wait a couple of days for payment. This is also a good business practice in general, for mitigating the impacts of payment delays on your business.

5. ACH payments work only in the U.S.

While countries abroad have their own payment transfer networks, the ACH network is U.S.-only. As a result, only customers that have U.S. bank accounts will be able to make ACH payments.

There are services that help non-U.S. residents make payments via ACH. For instance, using the Wise online money transfer platform, consumers and businesses outside of the U.S. can obtain U.S. checking account details for sending and receiving ACH payments.

However, the use of such platforms isn’t the most widespread. If most of your customers aren’t U.S.-based, then ACH may not be the best payment option for your business. You may have to instead opt for taking payment by credit card, wire transfer, or the local ACH equivalent.

Will your subscription business accept ACH payments?

ACH isn’t a new fad—this method of payment has been around for a long time. And the billions of ACH transactions that flow through the automated clearing house network annually only prove its popularity.

The demand for ACH transfers is likely to only grow in the future, too. Especially in the B2B sector, which chalked up a whopping 5.3 billion ACH payments in 2021. According to Nacha, this is a 20.4% increase from the year before!

If you’re ready to jump on the ACH bandwagon, our payment gateway enables subscription businesses to take ACH payments for a fee of only 1%, capped at $10 per transaction, as mentioned above.

This payment gateway is bundled in for free with our comprehensive recurring billing software, which includes a flexible product catalog and powerful subscription management. These features will come in handy as you accelerate the growth of your user base—by simply offering customers a new way to pay.

FAQs about ACH Payment

Q: What is an ACH Payment?

ACH stands for Automated Clearing House and refers to the financial network used in the U.S to transfer funds between entities, whether individuals or organizations. The National Automated Clearing House Association (Nacha) oversees the ACH network, facilitating B2B, C2C payments, and even payments to the government.

Q: How does ACH Payment work in a subscription business?

Subscription businesses can set up automated recurring ACH payments with the customer where whenever the customer owes the business a payment, the amount will be automatically deducted from the customer’s bank account by your bank.

Q: What are the advantages of using ACH Payments for a subscription business?

ACH payments offer a cost-effective way for companies to collect regular payments. The fees for receiving ACH payments are generally lower than those for credit card payments. Additionally, ACH is a secure method of payment, with strict compliance requirements in place to ensure the safety of transactions.

Q: What are the disadvantages of using ACH Payments?

The main drawbacks are that ACH payments are processed in batches, so it can take up to 3 business days for a company to be paid. Plus, the ACH network is U.S.-only, so only customers with U.S. bank accounts can make ACH payments.

Q: Is there a way for non-U.S. residents to make ACH payments?

Yes, platforms like Wise allow non-U.S. residents to obtain U.S. checking account details for sending and receiving ACH payments.

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

While both can be set up as automated payment systems, ACH payments generally have lower transaction fees than credit cards, making it a more cost-effective choice for businesses. However, credit card payments are usually faster and not limited to the U.S.

Q: Can ACH payments be reversed if fraudulent activity is detected?

Yes, unlike instant transactions, ACH payments are sent in batches throughout the day, giving a chance to reverse a payment if fraud is detected before the transaction is completed.


Written by:

Adolphus McKoy
Adolphus McKoy
Account Executive, Stax Bill