US Payments Are Broken — Here’s Why

Ria Golovakova
January 12, 2021
Read time:
4 min

As a business, you have a few options to receive payments electronically from customers, but they all come with trade-offs. Surprisingly, in 2021 businesses still face the choice between either speed or cost. There isn’t a single available payment option that’s both cheap and fast.

If you want fast transfers, you have two choices: cards or wire transfers. Credit and debit cards are the most widely used form of payment. But there is a catch — anytime a customer swipes their card, merchants incur several fees for the transaction. These fees include a processing fee charged by the payment processor such as Stripe, a card scheme fee charged by Visa, MasterCard, or AmEx, and an interchange fee charged by the customer’s bank. Altogether, these fees can average from 1.7–3.5% of each transaction your customers make online or in a store. For many retailers, these fees can eat up a significant portion of already thin margins.

Wire transfers are a type of bank transfer, moving money between two bank accounts directly, instead of between cards connected to those accounts. Wire transfers are real-time and typically processed the same day. However, they require bank employees to input the information manually, and so they can be quite expensive, costing up to $60 a transaction. Unless you sell luxury goods or real estate, you probably cannot ask your customers to pay such extravagant fees.

If you wish to preserve your margins, you can sacrifice speed. This allows you to use checks or the ACH network. Checks, whether mailed-in or e-checks, are appealing because they are free and a familiar payment method for most of your customers. However, checks can get lost in the mail, and e-checks, while faster, still take multiple days to process.

Your last option is to use the ACH network, which operates e-checks as well. ACH (Automated Clearing House) is a batch processing system set up within the United States that banks can use to aggregate and automatically process transactions. It is secure and fully electronic. Its rules and regulations are standardized across the country and overseen by Nacha, an organization formed specifically to administer the ACH Network. ACH payments have been available online since 2001.

There are two types of ACH payments: ACH Pull and ACH Push. In ACH Pull, also known as ACH Debit, your customer provides you with their account and routing numbers and authorizes you to pull the appropriate amount of money from their account, but ultimately you initiate the transaction. On the other hand, in ACH Push, also known as ACH Credit, your customer initiates the transaction themselves by pushing the money out of their account into yours.

In both cases, the process is as follows:

  1. A bank originates the transaction. This bank is called an ODFI (Originating Depository Financial Institution). Banks send ACH entries in batches, on some predetermined schedule.
  2. An ACH operator (The Federal Reserve or The Clearing House) sorts the entries into deposits and payments.
  3. Once the entries are sorted, the ACH operator sends the relevant entries to the RDFI (Receiving Depository Financial Institution).
  4. The RDFI receives the entries and debits or credits its customers accordingly.
  5. Money is settled between the banks at the end of the day.

ACH payments typically take 2–3 business days to be cleared because they are typically processed in batches. Additionally, ACH Pull payments are risky because they can bounce just like paper checks if your customer withdraws too much money and forgets to maintain the necessary balance to clear your promised transaction. These risks don’t exist with ACH Push because the transfer is initiated by the sender, which makes it potentially the best payment option.

However, there are still issues even with ACH Push because many top US banks impose limits on them. Even though the network allows free transfers of up to $100,000, many banks limit the amount of ACH withdrawals a month or require their customers to link accounts and restrict the number of links to those external accounts. Some banks only allow transfers to checking accounts, while others may prevent your customers from sending you money at all by only enabling ACH Push transfers to external banks if the customer owns both accounts. These restrictions with ACH Push transfers from consumers to merchants only exist in the United States of America, every other country in the world facilitates this movement without any issues.

We at Dapi understand how tough navigating the payment landscape can be. We are working tirelessly to help fix the broken payments system and give businesses a real solution. A payment solution that preserves your margins and provides a convenient payment route to your customers so that they will want to come back to you again and again.

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Written by:
Ria Golovakova