ACH and e-check validation and processing
Posted on May 30, 2008
E-checks and ACH debits are not direct alternative payment types to credit cards. This is primarily due to their respective validation and authorization capabilities.
With a credit card, a merchant can submit a request to the issuing financial institution and the approval or decline is returned in under 3 seconds. That 'authorization amount' is then guaranteed to the merchant for up to 30 days (depending on the institution and card type). With an e-check or ach debit, there is 'no real time validation' capability.
The closest thing to it is 'networks' owned by bank and company conglomerates that serve up a 'scoring' system based on shared data. They use this information to make their best prediction regarding whether an account is open or closed. If there is insufficient information to provide a score, that response is provided as well.
These networks typically cover a high percentage of financial institutions (~95%). The most important thing to note however is that no e-check or ACH validation service verifies sufficient or insufficient funds. Even if it could, an authorization request can't 'hold' or 'guarantee' the funds like a credit card transaction. These limitations are why e-check and ACH payment methods have not been as widely adopted as credit cards.
They are great payment types for 'trusted' payments such as recurring billing for gym membership and utilities, etc. but inadequate for ecommerce or other 'arms length' transactions. Realizing these short comings, the industry has been trying to get their foot in the door by coming up with a better solution. One such approach allows consumers to choose to pay via their online banking. When that option is selected, the merchant redirects the consumer to their own financial institution's website where they log in and complete the payment.
Thumbs up for the innovation, but as a consumer, I love my credit card and the convenience and protection it provides. It's certainly a hot topic right now and will be interesting to watch how this plays out.
