Understanding ACH vs. Credit Card Payments for MSPs: A Comprehensive Guide
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Data published in the 2022 AFP Payments Cost Benchmarking Survey reports that for outgoing B2B payments:
- 66% of businesses use credit cards.
- 87% of companies use ACH credit payments.
- 73% of companies use ACH debit payments.
When MSPs decide which payment methods to use or accept, they make profound decisions that affect their finances. The payment types they accept will significantly impact their business, affecting cash flow, processing fees, and client satisfaction.
This article will explore ACH vs. credit card payments for MSPs in depth.
You will learn which payment option is more cost-effective, which is more user-friendly, and which payment method is more susceptible to fraud.
The article will outline the pros and cons of each payment method, helping you choose the suitable method to maximize efficiency and cost-savings and streamline your MSP payment processes.
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Understanding Credit Card Payments
Credit card payments are the third most popular incoming B2B payment method.
We will begin by discussing the process of making and receiving credit card payments before moving on to the benefits and drawbacks of this payment method.
How Do Credit Card Payments Work?
Credit card payments are a fundamental component of modern financial transactions.
Let’s examine the credit card transaction process from when a card is accepted for payment to when the amount is debited.
The key players in this process are as followers:
- Acquiring bank: The bank or financial institution that processes the credit card transaction for the merchant.
- Card-issuing bank: The bank or financial institution that issued the credit card to the client.
- Merchant: The business (in this case, your MSP) that accepts client credit card payments.
- Credit card network: Companies like Visa, Mastercard, and American Express act as intermediaries between acquiring and issuing banks.
- Client/consumer: The individual or entity (in this case, your client) making the purchase with their credit card.
1. Initiation
When a client (also a cardholder) initiates a credit card payment, the merchant sends the transaction request to their acquiring bank.
The bank then forwards it to the appropriate credit card network (e.g., Visa or Mastercard).
The credit card network is an intermediary that transmits the request to the issuing bank.
2.Authorization
The card-issuing bank receives the transaction request and checks if the cardholder has available credit.
If the available credit is sufficient, the card-issuing bank authorizes the transaction.
3. Capture
Once the card-issuing bank authorizes the transaction (which usually takes a few seconds), the funds are placed on hold in the cardholder’s account. This means the client cannot spend the reserved amount elsewhere.
The merchant can proceed with the sale, as the funds are now secured.
4. Settlement
The merchant sends the details of the captured transaction to the acquiring bank, which then forwards the transaction to the card network for processing.
The card network verifies the transaction and sends it to the card-issuing bank for final approval.
5. Funds Transfer
Once the card-issuing bank approves the transaction, the funds are transferred from the cardholder’s account to the merchant’s account.
The merchant now has access to the funds, minus applicable fees charged by the credit card network and the banks involved, which we will discuss later in this article.
This process takes an average of one to three days for the settlement to post and the transaction to be complete.
After the transaction is complete, both parties can see a record in their respective accounts.
The cardholder will see a deduction from their available credit, while the merchant will see an increase in their account balance.
Pros of Accepting Credit Card Payments
- Immediate Authorization: Credit card payments provide instant authorization to reserve the payment amount.
- Consumer Preference: Offering credit card payment options caters to clients' preferences, improving satisfaction and potentially increasing sales.
- Enhanced Client Experience: Faster payment method and usually meets clients’ demands for quick transactions.
- Strong Consumer Protection: Credit cards offer strong consumer protection laws, including chargebacks and dispute resolution. These help clients feel safer and more confident making payments.
Cons of Accepting Credit Card Payments
- Processing Fees: Credit card transactions come with processing fees, which can affect your profit margins.
- Chargeback Risk: Merchants are responsible for paying chargeback fees when clients dispute unauthorized charges, which can be costly.
- Settlement Delays: Although authorization is instant, it takes an average of one to three days for credit card payments to settle and two to three days for banks to credit your account with the funds.
- Potential for Fraud: Accepting credit card payments exposes your business to the risk of fraudulent transactions.
- Complex Compliance: Businesses must comply with various regulations and standards, such as PCI DSS, to ensure the secure handling of credit card information.
Understanding ACH Payments
In this section, we will learn how ACH payments work and discuss their pros and cons for MSPs.
How Do ACH Payments Work?
ACH payments are electronic funds transfers (EFTs), sometimes referred to as direct deposit, eChecks, or direct debit.
The network that manages these transactions is the National Automated Clearing House Association or Nacha (formerly NACHA).
ACH payments include different steps to transfer funds from the originator’s bank to the recipient's bank account.
However, accepting these payments does not require much effort from you or your clients to send them.
ACH Payment Process
Here is a closer look at the process.
The process begins by having the payer (your client) submit a transaction request to their bank, which verifies and forwards it to a national ACH operator.
Next, the operator processes and sends the payment to your bank, which credits your account. This completes the transaction, often within the same day.
1. Initiation
In this scenario, your bank is called the Receiving Depository Financial Institution (RDFI)Your client starts the process by initiating an ACH transaction when they make a payment with their bank. This is the originating bank, also known as the Originating Depository Financial Institution (ODFI).
