What are ACH Payments and How Do They Work?

The Automated Clearing House (ACH) payment system facilitates the movement of billions of dollars daily, operating behind the scenes in the U.S. financial system.

It's a sophisticated system that many of us have benefited from, whether by using online bill pay or receiving direct deposit paychecks.

In this article, we'll explore the ACH network and ACH payments, how ACH payments function, and the ways in which it impacts our daily financial transactions.

Key Takeaways

• ACH (Automated Clearing House) is a vital network for electronically transferring money between bank accounts in the United States, facilitating billions of dollars in daily transactions.
• ACH payments, also known as ACH transfers, are widely used for various purposes, including direct deposit of payroll, bill payments, business-to-business transactions, and more.
• ACH payments are faster and more reliable than traditional paper checks and are separate from major credit card systems like Visa and Mastercard.
• Processing times for ACH payments vary, with standard transfers taking 3-5 business days. Next Day and Same Day ACH options are also available for faster transfers.
• ACH offers benefits such as convenience, cost-effectiveness, reliability, elimination of late payments, ease of setup, international money transfer capabilities, and integration with accounting software.
• However, ACH payments may have limitations and varying processing times depending on banks, and there are transaction limits and cutoff times to consider.

What is ACH?

The Automated Clearing House Network, or ACH, is a network used for electronically moving money between bank accounts across the United States.

The National Automated Clearing House Association (Nacha), which was established in 1974 to enhance the U.S. payments system, administers and manages the ACH network.

The ACH network has become integral to how consumers manage their finances. It also offers benefits to businesses that use it to receive payments from customers, make payments to vendors, and transfer funds between accounts held at different banks.

According to statistics released by Nacha, the ACH network was used to transfer $72.62 trillion in 2022 alone. Transaction types include government, consumer, and business-to-business transactions and international payments.

What are ACH Payments?

ACH payments are electronic fund transfers that use the ACH network to move funds between bank accounts in the United States. ACH payments are sometimes referred to as ACH transfers or transactions.

This payment method is widely used for direct deposit of payroll, payment of bills, business-to-business payments, and other recurring payments.

ACH payments are faster and more dependable than traditional paper checks, thereby streamlining accounts payable processes. Unlike wire transfers, paper checks, or cash, ACH payments don't go through card networks. ACH is a separate network from major credit card systems such as Visa, Mastercard, and American Express.

The ACH network operates for more than 23 hours every business day and processes payments four times a day. ACH payments can be credited as quickly as the same day or within one to two business days.

What is the Difference between AHC Payments and Transfers?

ACH Transfers and ACH Payments are closely related terms, but they refer to slightly different aspects of the same electronic funds transfer system, the Automated Clearing House (ACH).

ACH Transfers

ACH transfers refer to the broader concept of electronically moving money between bank accounts using the Automated Clearing House (ACH) network. These transfers encompass various types of financial transactions, both credits and debits.

On the one hand, ACH credits involve funds being pushed into an account, often initiated by the payer. For example, direct deposit of salaries, government benefits, or interest payments fall under this category. On the other hand, ACH debits involve funds being pulled from an account, typically initiated by the payee, to collect payments or debits authorized by the payer.

ACH transfers are used by both individuals and businesses for purposes ranging from payroll processing to bill payments, vendor payments, and more.

ACH Payments

In contrast, ACH payments specifically emphasize the act of making payments through the ACH network. ACH payments primarily focus on transactions where funds are being debited from an account to fulfill financial obligations or purchases. These payments often involve a payee, which is the entity receiving payment, initiating the transaction to collect funds from a payer, who is the entity making the payment.

ACH payments are commonly associated with recurring payments, such as utility bills, mortgage payments, subscription fees, and vendor invoices. They provide an efficient and automated way for individuals and businesses to settle financial obligations, with the payee taking the initiative to withdraw funds from the payer's account through the ACH system.

What are the Types of ACH Payments?

Direct Deposits

Direct deposit is a method of payment commonly used by businesses and government agencies to deposit funds directly into a consumer's bank account. Common examples of ACH direct deposits include salary or payroll, government benefits or transfers, tax refunds, interest payments, and more.

