The Automated Clearing House (ACH) network processes electronic financial transactions—such as direct deposit and direct payments. The ACH network is governed by Nacha and, as such, payments made through the ACH network must adhere to Nacha's guidelines.
In 2021, ACH moved 29.1 billion payments valued at more than $72 trillion. In the second quarter of 2022, the ACH network moved 7.5 billion payments valued at $19.6 trillion, mainly driven by same-day ACH and business-to-business payments.
In this article we'll explore:
- What is an ACH payment
- How do ACH payments work
- The difference between ACH Credit and ACH Debit
- The merchants benefits of accepting ACH payments
What is an ACH payment?
An ACH payment is a form of bank-to-bank electronic payment used to transfer money between accounts. Businesses in the U.S. use ACH payments to pay salaries, mortgages, bills, and loans as well as to make direct deposits. ACH payments are also referred to as ACH transactions or transfers.
How do ACH payments work?
ACH payments work by transferring money electronically from one bank to another. There are two types of transactions that use ACH payments:
- direct payment, whereby money is transferred to make or receive payments,
- direct deposit, whereby a business or government agency transfers payments to consumers.
The U.S. Federal Reserve or the Clearing House Payments Company—a private organization owned by some of the major commercial banks in the US—routes and processes ACH payments.
About 50% of the commercial ACH transactions in the U.S. are handled by the Federal Reserve banks. The other 50% are handled by the Electronic Payments Network (EPN), the Clearing House’s ACH payments service. The EPN and the Reserve banks are the two U.S. operators.
The following are the main steps involved in processing ACH payments:
- The originator, i.e., an individual, a business, or a bank, initiates the ACH transaction.
- The ACH entry is submitted by the originator's bank.
- The banks send ACH entries to the ACH operators in batches. Every bank sends these batches according to a set schedule.
- The ACH operator, i.e., the EPN or the Federal Reserve, sorts the entries into payments and deposits.
- Then the ACH operator sends the entries to the receiving bank.
- The receiving bank then confirms that the originator’s account has enough money to fund the transaction.
- Then the receiving bank either credits or debits the receiver's account, depending on whether it's a payment or a deposit.
ACH debit vs. ACH credit payments
There are two types of ACH payments; ACH debit and ACH credit.
In an ACH debit payment, the funds are pulled from a bank account, i.e., the payer (a customer) gives the payee (a merchant), permission to take the payment out of their account when it's due.
For instance, if a person sets up a recurring monthly payment for a personal loan, the lender would use an ACH debit to automatically pull the payment from the borrower's bank account.
Businesses that collect recurring payments value ACH debits because the process is automated, substantially reducing late and unsuccessful payments.
Before a company can begin using ACH debit, it must request the consumer's account details and authorization for the payment. The organization can request authorization from the consumer through the completion of a hardcopy paper form, verbally over the phone, or online.
Learn more: recurring payments explained
With an ACH credit, money is pushed from one account into another account. In this case, the person making the payment initiates the process for the money to be sent to the payee.
One example of an ACH credit is when a person sets up an electronic payment through their bank to pay a bill. Other examples of ACH credit payments are direct deposits from employers and peer-to-peer payments via payment apps.
To make an ACH credit transfer via an online or mobile banking app, the individual making the payment must have the recipient's banking details—account name, bank routing number, and account number. If the individual is making an ACH credit payment via a payment link or web page, they will only need to enter their own banking details and likely a customer reference number.
How long does an ACH payment take to process?
An ACH credit payment takes about 1-2 business days to settle, while an ACH debit payment takes one business day, according to Nacha. There are also same-day ACH credit and debit payments with a $1 million per transaction limit. However, some same-day transfers may process the next business day because of processing cutoff times. Additionally, peer-to-peer apps, such as Venmo and Zelle, offer instant ACH transfers for a nominal fee, usually a small percentage of the overall amount transferred.
Benefits of ACH payments for Merchants
While there are a number of benefits for organizations and customers that accept and use ACH payments, the following represent some of the most common:
Any business that accepts debit and credit card payments is aware of the processing fees that go along with these payment methods. But these merchants may not realize that ACH payments can cost much less than credit cards and debit cards and even paper checks. The reason is that the fees for credit and debit cards are usually calculated as percentages of the transactions.
