High-Risk ACH Processing: How ACH Works for High-Risk Businesses

When you are considered a high-risk merchant, you have to deal with the constant threat of account terminations, holds, and card declines. Because of this, many high-risk merchants turn to Automated Clearing House (ACH) processing as a backup payment method.

Instead of relying on cards, ACH uses a customer’s bank account to complete the payment. By using an entirely different payment network, merchants can avoid chargebacks and enjoy lower processing fees. 

However, high-risk ACH processing isn’t for every business model or customer type. To learn more about when this payment method works best, read on.

TL;DR

• When you use ACH payment processing, the payment is pulled directly from the bank account instead of getting processed through a card network.
• This type of approach helps merchants avoid account shutdowns, card declines, and card restrictions.
• Because the ACH network uses return codes instead of chargebacks, merchants can avoid chargeback risks. ACH returns are also less frequent than credit card chargebacks.
• ACH involves lower fees, making it ideal for large-ticket purchases.
• Merchants can also use ACH payment processing for subscriptions, installment plans, and other types of recurring billing.
• ACH payments settle in batches, so they generally take longer to settle. The settlement timeline for standard ACH is one to three days.
• While ACH is not an ideal method to use alone, it is an excellent backup or complementary payment method for high-risk merchants.

Through ACH, businesses can adopt a multi-rail payment strategy and achieve a more stable flow of revenue.

How High-Risk ACH Processing Works

With card payments, processing rules are set and enforced by major card brands, like Visa and Mastercard. Often, traditional payment processors don’t want to work with high-risk businesses because of the chargeback and fraud exposure involved. 

For these merchants, high-risk ACH processing offers an important alternative. ACH is a system where companies transfer funds electronically between different financial institutions. It involves sending money directly from one bank account to another.

In practice, using high-risk ACH payment processing involves a few steps.

1. The merchant applies with a high-risk ACH provider.
2. The ACH provider approves the merchant’s account. Once the account is set up, the merchant can process transactions.
3. Before the transaction occurs, the customer authorizes the debit. This can be done through online checkout, verbal authorization, or a signed authorization form.
4. Once the merchant submits the request, it is processed by the payment processor and then sent through the ACH network to the receiving bank.
5. The funds are pulled from the customer’s account. For standard ACH, the funds will arrive in about one to three days.

Why Merchants Use ACH as an Alternative to Card Processing

In high-risk industries, merchants may struggle to get their accounts approved. Holds are more common because of the fraud, return, and chargeback risks involved. Because of the many challenges involved, some high-risk merchants turn to ACH payments to complement their existing payment setup.

ACH bypasses the card networks, allowing companies to access an alternative if their account is shut down or a payment is declined. By implementing ACH payments alongside cards, merchants can enjoy a few key advantages.

• Lower Processing Costs: One key advantage of using ACH is that it tends to cost much less than card payments. Because of this, it is effective for merchants that have a high monthly volume of transactions or high-value purchases.
• More Predictable Payment Collection: When you use ACH, you can enjoy higher approval rates because there are no card-related declines. There is also significantly less variability in approval behavior.
• Limited Chargeback Exposure: Unlike traditional card networks, ACH doesn’t involve chargebacks. Instead, ACH relies on return codes and returns, which are less frequent and involve different dispute rules. As a result, merchants can enjoy having fewer penalties and less volatility. 
• Improved Customer Lifetime Value (LTV): By reducing the cost of each transaction and preventing payment interruptions, you can increase your average LTV.
• Better Control Over Billing: Bank accounts don’t expire, which makes them a great option for installment and subscription payments. ACH gives you more control over when and how payments are initiated.
• Enhanced Revenue Recovery: Card payments can fail. ACH payments are a useful part of a company’s revenue recovery plan.
• More Payment Plan Flexibility: Instead of simply swiping a card and accepting a payment at the point of sale, you can use ACH to set up payment plans and recurring subscriptions. Through billing subscriptions, you can increase your ongoing revenue stream and give customers more pricing flexibility for large transactions.

When High-Risk Merchants Use ACH Instead of Cards

Whether you’re concerned about fraud rates or simply want to get a backup payment option, high-risk ACH processing can help. There are a few common scenarios where merchants are more likely to use ACH instead of cards.

Reason	Benefits of Using ACH	Trade-Offs Involved in Using ACH
Addressing High Chargeback Rates	ACH is known for having fewer chargebacks and uses a different dispute process than card payments.	ACH returns can still happen. When returns do occur, they can be harder to dispute.
Processing U.S. Bank Payments as an Alternative to Cards	ACH gives merchants a lower-cost way to accept U.S. bank-account payments and reduce reliance on card networks.	ACH is mainly for U.S. bank payments, so it is not a direct replacement for international card processing.
Reducing High Decline Rates	Merchants can use ACH to lower the impact of card declines and boost their approval rates.	If there are insufficient funds in the account, failed payments can still happen.
Handling Subscription Payments	ACH is great for subscriptions. Unlike card payments, merchants don’t have to worry about expired or canceled cards.	When using ACH, merchants have additional customer authorization requirements to comply with.
Processing B2B and Invoice Payments Affordably	For large invoices and B2B payments, ACH can be used for a fraction of what card payments cost.	Merchants may have to manually reconcile payments. ACH also takes longer to process than card payments.
Reducing Transaction Costs for High-Value Transactions	ACH offers lower fees for high-value transactions. Chargebacks are less likely as well.	Because settlement can take longer, the delay can impact cash flow.
Gaining a Backup Payment Option	If the customer’s regular payment card is declined or expired, ACH can be used as a backup option.	Backups are good for cash flow, but they may introduce additional operational complexity when it comes to handling customer authorizations and compliance requirements.

