The ACH helps route funds from one bank account to another, which benefits both the merchant and consumer in most instances.
What is an ACH Payment? Simply put, an ACH payment is an electronic transfer of funds between banks using the Automated Clearing House network. This system processes payments between bank and credit union accounts and is commonly used for payroll, paying bills, sending tax refunds, and recurring payments. If you've ever used direct deposit, set up auto-pay for bills, or received a tax refund, you've likely interacted with an ACH transaction.
Whether you're a business owner looking to move money efficiently or a customer trying to send money without the hassle of paper checks or credit cards, understanding the ACH payment meaning is essential.
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.
The ACH network is a U.S.-based financial system managed by Nacha that allows individuals and businesses to transfer money securely. It facilitates ACH credits and ACH debits between originating depository financial institutions (ODFIs) and receiving depository financial institutions (RDFIs). Whether you're sending a paycheck or collecting a utility payment, ACH provides a reliable way to process payments quickly—often within one business day, though some providers now offer same-day ACH payments.
The ACH operators—including the Federal Reserve and The Clearing House—ensure that all ACH processing runs smoothly and efficiently.
The ACH system supports two types of ACH payments:
These money transfers are commonly used to pay bills, receive ACH credits like refunds, or make recurring payments from checking or savings accounts.
However, ACH payments are limited to U.S.-based banks and don’t support international transfers. They also require bank account and routing numbers, so they don’t work with prepaid cards or non-bank accounts.
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:
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:
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.
An ACH transaction starts when the sender (via an originating depository financial institution) submits a request to transfer money. That request is processed by the ACH network, which verifies the transaction and routes it to the receiving depository financial institution. Once cleared, the recipient’s account is credited or debited accordingly.
There are two main transaction types:
Because the ACH processing is batched, it’s efficient and less costly than a wire transfer—though it doesn’t happen in real-time.
There are many benefits to using ACH payments, especially for businesses that want to process payments efficiently.
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.
Standard ACH payments take 1–3 business days to settle, depending on the banks involved. However, many processors now offer same-day ACH, which allows day ACH payments to settle within hours.
This flexibility allows both businesses and consumers to transfer money based on urgency and transaction type.
ACH is known as a cost-effective payment method. ACH processing fees typically range from $0.11 to $1.00 per transaction, much less than the cost of credit card or wire transfer fees.
Some payment providers may also charge:
As a business, the more you rely on ACH credits or ACH debit for recurring billing, the more money you’ll save per transaction.
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.
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:
Just as it sounds, this code means your customer didn’t have enough money in their account to complete the transaction
This code will occur when your customer has cancelled their previously active 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.
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.
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.
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!
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Sam Elkins
Sam Elkins is a versatile payments expert and Product Manager at Swipesum. Instrumental in the development and management of Swipesum's AI-driven merchant services statement software "Staitment," Sam plays a crucial role in client interactions, drawing on extensive experience with clients ranging from Fortune 100 companies to SMBs globally. Sam graduated from the University of Tennessee, Knoxville. He enjoys live music, road trips, and adventures with his massive dog. Originally from Memphis and Cowan, Tennessee, Sam now resides in St. Louis.
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