Cash flow is the lifeblood of any business. The more delays there are in the process of receiving cash or paying it out, the less room there is to maneuver clever cash management strategies. Choosing the right method for business to business payments ensures your capital is working for you and not stuck in cash purgatory between transactions.
Why your corporate payment method matters
Open banking has made cash management and cash transparency simpler, and enabled powerful tools to automate processes which have been laborious and slow for decades.
Payments are no exception, and operating in modern ways to make payments simpler and easier to track. This frees up your team to spend time on more impactful work.
The most efficient payment form for a finance team who leverages open banking and API payment processing to the fullest is Real-Time Payments (RTP). Imagine instead of having your cash tied up for 2-3 days while payments are processed and settled, you can use that cash right up until the moment you need to hand it over to someone else.
How much interest could your company earn with a payroll-sized amount of cash for two days? What if you invested it?
Four primary business payment options
| Method | Speed | Range | Reversibility |
| ACH | 2-3 days | Domestic only (US) | Reversible |
| Wire Transfers | 1-3 days | Anywhere in the world | Irreversible |
| Book Transfers | Instantaneous | Only within a single institution | Reversible |
| Real-time Payments (RTP, API banking) | Almost instantaneous | Limited to qualified banks | Irreversible |
ACH Payments
Automated clearing house (ACH) is a type of electronic funds transfer. Created to reduce the number of paper checks used, the ACH network covers more than 10,000 financial institutions across the United States.
For businesses, ACH is the best option to dispense mass payments such as payroll thanks to its low fees. ACH payments can also be reversed in case of error (unlike Wire transfers).
ACH payments come in two types: ACH credit and ACH debit.
- ACH credit transactions are initiated by the payer – also known as “push payments,” they deliver funds from one bank account to another. Sometimes the ACH system as a whole is referred to as “direct deposit,” but it’s really the credit side of ACH.
- ACH debit works the opposite way, by requesting funds from a separate account – that’s why they’re known as “pull payments.” ACH debit is often used for recurring payments like autopay phone bills.
The two main drawbacks of ACH are:
- Slow payments, requiring 2–3 days to process
- Can only be used domestically
How ACH Works
An ACH transaction begins when the requester sends the details to their bank. Several times each day, a bundle of ACH requests is sent from the bank, called the originating depository financial institution (ODFI), to the clearinghouse. After 2–3 days, the request is processed through the central clearinghouse and the appropriate amounts debited to each account.
Wire Transfer Payments
Along with ACH, wire transfers are the other main type of electronic funds transfer. Unlike ACH, wire transfers send money right from bank to bank without going through a clearinghouse. This means they’re a lot faster – you can expect funds to arrive within a day, even as little as a few hours.
However, you pay for this expediency in the form of higher fees. Sometimes, the entity receiving your payment will also pay a fee. Because of these fees, wire transfers are a poor option if you need to send a high volume of payments. They’re best for large, infrequent payments.
In contrast to ACH, wire transfers can be sent internationally and converted to foreign currencies. So, if a manufacturer is sending a large sum of money to an international supplier, a wire transfer is the optimal approach.
One drawback of wire transfers is that they’re impossible to reverse. Be sure all information is entered correctly when making a wire transfer!
How Wire Transfers Work
Wire transfers work by communicating information including the recipient’s name and bank details. To ensure things go quickly, banks will take some of their own funds to deposit into a receiving account (they’re reimbursed by the originating bank behind the scenes).
Book Transfers
Book transfers are transfers made from one account to another in the same institution. So, if you’re sending funds from one J.P. Morgan account to another J.P. Morgan account, you’re using a book transfer. These transactions are useful since they’re free and instantaneous.
Real-Time Payments
Real-time payments (RTP) is a new payment option introduced by The Clearing House in 2017. With RTP, payments are made near instantaneously 365 days a year, even after business hours.
With RTP, you’re getting the perks of wire transfers without any of the drawbacks — fees are almost non-existent.
But there’s a catch! Only banks with 75% of checking accounts can use the RTP network. To guarantee instant transfers, banks using RTP are required to keep a certain amount of liquidity with the Federal Reserve.
All this means third-party payment rails can’t use RTP! The ability to access RTP payment rails is one of the major perks enabled by how Trovata works with banks instead of going around them.
How RTP Works
An RTP transaction begins when a sender’s bank transmits payment info to the network. The network will check the liquidity of the initiating bank before delivering funds to the recipient.
What distinguishes RTP from other payment methods is its reliance on banking APIs. With these APIs, RTP uses two-way communication between payer and payee.
With other payment methods, payment details would only flow one way: from payer to payee, guaranteeing lag times as communication often takes place outside of the payment system in order for settlement to occur.
RTP instead sends critical data within payments directly via setting up a two-way communication channel, enabling both the payer to its bank and from its bank to the payee’s bank to communicate with each other.
With this bidirectional communication flow, RTP empowers:
- Payment Confirmation: When a payment is sent, businesses are informed that funds have reached the payee’s bank account
- Request for Payment: Vendors will be able to send a Request for Payment within an RTP in the future
RTP also offers more security: open banking APIs use three levels of encryption and repeated authentication steps.
Batch Payments vs. Bulk Payments
A batch payment is when you consolidate multiple payments to multiple recipients into a single file. Batch payments are commonly used for expenses like payroll. Banks often charge additional fees to process your batch files.
Batch payments are recorded as a single line in reporting. The biggest drawback with batch payments is that if even one payment in the batch is declined, the entire payment might be declined. Reconciling that is a nightmare.
Bulk payments solve both problems. With bulk payments, each payment is made individually, and you can make mass payments without incurring any fees at all. If one is declined, it’s clear which payment failed, thereby simplifying reconciliation.
Just like batch payments, bulk payments appear as one line item in reporting.
Bulk payments are only possible with API banking via services like Trovata.
Further reading:
- When to send a check, wire, ACH, or RTP payment?
- Compare corporate payment processing methods
- Streamline payments processing with Trovata
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