• Payroll Deposits: Many employees receive their salaries through direct deposit. Instead of receiving a physical paycheck, their earnings are electronically transferred to their bank accounts on payday.
• Government Benefits: Government agencies often use direct deposits to distribute benefits such as Social Security payments, veterans' benefits, and tax refunds directly into recipients' bank accounts.
• Interest Payments: Financial institutions may use direct deposits to pay interest to account holders. For example, a bank may electronically credit the interest earned on a savings account.
• Pension Payments: Retirees commonly receive their pension payments through direct deposit, ensuring a hassle-free and secure way to access their retirement funds.
• Dividend Payments: Companies that issue dividends to their shareholders can use direct deposits to distribute dividend payments to shareholders' accounts.

Direct Payments

Direct payments refer to the electronic transfer of funds used for making (or receiving) payments by individuals or organizations. Common examples of ACH direct payments include bill or credit card payments, sending money to friends or family members, donations to non-profit organizations, and purchasing goods or services.

• Bill Payments: Individuals and businesses use direct payments to pay bills conveniently. This includes utility bills, credit card payments, mortgage payments, and subscription services. Customers authorize these payments to be automatically withdrawn from their accounts on specified due dates.
• Peer-to-Peer Transfers: Direct payments enable individuals to send money to friends or family members electronically. Popular peer-to-peer payment apps like Venmo and PayPal use the ACH network to facilitate these transactions.
• Donations: Non-profit organizations often accept donations through direct payments. Supporters can make one-time or recurring contributions to their chosen causes.
• Vendor Payments: Businesses use direct payments to settle invoices with vendors and suppliers. This streamlines the accounts payable process and reduces the need for paper checks.
• Online Purchases: When you make an online purchase and provide your bank account details for payment (e.g., for online shopping or booking services), it may involve a direct payment.

Types of ACH Transfers

Further, there are two basic types of ACH transfers: ACH credits and ACH debits. Transactions are categorized as either ACH credit or ACH debit transfers, depending on which way the money moves.

ACH Credit

ACH credit transfers involve the movement of funds into an account where the payer initiates the transfer. In other words, the payer pushes money into the payee's account.

• Direct Deposit of Payroll: Employers use ACH credits to deposit employees' salaries directly into their bank accounts. Employees authorize their employers to transfer their earnings electronically.
• Tax Refunds: When you receive a tax refund from the government, it often comes as an ACH credit transfer to your bank account.
• Interest Payments: Banks and financial institutions may use ACH credits to deposit interest earnings into your savings or investment accounts.
• Transfers Between Personal Accounts: You can initiate ACH credit transfers to move money between your personal bank accounts, such as from your checking to your savings account.

ACH Debit

ACH debit transfers involve the movement of funds out of an account, with the payee (receiver) initiating the transfer and the payer (sender) authorizing it. In this case, the payee pulls money from the payer's account.

• Bill Payments: You authorize service providers, such as utility companies or credit card companies, to withdraw funds directly from your bank account to cover bills. This is often done on a recurring basis.
• Mortgage Payments: Many homeowners set up ACH debits to automatically pay their monthly mortgage installments.
• Subscription Payments: Services like streaming platforms or subscription boxes may use ACH debits to collect subscription fees from customers.
• Charitable Donations: Non-profit organizations may receive donations through ACH debits, with donors giving permission for periodic withdrawals.
• Vendor Payments: Businesses make vendor payments by initiating ACH debit transfers to settle invoices or pay suppliers.

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How long does it take to process an ACH payment?

Although ACH transfers are reasonably fast, they are not instantaneous, and it usually takes 3-5 business days for the funds to be transferred. The time of day and day of the week also affects the transfer time and the type of ACH payment.

There are also Next Day ACH transfers and Same Day ACH transfers available.

Next Day ACH transfers typically settle within 1-2 business days, while Same Day ACH transfers can be completed on the same business day or the following business day, depending on when the payment was initiated. However, Same Day ACH transfers usually come with an additional processing fee for the same-day service.

How much do ACH payments cost?

According to an AFP survey, the median cost of initiating and receiving an ACH payment for all businesses is between 26 cents and 50 cents. In comparison, the median cost of issuing and processing paper checks is between $2.01 and $4.