For example, your client uses automatic billing to pay for recurring MSP services with automatic billing that they have authorized.
The ODFI compiles the payment files, verifies the information's validity, and ensures that all required fields are formatted properly for ACH processing.
2. Submission, ACH Clearing, and Settlement
The ODFI submits the payment files to one of the two national ACH operators: the Federal Reserve Banks or The Clearing House’s Electronic Payments Network (EPN).
These operators process and settle the transactions according to the ACH Operating Rules.
When the Federal Reserve Banks or the EPN receives the payment entries, the ACH operator forwards them to your bank.
In this scenario, your bank is called the Receiving Depository Financial Institution (RDFI).
3. Payment Completion
After receiving all of its incoming ACH transactions for the day, your bank (the RDFI) sends an ACH operator a settlement file. This file includes information about which transactions your bank has accepted and rejected.
If the transaction your client sent is accepted, your bank credits you with the payment amount minus ACH payment fees (which are minimal).
When a client’s ACH payment is debited from their account, it is credited to yours. This means you receive the funds, and the payment is complete.
Pros of Accepting ACH Payments
- Improved Security: ACH payments have lower fraud rates than checks, credit cards, and wire transfers.
- Cash Flow Predictability: Predictable, lower-cost transactions can maintain a steadier cash flow, allowing for more accurate financial planning and budgeting.
- Ease of Use: With an MSP-specific payment automation platform, accepting ACH payments is incredibly simple.
- Efficiency: ACH payments make accepting recurring payments very straightforward. Once clients enter their information, payments can be automatically transferred without manual input.
- Cost-Effective: ACH payments are one of the most cost-effective payment methods. They average between $0.20 and $1.50 per transaction.
Cons of Accepting ACH Payments
- Slower Clearing Times: ACH payments usually settle in one to three business days, longer than most credit card payments or wire transfers. Some transactions are eligible for same-day payments, but this is not always an option.
- Limited International Capabilities: Some banks do not facilitate international ACH payments, so you could be limited to accepting this method from clients in the US.
- Transaction Limits: Banks have incoming and outgoing limits for ACH payments, limiting the amount you can receive or send per transaction.
Comparative Analysis: ACH vs. Credit Card Payments
Next, we will provide a detailed comparison of ACH and credit card payments.
We will examine factors such as cost-effectiveness, transaction speed, user convenience, and security implications.
Processing Speed
Credit card payments are processed instantly. Although this does not mean the funds are immediately credited to your account, you have assurance of the payment's validity.
The funds usually take between one and three days to reach your account.
ACH payments can take between a few hours and up to three business days to settle. This will depend on the time of day a payment is submitted and whether it is eligible for Same Day ACH.
ACH payments are submitted in batches (three times a day), so if a payment is not submitted by the designated cut-off time, it will be processed in the next batch.
While the funds don’t clear immediately, the timeline is predictable and allows for more cash flow predictability.
For example, an MSP might use ACH payments for a consistent monthly service.
Verdict:
- Credit card payments have a slight edge in processing speed because of their virtually instant authorization.
Cost-Effectiveness
Processing and transaction fees for ACH payments are generally less expensive than credit card payments.
ACH fees are often a flat fee per transaction rather than a percentage of the transaction amount, as is often the case with credit card processing.
Credit card fees can add up fast, particularly for MSPs handling high-volume or recurring transactions.
Because of their lower fees, ACH payments can equal significant cost savings for MSPs.
Verdict:
- ACH payments generally have lower fees than credit card transactions, making them a more cost-effective payment option.
Security
ACH payments and credit card payments are both susceptible to fraud.
However, in 2023, 30% of businesses reported incidents of fraud with ACH debits and credits compared to 36% for commercial and corporate credit cards.
Although there is no extreme difference, the lower fraud rate with ACH payments can save businesses money regarding lost funds and potential chargeback fees.
Verdict:
- ACH payments win this category as they have lower incidences of fraud than credit card payments.
Client Protection
ACH payments are generally more complicated to reverse than credit cards.
Nacha has rules for ACH reversals, including that they can only initiated for these four permitted reasons:
- A duplicate payment
- The payment was sent to a receiving account that was different than the intended account.
- Incorrect payment amount
- A debit payment processed earlier than intended or a credit payment processed later than intended.
The reversal must also be sent to the bank within 24 hours of noticing the error and no later than five banking days after settlement.
Conversely, credit card payments have more robust consumer protections, and the process of chargeback and reversal are relatively straightforward. This might appeal to clients who want the peace of mind offered by these protections.
However, the ease of chargebacks can pose a challenge for MSPs. Chargeback fees add up for businesses. As explained above, they tend to cost between $20 and $100 per chargeback.
Verdict:
- Credit cards have more robust consumer protections that appeal to clients.
- When an MSP offers payment methods that clients are confident using, it can enhance their trust and satisfaction with the MSP.
Ease of Use
ACH payments require setting up bank details and getting authorization from your client to debit their account.
However, once set up, they become streamlined and easier to manage for both the MSP and the client.
Bank accounts typically last around 17 years, reducing the likelihood of failed payments due to expired information.