What To Expect When You Adopt ACH Payments

When you use high-risk ACH payment processing, there are a few key differences you should expect. As a different payment rail, it has its own underwriting expectations, compliance rules, and settlement timing. Merchants are expected to obtain customer authorization before debiting bank accounts. You’ll also likely have to handle more backend processes, such as verification, reconciliation, and retries.

Underwriting Expectations

ACH underwriting can feel demanding for high-risk merchants. Providers must determine if they are willing to support your company’s risk level. To do so, they will review your historical processing data, business model, industry, billing structure, and average transaction. The provider will also check your website to see your refund policy, disclosures, and other compliance data.

Even if your account is approved, you’ll often face volume or ticket limits. The ACH provider may also require rolling reserves to offset any losses. After your approval process is complete, your account will continue to be monitored for its ongoing performance and return rates.

Fraud and Return Risks

Although ACH payments don’t involve traditional chargebacks, fraudulent transactions and returns are still possible. With ACH, customers can dispute debits. As a merchant, you may also deal with closed accounts, insufficient funds (NSF), and unauthorized debits. Because customers often have extended timeframes for disputing transactions, unauthorized debit claims carry an added risk. If you exceed your return threshold, it can lead to extra restrictions, financial penalties, or account termination.

Settlement Timing 

Unlike credit cards, ACH uses a batch processing system. You can expect standard ACH to take about one to three business days to process. Meanwhile, same-day ACH can take the same or next business day to process.

However, these settlement timelines are for average merchants. With high-risk ACH payment processing, there are often more risk reviews and reserve requirements. Because of this, settlement can take longer in some instances.

Account Stability

While ACH processing may take more time, high-risk merchants use it because of its better stability. Credit card networks are often volatile because of unexpected account shutdowns, changing chargeback thresholds, and sudden declines. ACH doesn’t follow the card network rules, so providers are often more flexible. 
Many businesses use ACH processing as a backup rail to ensure stable revenue if their card processing is disrupted. However, some merchants use ACH as a primary method, especially if they operate a subscription business or collect high-value transactions.

What Types of Businesses Benefit Most From ACH Payments? 

While ACH is an effective tool, it isn’t the best payment method for every business. For example, a local coffeeshop will rely on card payments and mobile wallets for day-to-day transactions. However, certain business models can benefit from using ACH as a part of their payment ecosystem.

Companies That Regularly Have Large-Ticket Payments

Large-ticket payments can be expensive if a customer files a chargeback dispute. Percentage-based card network fees can also add up significantly. By using ACH payments, companies that rely on large-ticket payments can reduce their transaction costs, decrease transaction friction, and lower chargeback risks. 

Many customers use installment payments to pay for large transactions. Through ACH, you can easily facilitate payment plans at a low cost.

Businesses That Have Card-Averse Customers

Some customers dislike using cards because of security concerns, personal preferences, or issues getting approved for a card. ACH allows you to reach these clients and capture revenue that would have been lost.

Firms That Rely on Recurring Billing

While a credit card eventually expires, bank accounts don’t. If you use ACH for recurring billing, subscriptions, and memberships, you can avoid card declines and ensure a consistent stream of revenue.

How PayCompass Helps High-Risk Merchants Incorporate ACH Payment Processing

PayCompass can help businesses understand high-risk ACH processing. Whether you want help incorporating wire payments, need a payment gateway set up, or are looking for chargeback prevention tools, we offer the support you need.

Our team starts by identifying the areas where ACH payments can have the largest impact, such as with your high-value purchases and subscription payments. Then, we can assist you in implementing ACH processing alongside your traditional payment processing systems. Our payment processing experts can help high-risk merchants navigate complex underwriting requirements to apply for and set up their merchant accounts.

Through ACH payment processing, merchants can achieve a more stable, flexible payment setup. Our team can help you reduce your reliance on a single payment method and achieve a more consistent revenue stream.

Final Thoughts

For the average business, high-risk ACH processing isn’t going to be the only payment method available. Instead, most merchants use ACH for specific purchase types. Whether you want to use ACH as a complement or an alternative to your standard payment setup, ACH offers a number of important benefits. More consistent revenue, fewer chargebacks, lower fees, and more stable subscription payments are just a few of the advantages involved in using this payment option.

Through ACH, merchants can strengthen their overall payment strategy. To learn more about how this approach can help, reach out to PayCompass today.