What is an ACH Payment?

Have you ever gotten paid through direct deposit or paid a bill online through your checking account? Then odds are you’ve interacted with the Automatic Clearing House, or ACH, even if you’ve never heard the technical name.

The ACH helps route funds from one bank account to another, which benefits both the merchant and consumer in most instances. Payments can be automated, records can be updated automatically, and online payment options make it easier for your customers to pay you. ACH credit payments are initiated by the payer, who 'pushes' money into another account, such as wages or direct deposits. ACH debit is a mechanism for businesses to pull funds directly from a customer's account with prior authorization, offering benefits like reduced administrative burdens and improved cash flow. With all these benefits, it’s important to understand the basics of ACH payments so they can fit into your unique business plan.

Overview of the Automated Clearing House (ACH) Network

The Automated Clearing House (ACH) network is a centralized system that facilitates the electronic transfer of funds between financial institutions in the United States. Managed by the National Automated Clearing House Association (Nacha), the ACH network supports a wide range of transactions, including direct deposits, bill payments, and e-checks. This network provides a secure and efficient way for individuals and businesses to move money between bank accounts, making it a popular choice for both personal and commercial transactions. Whether you’re paying bills, receiving a paycheck, or transferring funds, the ACH network ensures that your transactions are handled smoothly and securely.

The Basics of ACH

The automated clearing house network is a system that facilitates electronic transfers of funds between banks in the U.S. and is governed by the National Automated Clearing House Association (NACHA), which oversees electronic payments in the United States. Since the ACH is a US-based network, it has a few restrictions that might not apply to other payment networks. For example, ACH Payments only work with checking and savings accounts. Luckily, most of your customers will have at least one of those account types, but if they don’t, you won’t be able to accept their payments through ACH. Another important restriction to understand is that ACH payments are only applicable in the U.S. and Puerto Rico—so no international purchases.

All ACH payments require the involvement of four institutions to be processed:

1. The Automatic Clearing House (ACH)
2. The Originating Depository Financial Institution (ODFI)
3. The Receiving Depository Financial Institution (RDFI)
4. The National Automated Clearing House Association (NACHA)

Payments are initiated by the ODFI, received by the RDFI, and the entire transaction is overseen by NACHA.

ACH allows you to both “pull” transactions out of customers’ accounts who set up recurring payments and “push” payments into employees’ and suppliers’ accounts. However, ACH payments are typically processed in batches three times a day, which can slow down processing times—but will save you money compared with other payment options.

ACH payments are generally used in five transaction situations:

1. Customer to merchant payments
2. Direct deposits into employees’ accounts
3. Moving money from one personal bank account to another
4. Business to supplier payments
5. Taxpayer to IRS payments

All of these situations are everyday payments that can be simplified by integrating ACH payments into your business. All a company needs to request an ACH payment or pay someone else with one is bank name, account type, routing number, and account number of the other party.

How ACH Transactions Work

An ACH transaction is an electronic payment processed through the ACH network. The process begins when the sender initiates the transaction by providing the recipient’s bank account information and the amount to be transferred. The sender’s bank then forwards the transaction to the ACH network, which verifies the details and ensures that the sender has sufficient funds. Once verified, the ACH network sends the transaction to the recipient’s bank, which credits the recipient’s account with the transferred funds. ACH transactions can be categorized into direct deposits, such as payroll, and direct payments, like bill payments and e-commerce transactions. This versatility makes ACH transactions a reliable and efficient method for various financial activities.

The Benefits of ACH Payments

Probably the biggest benefit of offering ACH payments is that they are entirely electronic. Not only is this good for the environment, it makes payments much easier for consumers and record-keeping much easier for merchants. Most ACH payments take three to five business days to be processed, but those times have been decreasing over the past few years. Some payments companies even offer same-day payments through ACH nowadays.

ACH transfers streamline the process to pay bills, offering convenience and security compared to traditional methods like checks and wire transfers.

ACH payments save you time and resources, but did you know they can actually save you money too? Collecting payments electronically through ACH networks costs you less in fees than credit and debit card purchases—and even less than wire transfers.