Debit and credit cards have the highest processing fees, and even though transaction costs for paper checks are the lowest, they still cost companies more resources than accepting ACH payments.
In 2021, paper checks were still the payment method most subjected to fraud (two-thirds of businesses were victims of check fraud) — although the rate is declining likely because fewer individuals are using paper checks for business-to-business transactions given the increase of digital payments, according to the 2022 AFP Payments Fraud and Control Survey. However, most businesses still use checks as their primary payment method, according to the survey.
ACH payments, however, are generally more secure than other payment methods, including paper checks and debit and credit card payments, because ACH payments are required to pass through clearinghouses that impose stringent regulations. With ACH payments, money is transferred directly between bank accounts, and account numbers are kept confidential.
ACH payments are convenient for businesses as well as their customers as ACH offers a far more efficient, user-friendly means to make and take payments.
For one thing, customers can use ACH debits to set up automatic one-time payments or recurring payments so they don't have to remember to pay their bills on time every month. And businesses that use ACH debits can save time and effort because money is transferred electronically, which means they don't have to do any manual work to take payments.
Reduce human error
Because ACH payments are automated, they reduce the risk of human error by doing away with most of the manual tasks needed to process payments. ACH payments also cut down on the time it takes to fix employee errors. The fact is that businesses pay a high cost for human errors.
According to IBM Security’s 2022 Cost of a Data Breach Report intentional and unintentional human errors account for 21% of data loss. With ACH payments, businesses eliminate the chance of human error.
Additionally, accepting ACH payments means businesses don't have to deal with paper checks, saving time processing payments as well as eliminating frequent trips to the bank to make deposits. Consequently, employees can focus on more productive work.
ACH payments are great options for organizations—and their customers—that operate on a subscription-based model.
Payment processing costs can be extremely high for subscription-based businesses as well as businesses that bill their customers on a regular basis because of the high number of recurring transactions they process monthly. Not only that, but customers may forget to pay their bills, which means invoices aren't paid, causing cash flow issues for businesses. ACH payments solve these issues.
Because ACH payments are a cost-effective payment method, they enable businesses to save on their processing fees. When added together, these individual savings can significantly affect a company's bottom line. And with recurring billing, businesses don't have to hassle their customers about their late payments.
Processing time is faster
Unlike paper checks that are usually sent via the U.S. Postal Service, ACH payments (or eChecks) are made online, reducing processing time. In addition, banks usually give ACH payments preferred funding over paper checks, which means they'll typically process ACH payments before processing paper checks. These features mean businesses get their funds faster than with paper checks.
Customers prefer ACH payments
Many customers prefer ACH payments over paper checks, in part because automated payments remove the hassle of writing checks and remembering to mail them. ACH payments also arrive faster than paper checks and customers can see exactly when their accounts receive payments. And they don't have to worry that their checks will be lost or stolen while en route. Some businesses may also offer discounts to consumers who pay their bills with ACH payments.
Potential drawbacks of ACH payments for businesses
Despite the many benefits of ACH payments, there are still some potential drawbacks for merchants, including:
Limitations on geographic locations
A drawback of ACH transactions is that the ACH network is only available in the U.S. as well as Guam, American Samoa, the Northern Mariana Islands, and the U.S. Virgin Islands. Since there isn't a worldwide ACH standard, companies that need to transfer money internationally must use alternative methods, such as wire transfers, mailing paper checks, or initiating a transfer through a third-party payment processor.
Many banks have limits on how much money businesses can send by ACH daily, weekly, or monthly, and some may impose per-transaction limits. Organizations should check with their bank to determine that it supports the types of transfers they need to run their operations.
How to accept ACH payments in your business
ACH payments are versatile alternatives to debit and credit card payments and they enable merchants to debit funds quickly and easily from their customers' bank accounts—moving money between banks without using paper checks, wire transfers, cards, or cash. Companies can then use Checkout.com’s unified payments API to easily accept ACH payments.
Because of their lower processing fees as compared to other payment methods, ACH is ideal for merchants that process high-value payments, as well as those that process recurring payments, such as utilities, insurance premiums, car installments, rent payments, gym memberships, and many more.
Merchants can learn how Checkout.com can help them accept ACH payments here.