By Eyal Feldman
Automated Clearing House (ACH) payments for accounts payable require an exhausting reconciliation process if not done directly through your bank. It’s such a nightmare that many accounts payable and accounts receivable departments prefer paper checks. But ACH isn’t the problem. The problem is how ACH is implemented by business-to-business (B2B) payment providers. ACH is a secure and reliable system that crushes credit card payments on fees and beats paper checks on costs.
The real problem is that, with ACH, B2B payment providers are incentivized to minimize their costs and maximize transaction fees, in part by making ACH reconciliation a headache. ACH payments don’t serve their business model. It’s that model, not ACH, that needs to evolve.
Why We Have ACH
Starting in the mid-19th century, U.S. bankers visited physical clearing houses daily to exchange checks drawn on other banks. The bankers balanced the books and then funded or drew from their settlement accounts. Although the clearing process became less manual over time, physical checks remained a major hurdle to greater efficiency and digitization.
So, bankers came up with ACH, a way to do electronic checking using only account and routing numbers. The National Automated Clearing House Association (NACHA), the nonprofit that runs ACH, was founded in 1974. It works like this: an originator (i.e., your business) pushes a payment to one of 32 NACHA member banks, which forwards the transaction to one of two ACH operators, which transmits this to a receiving NACHA bank, which credits the receiver (i.e., your vendor).
For banks, ACH payments are far less expensive to process than physical checks or credit cards, so they pass the savings on to their customers. Whereas a business might pay up to 4% on credit card transactions, the processing fee for ACH is a fixed amount, regardless of the transaction size, and ranges from a few cents to a dollar.
Not Enough Pie
With a 4% credit card fee, card networks, banks, device makers, and payment providers each take a slice of the pie. Hence, their issue with ACH: how do you make money on it?
The fees on ACH transactions are usually an insufficient source of revenue. The incentive for a B2B payment provider is to invest little in ACH workflows and push higher-fee payment methods instead. And the more difficult ACH reconciliation is, the more likely businesses are to accept an alternative (and expensive) payment option, such as virtual cards.
Why Reconciliation Is a Pain
Generally, accounts payable departments make ACH runs in batches. If the task is to pay 25 invoices, the payment provider debits one lump sum from the originator’s account. Then, it pays from that lump sum into 25 receiving accounts.
The batch method minimizes fees for the payment provider while making reconciliation a mess for both the originator and receiver. Although many enterprise resource planning and accounting systems do automatic reconciliation by uploading the customer’s bank statement. Having one lump sum for several payments in the bank statement makes this functionality useless and forces accounts payable departments to find new processes to reconcile.
Furthermore, the receivers get no help. They must apply the payment to the correct invoice, which is no easy task for accounts receivable departments. NACHA rules do enable originators to pass along 80 characters of payment-related information, but if the originator’s account is debited in a lump sum, that data is lost. If the receiver sold, say, $10,000 worth of goods and frequently generates invoices at that value, it’s hard for accounts receivable to match payments.
Responsibility on the Payment Provider
Why would payment providers solve this problem or innovate in ACH if their business model is to monetize each transaction? They’re better off creating friction in ACH and driving everyone to higher-fee credit cards, which are convenient to reconcile.
The solution is obvious yet hard to implement. Payment providers should debit the originating account and credit the receiving account on a one-to-one basis. Rather than attempt to make their money on a commoditized transaction – or drive users to virtual cards – the payment provider should create value beyond merely enabling the transaction. They should earn their revenue through intelligent automation, workflows, and data, not by skimming off every transaction.
It’s time for payment providers to simplify ACH reconciliation and earn their revenue through real value creation. The conflict of interest between payment providers and their customers has hindered the success of ACH for far too long.
Eyal Feldman is founder and CEO of Stampli in Mountain View, Cal. He can be reached at firstname.lastname@example.org.
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