Another benefit of ACH payments is that you can potentially reach a larger audience of customers. People can purchase electronically even if they don’t have a credit card, or if they don’t feel safe sharing their card information online. Customers will also like the automatic ACH payment feature because they won’t have to keep an eye out for bills, and they don’t have to worry about getting extra fees.

ACH Payment Processing Time

The processing time for ACH payments can vary based on the type of transaction and the banks involved. Standard ACH payments typically take one to three business days to process. However, with the advent of same-day ACH payments, transactions can now be completed in as little as a few hours. Same-day ACH payments are processed in real-time, offering a faster alternative for urgent transactions. Additionally, the ACH network provides other processing options, such as next-day and two-day processing, catering to different needs for speed and efficiency. This flexibility ensures that ACH payments can meet the varying demands of both businesses and individuals.

What do Same Day ACH Payments Cost?

While ACH isn’t free, it is often a more affordable payment option than card payments or wire transfers for small and large businesses alike. If you’re a small business, you can expect to pay around $1.00 for every transaction, but if you’re a larger business, that cost can go down as low as $0.11 a transaction. Banks and credit unions incur annual fees for participating in the ACH system and may decide whether to pass these costs on to their customers.

The bottom line is the more transactions you receive through ACH payments, the less you’ll pay for each—especially if you receive a lot of recurring payments. Some services may charge a monthly fee on top of per-transaction costs. Others charge fees based on a flat percentage fee. Some services even include ACH payments in their contracts at no additional cost. Whatever you choose, make sure you shop around for the one that works best with your needs and budget. Credit unions also incur these fees, and customers should check directly with their credit union regarding any fees associated with ACH transactions.

ACH Transaction Risks

Since ACH payments are collected in batches three times a day instead of in real time, you run into the risk of your customers’ account being rejected. In general, there are four rejection codes that may occur after a transaction:

1. R01: Insufficient Funds

Just as it sounds, this code means your customer didn’t have enough money in their account to complete the transaction

2. R02: Bank Account Closed

This code will occur when your customer has cancelled their previously active bank account.

3. R03: No Bank Account

If the ACH cannot locate the routing/account number of an account, this code will occur. In most instances, the customer just has to re-enter their numbers to ensure there wasn’t a typo.

4. R04: Reject

This code occurs when an account isn’t set up to release funds through ACH.

If you do end up receiving one of these codes, you do also risk receiving a penalty fee from your provider. The lessen the chance of this fee, make sure you rectify the rejection in a timely manner.

ACH transfers are electronic money transfers within the Automated Clearing House network, known for their convenience and security. However, potential drawbacks include the risk of scams and the time it takes to process transactions.

Although ACH is run through the government, it doesn’t have the same PCI-compliance guidelines that credit card processing requires. For this reason, you have to ensure that your customers’ information is valid and that your ACH includes fraud protection.

Other risks you may encounter have to do with the time it takes to process ACH transactions. Some transactions that are initiated at the end of the week may not be completed until after the weekend. Additionally, some ACH providers have daily or monthly caps for how much money can be moved, so make sure you know your cap limits before initiating more payments.

Comparison to Other Payment Methods

ACH payments offer several advantages over other payment methods, such as wire transfers and credit card payments. One of the primary benefits is cost-effectiveness; ACH payments are generally less expensive than wire transfers. They also provide a higher level of security compared to credit card payments, as they reduce the risk of fraud. Moreover, ACH payments are highly convenient, allowing users to initiate transactions online or through mobile devices. This method is versatile, supporting a wide range of transactions, including direct deposits, bill payments, and e-commerce transactions. Overall, ACH payments provide a fast, secure, and convenient way to move money between bank accounts, making them a preferred choice for both personal and commercial use.

The Steps to Getting Started

With all the benefits ACH payments have to offer, your next question is probably how (and how soon) can I start accepting them? The first step is to get a payment processor, and preferably one that readily offers ACH payments. If you already have one, you can ask them what ACH networks will work with your existing contract. If you don't have a processor yet, it might be worth it to do your research about the best ones for ACH before deciding. Of course, feel free to consult our payments experts at SwipeSum if you're in need of help!