As a corporate treasurer, you understand that payments are the lifeblood of any business. With so many payment options available today – from ACH to real-time payments – it can be hard to decide which is best for your company. The stakes are high, and the decision should be informed by cost, reliability, and the needs of the particular payment at hand. In this blog post, we’ll explore both ACH and real time payments (RTP) so that you can make an informed decision about the right fit for your organization’s payment needs. Dive in if you’re ready to understand how to choose between two powerful payment methods.
The history of ACH
The technology behind Automated Clearing House (ACH) payments has been around since the late 1960s-mid 1970s but it wasn’t until the late 1990s and early 2000s that ACH became the norm for payroll, and banks began to offer consumers the ability to initiate ACH payments via phone banks or online bank portals.
In the 20+ years they’ve been around, ACH payments have become the gold standard for making payments reliably, and at low cost. This mass adoption is well deserved. ACH is faster, more secure, and easier to issue and track than its predecessor…the check.
As ACH adoption increased, countless organizations evaluated ACH as replacements for paper checks. In most cases, advancing to ACH was a no-brainer and the switch was made. Whether you are a large manufacturer paying your vendors for components or HR just looking to pay employees, ACH or ACH equivalents worldwide are now used for most business payments.
Fast forward to today. Similar conversations are being had surrounding Real-Time Payments vs. ACH payments. Just like the previous bout between ACH and checks, adoption will never be universal, but the analysis needs to be done to see whether ACH payment rails are still the undisputed champion for mass, low-cost payments.
Real-Time Payment: Definition and Basics
Send money with a few clicks? That’s the promise of real-time payments and RTP networks, an increasingly popular service allowing consumers and businesses to securely transfer funds instantly between their bank accounts. These payment channels are most frequently seen country by country due to local currency requirements – with some exceptions.
Examples of Real-Time Payment Networks
Some examples of real-time payment networks available today include:
- Europe’s SEPA Instant
- UK Faster Payments
- UPI in India
- Brazil’s PIX
- PayNow in Singapore
- Thailand’s PromptPay
- FedNow in the US – expected to launch in 2023
Similarities between ACH and RTP
ACH and RTP are both payment methods targeted at delivering efficient payments for domestic or regional (e.g. SEPA) payments facilitated in most cases by government sponsored organizations to facilitate movement of money. ACH payments have expanded to offer, in some limited circumstances, cross-border settlement which currently is being explored for RTP; but both focus primarily on domestic settlement and do so in an efficient manner.
Created to facilitate bulk payments, ACH payments have limits of one million USD. Similar limits exist for some RTP networks.
Until 2022, the global adoption of RTP among large multinational corporates was hampered by the ceilings imposed by RTP networks. Most large multinational corporations have bulk “low-value” payments that exceeded the previous US limit of $100,000, leaving RTP as a payment channel to be used primarily by consumers.
While this limitation still exists in some areas like in Europe where SEPA Instant limits remain at 100,000 Euros, fortunately, in the US and many other countries globally, these limits have increased and now match their ACH counterparts.
For many organizations already accustomed to the turnaround time needed for ACH payments, speed will not be the deciding factor for which payment channel to use. The more likely decision-maker is cost. Compared to wire payments and checks, ACH and RTP are both significantly more cost effective.
ACH averages between 26 and 50 cents per transaction, depending on the business, with an average of 25 cents being attributable to external parties like the bank and the payment network. RTP leverages newer technology and can offer slightly lower external costs averaging 16 cents and the same should apply to internal costs when you consider the additional capabilities below.
For this reason, RTP adoption is expected to increase dramatically, perhaps surpassing ACH as the go-to option for settling mass payments in the years to come.
Differences between ACH and RTP
We’ve discussed that speed isn’t the primary requirement for bulk settlements. But, it remains a key factor. There are always a handful of accounts payable transactions that require immediate processing for shipments to be processed or credit to be released. ACH payments can now be processed and delivered same-day, but they are by no means immediate.
ACH Payments are processed in batches. A payment is first sent to the ACH network and then relayed to your bank. But because ACH payments are processed in batches, there’s a delay. Money is only credited to the counterparty when the full batch of payments has been processed. This hold-up can result in a delayed shipment or impede an order.
With RTP, delivered via API to the bank, settlement occurs nearly instantly. The recipient can confirm receipt of funds within minutes, eliminating the core business to operate without limitations imposed by the method of payment.
ACH payments have become a trusted payment method for making high volume payments at scale using a network. In the majority of cases, a recurring vendor that was paid successfully last month will generally be successfully paid the next time using the same instructions.
However, ACH payments do not provide confirmation from the bank when an ACH payment is successfully received. Especially for payments to a new payee or new bank account, this poses a true risk to finance teams. Plus, there are high internal costs to chasing down ACH failures and addressing ACH returns for several days after transmission.
RTP networks support immediate payment certainty. Within seconds to a few minutes of sending, instant payments made via bank API deliver immediate confirmation from the payer bank that the payment was sent successfully. Within seconds to a few minutes, confirmation of receipt from the payee’s bank is received.
This advancement in technology means:
- Immediate and maximum confidence in the success (or failure) of a payment. Whether it is sent successfully or fails, treasury, HR and accounts payable teams know for certain within seconds or minutes. RTPs deliver the payment status information that these teams have been clamoring for. Some finance teams are even employing the use of push notifications via webhooks to further automate their processes.
- Opt to transmit a proof of receipt so the beneficiary knows immediately when the funds have been successfully deposited into their bank account
- Shipments and credit can be release in a more-timely manner
- Employees have earlier access to funds in their accounts, benefitting the organization and its employees in countless ways
Note: Today, proof of payment is the standard. With the advent of RTP and bank APIs, we can expect to see the standard shift to proof of receipt. Just as we no longer accept “The check is in the mail,” no longer will it be acceptable to simply show that the payment has left the payer’s bank account. Instead, proof that it has successfully arrived to the payee’s bank account will become the norm.
New forms of payments bring enhanced security measures because they address known shortcomings of legacy payment methods.
ACH payments leverage file-based communication to instruct money movement. Files are written to disk typically unencrypted, even for a moment, and a subsequent process then encrypts and moves the file. Because these are two separate actions, it leaves ACH payments vulnerable to internal and external fraud.
RTPs do not use file-based communication. Instead, they use APIs. That momentary point of risk in file-based communication, where a foreign file can be inserted into the process, or be manipulated, no longer exists with APIs.
Messages, not files, with nothing ever written to disk, plus end-to-end encryption, offer next-level security. Bank APIs enable on-demand and real-time payment initiation, end-to-end payment tracking, and ultimately confirmation of funds being delivered. Because RTPs use no files, it eliminates the risk inherent with ACH and file-based communication.
How to Choose between RTP and ACH
The criteria above can be used when evaluating what communication makes sense for your organization for a particular country. Some countries and regions are more prepared for a changing of the guard with utilization moving to RTP for more secure, more timely, and in many cases less expensive bulk payments.
For those looking at bulk payment setup for the first time, it is almost a no-brainer to onboard RTP because the benefits clearly outweigh the disadvantages. For those with functioning ACH connectivity, it comes down to when the differences above provide sufficient value to invest in making the switch.
Value today doesn’t consider continuous improvement occurring with RTP, including opening doors to real-time cross border settlement being enabled by banks for internal settlement (intercompany) leveraging blockchain technology across regions; or across RTP networks, where alliances are being created between countries enabling networks to work together – enabling a network of networks for Real-Time cross border settlement.
These improvements, along with many others that are being worked on behind the scenes, will continue to give corporates new opportunities to improve business processes and open new doors.