ACH (Automated Clearing House) payments are an electronic way to transfer funds between bank accounts. For businesses, they offer advantages over traditional paper checks, including faster processing, lower costs, and streamlined cash flow. Many companies use a Third-Party Payment Processor (TPPP) to handle ACH payments, but is it possible to accept them directly through your bank? More importantly, should you?
How to Accept ACH Payments Directly Through Your Bank
Overall, the process is pretty simple and takes just a few steps:
- Open a Business Bank Account: If you don’t have one, you’ll need to establish a business bank account to receive ACH payments. Limited-purpose accounts (LPAs) are a strategic way to mitigate security risks associated with ACH transactions, especially when you’re not using a Third-Party Payment Processor (TPPP). (more on this below)
- Gather Customer Information: You’ll need your customer’s bank routing number, account number, and the type of account (checking or savings).
- ACH Authorization Form: In some cases, you may need your customer to complete an ACH authorization form provided by your bank.
- Initiate the Payment: Your customer will need to initiate the payment from their own online banking portal or by speaking with their bank representative.
Benefits of Accepting ACH Payments Without a TPPP
- Lower Fees: By cutting out the third-party processor, you can potentially save money on processing fees.
- Potential for Faster Processing: Direct bank-to-bank transfers might result in faster processing times in some scenarios.
Risks of Accepting ACH Payments Without a TPPP
- Increased Administrative Burden: You’ll be responsible for managing the entire process, including obtaining customer information, tracking payments, and handling any disputes.
- Technical Setup: Depending on your bank, you may need some technical understanding to set up incoming ACH payments.
- Recommend Secure Communication Channels: Emphasize that you should only share your banking information through secure channels, such as a password-protected payment portal or a direct, encrypted line with the customer’s bank. There are also free services online such as 1ty.me that can allow you to securely send notes with sensitive information.
- Educate Customers: Ensure that customers know the importance of being vigilant about protecting their own bank account information as well. Phishing scams targeting ACH transfers are a real threat.Increased Security Concerns: You’ll be responsible for safeguarding sensitive banking information, including your routing number and account number. Sharing this information directly with customers increases the risk of fraud if their accounts are compromised.
Use An LPA:
Limited-purpose accounts (LPAs) are a strategic way to mitigate security risks associated with ACH transactions, especially when you’re not using a Third-Party Payment Processor (TPPP).
Here’s how LPAs work in the context of ACH payments:
- Designated for ACH: An LPA is a separate bank account established specifically for receiving ACH payments. It doesn’t function like your primary business checking account and may have limitations on features and functionalities.
- Reduced Exposure: By keeping your main business account separate from ACH activity, you minimize the potential damage if fraudulent activity were to occur through ACH transfers. Even if hackers gained access to your LPA login, they wouldn’t have direct access to your main business funds.
- Potential for Lower Fees: Some banks might offer reduced fees for ACH transactions processed through LPAs compared to your main account.
Here are some things to consider when using LPAs for ACH:
- Account Fees: LPAs may have different fee structures than your main business account. Compare fees associated with setting up, maintaining, and transacting through the LPA.
- Transferring Funds: You’ll need a plan for regularly transferring funds from the LPA to your main business account to avoid cash flow issues.
- Integration with Accounting: Ensure your accounting software can handle separate accounts to seamlessly integrate ACH transactions processed through the LPA.
Overall, using a limited-purpose account can be a security measure for businesses that accept ACH payments without a TPPP. It adds an extra layer of protection for your main business finances. However, it’s important to weigh the potential benefits against the additional management burden and potential fees involved.
When Does Bypassing a TPPP Make Sense?
Accepting ACH payments directly through your bank might make sense if:
- You have a low volume of ACH payments. The administrative burden might be worth it if you only handle a small number of payments.
- You deal with large transaction amounts. Saving on TPPP processing fees can be significant when dealing with large transactions.
- You have in-house technical expertise. This can help set up and manage the process without external support.
When Should You Use a TPPP?
For most businesses, a TPPP offers a more convenient and secure way to handle ACH payments. Consider a TPPP if:
- You process a high volume of ACH payments. TPPPs offer tools to streamline and automate recurring payments or larger batches.
- You prioritize customer convenience. TPPPs often provide seamless payment portals that customers find easy to use.
- Security & Compliance are Paramount. TPPPs will have strong security measures and help with compliance within the ACH network.
Key Takeaways
While accepting ACH payments directly through your bank is possible and generally secure, weigh the pros and cons carefully. If you prioritize cost savings and have the resources to manage the process, going without a TPPP might be viable. However, for most businesses, the convenience, security, and scalability offered by a TPPP make them a more practical choice.