ACH vs Alternatives: The Best Way to Process Loan Payments
Brian Allen
Oct 2, 2024
9 mins read
One of the biggest challenges in loan servicing is choosing the most effective method of collecting payments. The way you accept payments isn’t just about convenience though. It’s about minimizing costs, enhancing security, and maintaining steady cash flow.
But with so many options available today, what’s the best one for you? More importantly, why do lenders swear by the ACH payment method? That’s exactly what I have explained in this blog.
I’ll guide you through a comparison of ACH payments with other payment methods such as wire transfers, hosted payment gateways, debit cards and credit cards. I will highlight:
Let’s begin!
Now, let’s understand each type of payment option along with their advantages and disadvantages. This will help you gauge why ACH payments are considered a more reliable option than any other form of payment.
ACH (Automated Clearing House) payments are electronic payments that transfer money directly between banks through the ACH network. This system is overseen by NACHA (National Automated Clearing House Association) in the United States. It is governed by the Federal Reserve and is considered one of the safest payment options available.
ACH payments work in two ways:
| Advantages | Disadvantages |
|---|---|
| Cost Effective: Save on transaction costs. ACH payments offer one of the lowest processing fees compared to other payment methods. | Amount Limitations: ACH transfers may have transaction limits and/or monthly or weekly limits. |
| Superior Security: ACH transactions are highly secure, with strong encryption and fraud protection measures in place. This reduces the risk of unauthorized transactions. | Limited International Transactions: ACH is primarily a U.S.-based payment system. International payments with ACH may require additional steps to be taken. |
| Low Transaction Cost: ACH payments have minimal per-transaction fees. This makes them an economical choice for both large and small loan payments. | Reversibility: Borrowers can reverse the ACH payments within a certain timeframe. This can lead to issues if the funds are already disbursed. |
| High Convenience: ACH payments get deposited directly, offering more convenience than checks or wire transfers. | Daily Cut Off Times: ACH transactions are subject to daily cut-off times, which can delay payment processing if not initiated within the specified window. |
| Recurring Payment: ACH is ideal for setting up recurring payments. It ensures that loan repayments are made on time without borrower involvement. | Lack of Rewards or Discounts: Unlike credit cards, ACH payments do not offer rewards or discounts, which may be less appealing to some borrowers. |
Wire transfers are electronic transfers of funds between banks or financial institutions. They are typically used for large, one-time transactions. Wire transfers are known for their speed and ability to easily transfer money internationally. They are a common choice for significant loan payments or real estate transactions, especially with large banks and lending institutions.
There are two types of wire transfers:
Advantages & Disadvantages of Wire Transfers
| Advantages | Disadvantages |
|---|---|
| Ideal for Cross Border Transactions: They are widely accepted internationally, making them an excellent option for cross-border payments. The currency conversion is handled by banks. | High Fee: Wire transfers can be expensive. Fees range from $15 to $50 per transaction. This makes them more expensive for frequent payments. |
| Fast Settlement: Domestic transfers are typically settled within 2 working days. This is crucial for time-sensitive transactions. | Not Preferable for Small Loan Payments: The high fees associated with wire transfers make them impractical for smaller loan payments, where the cost may outweigh the benefit. |
| Secure: Compared to checks, wire transfers are safe. The networks facilitating these transactions employ encryption and the highest security standards. | Limited Accessibility: Setting up wire transfer networks is a hassle. They also require the borrower to visit a bank or use specialized online banking services, which can be inconvenient. |
| Payment Doesn’t Bounce: Since funds are verified before the transfer is completed, there is no risk of the payment bouncing due to insufficient funds. | Cannot be Canceled or Reversed: Once a wire transfer is initiated and processed, it cannot be canceled or reversed. This leaves no recourse for correcting errors or disputes. |
Hosted payment gateways are third-party services that enable lenders to accept online payments via their website. These gateways securely handle the payment process, transferring funds from the borrower’s bank or card account to the lender’s account.
The most popular payment gateways include:
Advantages & Disadvantages of Hosted Payment Gateways
| Advantages | Disadvantages |
|---|---|
| Convenience: Hosted payment gateways allow borrowers to make payments online at any time. This provides flexibility and ease of use. | Setup and Maintenance Costs: Implementing a hosted payment gateway can involve setup fees, ongoing maintenance costs, and transaction fees. This makes this option more expensive to lenders. |
| Immediate Payment Confirmation: Payments made through these gateways are processed instantly. So, lenders can receive funds without any delays. | Reliance on Third Parties: Since the payment process is handled by a third-party provider, lenders have less control. They also can be dependent on the gateway’s uptime and performance. |
| Customizable: Many payment gateways offer customizable options, allowing lenders to tailor the payment process to meet their specific needs. | Security Risks: Lenders have to rely on the provider to ensure security of their transactions. Unless robust security measures are applied, the risk of breaches lingers. |
Although credit card payments are one of the most convenient payment methods for borrowers, lenders typically refrain from offering this option. Some lenders may allow a one-time payment with a credit card, but that’s rare. This type of payment can be called ‘paying off a debt with a debt’.