For MSPs using a recurring payment model, ACH payments help maintain a steady cash flow with lower transaction fees.
Credit card payments can be set up quickly and easily, making them convenient for your client's immediate use.
While obtaining client authorization is a best practice, it is not legally required for merchants.
However, most credit cards expire between three and five years after being issued, leading to failed payments and late fees if clients forget to update their information.
If you use a recurring payment model, as most MSPs do, ACH payments can improve cash flow due to lower transaction fees and efficient handling.
Verdict:
- Both offer convenience but in different ways.
- ACH payments require an initial setup but become streamlined and hands-off afterward.
- Credit card payments are easy to set up but expire faster than bank accounts.
International Transactions
More banks are starting to offer international ACH payments, but they are less common than international credit card payments.
Sometimes, banks that offer this service only offer it for payments between certain countries. This can present a limitation to MSPs with international clients.
Verdict:
- Despite their higher fees, credit cards or wire transfers might be the most practical route for cross-border transactions.
Customer Preferences
ACH payments may be preferable because of lower fees for clients making large or recurring payments.
ACH payments also suit MSPs with long-standing relationships with clients who use a recurring revenue model.
Some clients prefer credit cards because of their consumer protection laws and easy dispute resolution processes.
Credit cards can also be convenient for clients who make frequent payments of varying amounts.
Verdict:
- ACH payments and credit cards both have benefits and limitations and are tied in this category.
- Offering both of these options allows you to meet various customer preferences and serve a wider range of clients.
Regulatory Compliance
Credit cards and ACH payments both have regulatory compliance requirements to adhere to.
For ACH payments, you must follow certain Nacha rules that govern the ACH network in the US.
Payments using credit cards must follow several international regulations, such as PCI-DSS.
Verdict:
- Both payment methods are subject to their own regulatory compliance requirements.
- Violating Nacha’s operating rules or payment card data security rules can result in significant fines.
Suitability for Business Type
ACH payments are commonly used for recurring payments, which makes them especially suited for MSPs that offer monthly subscription services.
MSPs requiring same-day or next-day payment processing may prefer ACH payments as they can offer faster availability of funds.
On the other hand, credit card payments are common for one-time purchases.
If you choose a payment automation platform that offers flexible financing options, you can offer both of these payment methods depending on your clients’ needs.
For example, your clients might use ACH payments to pay for their monthly subscription services and credit card payments for one-time purchases of add-on services.
This allows you to have a versatile payment system that caters to your business's and customers' different needs.
Verdict:
- MSPs with recurring revenue models particularly benefit from the lower fees of ACH payments.
- Credit card fees are significantly more expensive, depleting your profits and cash flow.
With a comprehensive understanding of the benefits and drawbacks of ACH payments vs. credit cards, it is clear there are circumstances in which one option is more practical than the other.
However, these pros and cons will be of varying importance to your MSP clients. Some will prioritize credit card consumer protection over the cost savings of ACH payments.
If you can offer your clients numerous payment options, they can choose the best method for them.
This convenience helps you get paid faster and decreases the likelihood of failed transactions.
Conclusion: Choosing the Best Payment Method for Your MSP
In this detailed analysis of ACH vs. credit card payments, we reviewed their pros and cons.
The insights in this comparison will help you make more informed decisions about your MSP payment methods.
It’s important to assess what’s best for your business needs and clients’ preferences.
For instance, if your MSP relies heavily on recurring monthly or yearly payments, ACH might be your most economical and predictable payment plan.
MSP ACH Payment Case Study: Excellent Networks
Let’s take the example of a Texas-based MSP Excellent Networks.
When they turned to FlexPoint to streamline its payment platform and automate payment processing, they quickly realized that their clients prefer to use FlexPoint’s ACH and AutoPay options.
With clients switching to these payment methods, Excellent Networks saved more than $10,000 per year on credit card processing fees.
MSP Credit Card Payment Case Study: IT Vortex
IT Vortex, a NJ-based MSP, became increasingly frustrated with using PayPal for invoicing and turned to FlexPoint for a streamlined solution.
With PayPal, IT Vortex’s Bookkeeper and Office Manager had to spend an extra five hours a month manually attaching invoices, sending out links, and chasing down payments.
Their clients also had to leave IT Vortex’s site to pay on a different website. This forced them to pay their own processing fees because PayPal wouldn’t let IT Vortex absorb these costs upfront.
After switching to FlexPoint’s AutoPay functionality, IT Vortex now receives payments weeks faster than before.
Along with two to 30 times faster payment cycles, they saved 60 hours a year on manual invoicing and more than $15,000 monthly on invoices.
For both companies, utilizing MSP-specific payment software enhanced their ability to track and manage payments, reduce the risk of errors, and increase overall efficiency — whether they primarily used credit card payments or ACH.
FlexPoint helps you eliminate manual processes and make getting paid simpler than ever.
Enhance your MSP's payment processes with FlexPoint's advanced solutions.
With our expert guidance and support, discover the best payment method to suit your MSP needs.
Schedule a personalized demo to learn more about how we can help improve your financial operations.
Additional FAQs: ACH vs. Credit Card Payments
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