Payment processing is a crucial part of doing business for any company. Increasingly businesses are converting old-fashioned paper-based payment systems to electronic ones.
There are many benefits to making and receiving payments electronically. For starters, electronic payments greatly improve efficiency, saving both time and money. Most customers and employees also appreciate the option of paying and receiving funds electronically. In addition, switching to electronic payments is an environmentally friendly move that can save literally tons of paper.
The process of sending and receiving payments electronically is referred to as electronic funds transfer, or ACH, which stands for the Automated Clearing House. This is the nationwide electronic payment network that allows the clearing of electronic payments and payment-related information between financial institutions.
Using the ACH, businesses and their customers (whether business-to-business or business-to-consumer) can exchange funds electronically instead of via checks or wire transfers. Payment-related (or addenda) information can also be sent along with ACH transactions in a process known as electronic data interchange.
There are three primary types of ACH payments.
Many employees in the United States are paid via direct deposit instead of paper checks. Recipients of many types of government payments, such as tax refunds, Social Security, and other benefits, are also paid electronically.
Using direct deposit instead of paper checks can save between $2.87 and $3.15 per payment, according to the National Automated Clearing House Association. Many payroll software packages allow direct deposit, as do most independent payroll processors. Three out of every four employees who have direct deposit available to them use the service, and 97 percent of them say they are very satisfied with it, reports NACHA.
Also referred to as automatic or direct debit and automatic or electronic bill payment, this is the transfer of payments from your customers’ checking or savings accounts directly to your account. It’s ideal for companies that collect recurring payments such as utility bills, insurance premiums, and health club dues.
Direct payments improve both the accuracy and efficiency of receivables collections. Research shows that it can save companies an average of 11.5 cents per payment (when compared to checks) in reduced processing costs. More than half of all U.S. households use direct payment for at least one recurring bill, according to NACHA.
This hybrid payment method is part check and part electronic transfer. Here’s how it works.
When a paper check is presented to you as payment, it is converted to a onetime ACH debit and the payment information is captured along with it. You then make an image of the check for archival purposes and destroy the original check, thus halting the paper trail. At this point, an ACH file is created and presented to your bank, and the payment is processed through the ACH network, with the customer’s account debited and your account credited for the amount due.
For point-of-purchase transactions, the check conversion takes place at the register, where an image is retained for archival purposes and the original voided check is returned to the customer. Or the check can be collected at the register and converted later in a centralized location, where an image is created and retained and the original check destroyed. In both instances you must notify your customer before accepting the check that you are going to convert it into an electronic payment for ACH processing.
To learn more about the potential benefits of electronic payments, visit electronicpayments.org.
Don Sadler is a freelance writer and editor specializing in business and finance.