What’s the Difference Between ACH and EFT Payments?

Aug 22, 2022 by Izzy Howell

B2B payments, like so many other aspects of our everyday lives, have officially moved online.

However, just like with any other rapidly changing technology, there are a few common misconceptions — namely, that online money transfers are risky. The truth is, digital payments are more secure than ever before due to the ever-maturing tech landscape and the giant steps forward that are being made in cyber security. Today, online payments are actually far safer than offline payments because their underlying technology greatly reduces malicious actors and human errors by making it more difficult to commit fraud or make mistakes. They’re also much more efficient, which means they have significant benefits when it comes to helping your AR department: namely, they can greatly reduce DSO and make your revenue stream much more predictable.

In addition to electronic checks (eChecks), direct deposits, and wire transfers, two of the most well-known forms of digital payments are ACH and EFT. However, these payment methods are often confused with one another.

So, what is the difference between an ACH and an EFT payment, and how can understanding the difference impact your business?

What’s an EFT payment?

EFT stands for electronic fund transfer. Simply put, an EFT payment is an overarching term for all digital payments — essentially, it refers to the electronic transfer of money among banks, companies, and individuals. That can manifest in many ways, including peer-to-peer, eCheck, direct deposit, credit and debit card payments, and ATM transactions. In fact, any time you’re moving money from your checking account to your savings account, sending money to your friend via PayPal, or swiping your debit card at your local coffee shop, you’re using underlying EFT technology to make the digital payment possible.

How do EFT payments work, and how are EFT payments used?

There are two parties involved in an EFT payment: the sender of the payment and the receiver of the payment. However, these transfers can be processed without the direct involvement of bank employees because they are initiated solely through digital channels that are supported by algorithms.

To send funds via EFT, the payer must initiate the transfer through an internet payment terminal. Then, the payer’s bank sends a request to the payee’s bank, which will proceed to verify the account details and receive the payment.

EFT payments include but are not limited to the following:

  • ACH payments
  • ATM transactions
  • Credit and debit card transactions
  • eChecks
  • Direct deposit
  • Phone payments
  • Peer-to-peer payments
  • In-app purchases

What are the advantages of EFT payments?

EFT payments have many unique advantages:

  • Higher security: EFT payments are protected through the Electronic Fund Transfer ACT (EFTA), which gives users legal recourse regarding unauthorized transactions and lost or stolen debit cards. It also allows banks to set a withdrawal limit on debit cards to protect against fraud and entitles individuals to compensation if their banks violate EFTA guidelines.
  • Speedier transactions: Digital payments enabled by EFT technology are much faster than traditional payment methods like paper checks because they eliminate mail float – the time it takes for a check to travel from the payer to the receiver through the postal system.
  • Recurring payments: EFT payments can allow for autopay and automatic recurring payments, making it easy for both AP and AR teams to effortlessly send and receive money. For businesses that provide monthly services, automatic recurring payments can greatly reduce DSO and ensure continuous cash flow.
  • Increased flexibility: EFT technology makes it possible to do business anywhere, anytime. Individuals and companies can send payments remotely to payees who live all over the world.

What’s an ACH payment?

ACH stands for the Automated Clearing House – the official electronic network that enables EFT payments from one bank account to another and connects over 10,000 banks and other financial institutions in the US. Essentially, ACH is a form of EFT payment because it uses EFT technology to transfer funds between different bank accounts, but not all EFT payments are processed as ACH transactions. ACH payments are run by the National Automated Clearing House Association (NACHA) and include different payment categories such as direct deposits, peer-to-peer payments, bill payments initiated by e-commerce platforms, and ACH payments initiated by paper checks.

How do ACH payments work, and how are ACH payments used?

Like EFT payments, ACH payments eliminate the need for paper-based payment methods such as traditional checks. ACH payments fall under two different categories — direct payments and direct deposits — and are processed in batches by the Automated Clearing House. This can result in a delay when it comes to receiving the funds, and this is why it can take anywhere from 1 to 5 days to receive payment via ACH.

In order to send money via ACH, the payer must sign an agreement that authorizes the payee to withdraw funds against invoices from the payer’s account. This happens after payers make their routing and bank account numbers available to the payees.

The popularity of ACH payments has been rising steadily, and the ACH network saw 29.1 billion payments valued at $72.6 trillion in 2021. Today, ACH payments are used by many institutions, including the following:

  • Government entities, such as state departments and the IRS
  • Businesses who need to pay freelancers and employees
  • Businesses who need to pay other businesses for their services
  • Nonprofit organizations that need to pay their team members

What are the advantages of ACH payments?

ACH payments also have a set of advantages that are similar to those of EFT payments, plus other unique benefits:

  • Higher security: Similarly to EFT, ACH eliminates the need for paper processes, meaning they significantly reduce the potential for fraud and human errors. ACH payments are also never susceptible to getting lost in the mail.
  • Speedier transactions: The ACH system supports faster processing times than paper checks and helps businesses speed up their time to cash – something that helps businesses better regulate their cash flow and plan their operations more effectively.
  • Recurring payments: Just like EFT payments, ACH payments enable autopay and automatic recurring payments, which makes it easier for AR departments to collect money faster and maintain more control over their revenue.
  • Increased flexibility: Like EFT, ACH empowers companies to do their business from anywhere in the world and quickly pay contractors and B2B services – even if they aren’t local.
  • Lower costs: When businesses use ACH payments to pay contractors or other businesses, money is directly transferred from one bank account to another with a median internal cost of $0.29. In contrast, credit card networks often charge exorbitant fees that drain revenue and harm the bottom line of businesses everywhere.
  • Easy integrations: ACH is already integrated with most accounting software and can also easily be integrated with new payment platforms. ACH payments can allow businesses a chance to grow and scale without the limitations of manual processes.

What is the difference between EFT and ACH?

So, ACH or EFT? Remember, ACH payments are just a form of EFT payments, but EFT payments encompass a much wider umbrella of digital fund transfers. Both ACH and EFT are forms of digital payments, but ACH payments occur when funds are transferred from one bank account to another either as a direct payment or a direct deposit. Like ACH, EFT payments are much more cost-effective and speedier than manual processes. However, ACH payments usually take a few days, while EFT payments have a much wider range when it comes to processing time since there are so many different kinds of money transfers enabled by EFT technology.

Why should you use digital payment methods?

Digital payments help businesses collect their revenue more quickly and securely and can help AR departments avoid the punitive fees incurred by credit card networks (which can be as high as 3.5%). On top of that, manual processes like paper checks can greatly extend DSO and make business operations unpredictable.

ACH and EFT technology both enable faster alternatives for collecting revenue, and both help businesses keep up with the pace of our current culture. For companies to grow and scale effectively, digital alternatives provide a meaningful leg up.

The future of digital payments

The future of B2B payments is frictionless, cashless, and feeless, meaning your company gets its revenue faster without sacrificing its bottom line.

If you want to learn more about how Paystand is pioneering new B2B payment technology and making this a reality for businesses across the US and LATAM, you can request a demo with us here.