The average processing fee for an ACH payment is around 11 cents. However, several factors can affect the cost per transaction. Here are a few:

1. The volume of transactions being processed is one such factor, with larger transaction volumes resulting in lower per-transaction fees.
2. Faster or instant ACH transfers attract a premium.
3. Accessing ACH indirectly through a third-party payment processor can attract additional fees

Benefits of ACH payments

This discussion focuses on the benefits of ACH payments for businesses, but you (as a personal consumer) can also enjoy the benefits of using ACH.

For organizations that need to issue payments or transfers, ACH offers many advantages:

1. Convenience

When comparing the convenience of ACH to writing checks, ACH is undoubtedly more convenient. With ACH, there are no paper checks to handle, no file cabinets to store them, and no pens needed to sign them. It takes less time to process ACH payments and for vendors to have access to the funds. Although checks continue to be used in many industries, vendors are increasingly choosing ACH as their preferred method of payment.

2. Cost-effective

While card networks offer a similar convenience as ACH, they are often associated with higher costs, especially for businesses that process recurring payments.

Credit card fees and flat-rate processing fees can be as high as 2.5% of the transaction value.

In comparison, ACH transactions typically cost between 20 cents and $1.50 per transaction. ACH can provide significant savings for businesses that process a high volume of transactions.

3. No more late payments

With an ACH Debit in place, late vendor payments are no longer a possibility. And ACH payments rarely fail, unlike cards!

4. Easy to set up

ACH payments can be set up through your bank, an ACH operator, or a payables automation service like Nanonets.

5. Can be used for international money transfers

ACH payments can be used for international money transfers, saving several days or even weeks compared to physical checks.

Although there is no global ACH system, many countries have their own systems that interface with ACH. For example, SEPA (Single Euro Payments Area) is the equivalent system in Europe, while Australia uses "Direct Entry."

6. Integration with accounting software

The integration of the bank with the electronic funds transfer simplifies accounting by eliminating the need to manually update two separate records, as you would do in the case of balancing a checkbook.

This also allows for seamless integration with numerous accounting tools and software services that provide comprehensive transaction histories through the ACH system.

Downsides of ACH payments

Despite its overwhelming benefits, ACH payments also have a few drawbacks:

ACH payment limits

ACH transfers may have limitations set by banks, such as per-transaction, daily, weekly, or monthly limits. Limits may differ for different types of ACH transactions. Furthermore, transfer destinations can also be restricted by banks.

ACH payment timings

Timing is crucial when sending an ACH transfer, as not all banks process them at the same time. There may be a cutoff time, and initiating a transfer after that could result in a delay, which can be problematic if you're trying to avoid late fees.

ACH transactions usually take one to three business days to complete, which is considered slow compared to the fast-paced fintech industry. However, the introduction of Same-Day ACH processing has been a solution to this problem!

ACH vs. Wire Transfer

ACH (Automated Clearing House): ACH transfers are cost-effective and commonly used for various purposes like payroll deposits, bill payments, and recurring transactions. However, they are not known for speed, taking 3-5 business days for completion. ACH transfers require authorization from both the sender and receiver, making them secure and controlled. They operate on a batch processing system, primarily for domestic transactions within the United States, regulated by Nacha.

Wire Transfer: Wire transfers are renowned for their speed, often same-day or within hours. They are suitable for time-sensitive and high-value transactions, including international transfers and real estate purchases. Wire transfers, however, come at a higher cost, with fees ranging from $15 to $50 or more for domestic transfers, plus additional charges for international transfers. They require minimal authorization and are considered immediate and irreversible. Wire transfers can handle both domestic and international transactions involving a network of banks.

The choice between ACH and wire transfers depends on factors like transaction speed, cost, and whether it's a domestic or international transfer. ACH is ideal for routine transactions, while wire transfers are best for high-value or time-sensitive ones. Wire transfers offer speed but come with higher fees, while ACH is cost-effective but takes more time.

Conclusion

ACH transfers offer a convenient and straightforward method for sending and receiving money. However, it's crucial to be aware of your bank's policies for ACH direct deposits and payments, whether you are sending or receiving money.

The ACH network is an impressive technological system designed to improve the efficiency and security of banking. It significantly improves the daily lives of millions of people, though its benefits are often overlooked.

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