Advantages & Disadvantages of Credit Card Payments
| Advantages | Disadvantages |
|---|---|
| Increased Payment Flexibility: Credit card payments can enhance borrower satisfaction by providing more flexible payment options, potentially leading to improved customer retention and loyalty. | High Processing Fees: Credit card payments typically incur processing fees of 2-3% per transaction, which can be costly for lenders, especially on large loan payments. |
| Higher Collection Rates: Credit card payments can help reduce delinquencies by offering borrowers an alternative method to make payments, especially in cases where they might not have sufficient funds in their bank accounts. | Chargebacks: Credit card payments are subject to chargebacks, where borrowers can dispute a transaction and potentially reverse the payment, leading to revenue loss for lenders. |
| Immediate Payments: Credit card transactions are processed almost instantly, allowing lenders to receive funds more quickly compared to some other payment methods, such as checks or ACH transfers. | Losing Merchant ID: If a lender experiences a high rate of chargebacks, it can trigger scrutiny from the payment processor. This can then lead to them losing their ability to process credit card payments if their Merchant Identification Number (MID) is revoked. |
Debit card payments function similarly to credit card payments but are directly linked to the borrower’s bank account. When a borrower makes a payment using a debit card, the funds are immediately withdrawn from their bank account and transferred to the lender’s account.
This is another popular method that lenders use to ensure loan payments are directly deposited in their accounts.
Advantages & Disadvantages of Debit Card Payments
| Advantages | Disadvantages |
|---|---|
| Immediate Fund Transfer: Debit card payments are processed almost instantly, allowing lenders to receive funds quickly. This can improve cash flow and reduce the risk of late payments. | Potential for Insufficient Funds: If a borrower does not have sufficient funds in their account, the debit card payment may be declined. This could lead to missed payments or additional administrative work to resolve the issue. |
| Reduced Risk of Chargebacks: While debit cards can still be subject to chargebacks, the risk is generally lower than with credit cards. This is because debit card payments are often tied directly to available funds in the borrower’s account, reducing the likelihood of disputes. | Limited Availability for Recurring Payments: Some borrowers prefer not to use their debit card for recurring payments due to concerns about insufficient funds or the impact on their cash flow. This could reduce the adoption rate of debit card payments for loans. |
| Reduced Delinquency: Debit card payments provide a convenient payment method for borrowers, increasing the likelihood of on-time payments and reducing the chances of delinquency. | Transaction Limit: Many debit cards have daily transaction limits set by banks, which could be problematic for larger loan payments. This may require borrowers to make multiple payments or use other methods, complicating the repayment process. |
| Enhanced Security: Debit card transactions are often secured by PIN codes and two-factor authentication. This reduces the risk of fraud compared to other payment methods like checks. | No Cashback or Rewards: Unlike credit cards, debit card payments don’t provide any reward or cashback. This can seem like a less viable option for some borrowers. |
While other payment options like credit cards, wire transfers, debit cards and third-party hosted payment gateways have their advantages, ACH rises a notch above them.
ACH payments offer a balanced combination of cost-effectiveness, security, and convenience. For lenders, ACH reduces transaction fees, enhances security, and provides a reliable way to manage recurring payments. For borrowers, ACH offers a hassle-free, automated payment experience that minimizes the risk of missed payments.
Bryt Software’s ACH Payment Solution
Bryt’s ACH Payment Module eliminates the need for paper checks, streamlining your payment processing with ease. With this solution, you can effortlessly track payment statuses and access your funds quickly, all while keeping costs in check.
With Bryt, you can set up:
With Bryt Software, you can facilitate secure, automated payment processing. This improves accuracy and enhances the overall borrower experience.
That said, evaluate your borrowers’ needs before you choose one option. Ensure you are providing them with more than one option if needed and be ready to tweak the strategy whenever needed.
The right repayment option is one that offers a blend of convenience, cost-effectiveness, security, and reliability.
Whether you opt for ACH payments, credit cards, or a combination of methods, the goal is to provide a seamless and satisfying repayment experience. This way, you can foster long-term relationships with your borrowers and improve portfolio performance.
