You’ve seen it everywhere. From your bank statement to your electric bill, even at your doctor's office – organizations urging you to “Go Paperless!”. Like it or not, our economy is online, and this trend towards the digital won’t be changing anytime soon. Especially when it comes to payment methods. Gone are the days when cash or checks were the most trusted and dependable forms of payment. Now, the clearing house is king.

The Automated Clearing House, that is, or better known as the ACH. You’ve likely interacted with the ACH numerous times. If you’ve ever received a paycheck through direct deposit or gotten money via electronic or “eCheck”. This is all the work of the ACH network.

In the first three months of 2020 alone, 6.4 billion transactions took place on the ACH network, according to its governing body, the National Automated Clearing House Association, or NACHA. To illustrate the growing impact of digitalization, this figure is up 7.1% from the previous year.

And property management is a part of that wave. More and more landlords are choosing to utilize ACH to manage their rent collection for several reasons. The speed, convenience, and security of the ACH network make it an ideal option for many business owners. Read on to learn the basics of what it takes to manage ACH payments and find out if it's right for you.

What is it?

The key word here is “automated”. The automated clearing house is a system that automatically processes financial transactions. This is where we let the computers take over. There is no manual transfer of funds in this scenario.

Money moves through authorized ACH channels and, at the close of each business day, transactions are batched by two primary systems - the Federal Reserve and the Clearing House. Once collected, the requests are sorted and allocated between banks and accounts. This all happens at once and online, making it the fastest and most efficient way to move your money.

In addition to direct deposit and echeck, ACH is also the tool used for online bill pay and even peer-to-peer technologies like Venmo and Paypal. Now you can see how the ACH network is already working to improve your day-to-day life.

How does it work?

When it comes to landlords looking to utilize the ACH network, the first step is to get tenants signed up. There is a detailed form that they must fill out. Historically, this has been a manual part of the process; however, with the rise of property management software, it’s become increasingly easy to complete this step online. Information collected includes tenant name, banking institution, account number, routing number, and transfer amount. Once completed, the landlord will receive notice from the bank that the tenant has authorized direct payment.

Now the ball is in the landlord’s court. Once they have set up their own ACH account, they will forward payment details to their own bank. That bank will then make an ACH entry for the tenant, batch it, and send it along with other payments to the ACH Operator for sorting.

Next, the request for payment is sent from the ACH Operator, through the authorized channels, to the tenant’s bank. There they will verify that there are sufficient funds in the account and, if so, proceed with debiting the account for the approved total. Finally, the payment is collected with all other payments and ultimately transferred.

How to get started.

If the above breakdown has your head spinning, don’t fret. The process may seem complicated, but you as the landlord will never be responsible for these steps that happen behind the scenes. Even the historically manual set-up process can be made super simple by employing the use of property management software.

In terms of set-up for starting to collect ACH rent payments online, there are two options. You can either work directly with your banking institution or utilize property management software. While it may feel like the safest option to work one on one with your bank, there are some disadvantages to this approach.

Unfortunately, the in-person process is not necessarily tailored toward rent collection, and as such, there tend to be some pretty glaring gaps in reporting. This is a major downside when it comes to keeping clear and detailed records of all transactions for accounting purposes. Additionally, many landlords run into unexpected costs in the form of setup fees and monthly minimums.

As an alternative, property management software is specifically designed for your business. They take into consideration all aspects of rent collection and all the details and one-off scenarios that come with it. The initial set-up process can be as easy as signing in and providing bank verification. In a few clicks, you can have a personalized, professional, and automated process for managing your incoming rental payments.

While both methods are effective in making the jump to accepting ACH payments, it’s important for landlords to understand the benefits of each and make the best decision for their business.

The pros.

Convenience. Say goodbye to your binders, manila folders, and bursting accordion files of receipts. Their time is officially up. All transactions on the ACH network are tracked and recorded in real time, meaning there’s no need for your manual accounting. The best part is that tenants have the option to set their payment to process automatically each month. Can you say “no more late rent”?

Affordability. The ACH is an inexpensive alternative to credit cards. You can avoid hidden fees and have a better idea of what to expect, with most flat fees ranging between $0.20 - $1.50 and percentages from 0.5% - 1.5% per transaction.

Security. While no payment method can be 100% free from the threat of fraud, governing body NACHA closely monitors all activity and provides a legitimate safety net for suspicious activity.

Speed. The ACH hasn’t traditionally been known as the fastest in their realm, but they’re looking to change that. These days, payments generally take 1-2 days for processing, meaning the money actually hits your account in about 3-5. Additionally, NACHA has worked to expand same-day processing, which has increased by 42% since the beginning of 2019.

The cons.

Transaction Limitations. Banks will generally place a limit on how many transactions can take place daily, weekly, or monthly involving one account. The particulars vary between banking institutions, but any business looking to grow, this is an important factor to take into consideration.

Limited Accessibility. For a landlord to submit his or her own ACH transactions directly to the bank, it can be difficult to navigate and demanding of their time. The alternative, property management software, is specifically designed to allow for maximum accessibility, especially for the landlord on the go.

Insufficient Funds. While an ACH payment can feel like a step security-wise from a written check; unfortunately, there is still a chance it could “bounce”. If the tenant does not have enough money in his or her account to cover the full amount, the transaction will not process. This could take days for a landlord to realize and ultimately result in negative consequences for all parties.

Conclusion

When it comes to learning all the information outlined above about ACH, “going paperless” might not seem like the most convenient thing for a landlord; however, it most absolutely is for your tenants. If you’re looking to stay competitive in your business, the sooner you go digital the better. And whether you choose to manually set up ACH with your bank, or employ a property management software, it helps to know the ins and outs of the system. Stick to the basics and you’ll be an expert in no time.