How Do ACH Payments Work?

Table of Contents

• What Exactly is an ACH Payment?
• ACH Payment Types
• ACH Debit
• ACH Credit or Direct Deposit
• ACH Direct Payment
• Split Deposit
• How do ACH Payments work?
• Are there any costs associated with ACH Payments?
• What are some key benefits of ACH Payments?
• Are there any problems when making ACH Payments?
• How to make/receive ACH Payments?
• Are Wire Transfers the same as ACH Payments?
• What are some good scenarios for using ACH Payments?
• ACH Direct Deposit for Organizations
• ACH Direct Payments for Individuals & Businesses
• Personal ACH Payment Channels
• Third-party Applications
• Bank Services
• Conclusion

ACH payments, sometimes referred to as electronic Check, involve the electronic disbursement of cash from one financial account to another. They are fast turning into a popular method of making payments and getting paid in various circles. ACH facilitated over 24.7 billion transfer requests in 2019; this included both individuals and corporate transfers.

In this article, we will explain the fundamentals of ACH transfer services and the best situations to pay with them.

What Exactly is an ACH Payment?

Every day, some clients request that their money in Bank 'A' be moved to Bank 'B'. Also, some other clients make inverse transaction requests to move their cash in Bank 'B' to Bank 'A'. The two banks will record credits and debits that will eventually be reconciled. An ACH (or Automated Clearing House) is a central clearing network that handles this reconciliation.

Any electronic cash-transfer between financial services providers that is facilitated by ACH network qualifies as an ACH payment. In America, the Federal Reserve partners with the electronic payments' union — NACHA — to oversee ACH processes. Every day, debit requests and credit requests are garnered and a batch or set of requests are forwarded to ACH at specific times of the day — and this happens up to three times on a typical work day.

ACH Payment Types

There are a few types of ACH Payments, and we list them below.

ACH Debit

Effects a debit or cash withdrawal from your account.

ACH Credit or Direct Deposit

Happens when an organization makes a deposit straight into a bank account, for example, a company depositing payroll straight to a worker's account. Up to 93% of workers in the U.S. receive their monthly pay through ACH Direct Deposit. You are receiving money.

ACH Direct Payment

Direct Payments cover all electronic cash-transfers that happen specifically as a means of making payments — whether paying or collecting payment.

Split Deposit

Workers may arrange for a fraction of their monthly pay to be diverted to a special account for savings or for future investment.

How do ACH Payments work?

The process flow for ACH payments works as follows:-

• You, as the originator of the transaction, create a payment request by approving a debit action to be performed on your account.
• Your transaction request entry is recorded and queued by the Originating Depository Financial Institution (or ODFI) — which in this case is your bank or preferred ACH operator.
• Sometime later, the ODFI transmits a batch or set of ACH requests to the Clearing House for processing. On a typical business day, an ODFI may send up to three different batches of ACH payment requests.
• ACH works on each set of payment requests and forwards the results to the Receiving Depository Financial Institution (or RDFI) — which is the payment beneficiary's bank.
• The beneficiary's account with the RDFI credited any a few hours to two days, and your account will record a debit.

Are there any costs associated with ACH Payments?

It usually costs nothing to accept ACH payments. Some ACH service providers collect a fixed fee for each transaction or monthly while others may take a fraction of each payment.

What are some key benefits of ACH Payments?

Below we list some key benefits that ACH Payments offer.

1. Lower costs: It's significantly cheaper and easier to pay with ACH than with most other common payment methods. Many payment processors even allow you to pay with ACH at no cost for certain types of transaction. While the traditional paper checks seem inexpensive on the surface, they actually cost way more when you consider the cost of materials, manpower, postage, bank fees, time, the stress of verifying deposits, and so on.
2. Security: The 2020 AFP Payments Fraud and Control Survey shows that conventional paper checks still carry the highest risk with wire transfers following closely behind. ACH cash transfers are less vulnerable to fraud as they are electronic transfers that can't go missing in transit, and require no human intermediaries.
3. Convenient and time-saving: ACH takes the stress away from making payments and saves time too for both the payers and the recipients. The money is moved electronically, thereby saving users the hassle of dealing with a physical check.
4. Fewer human errors: It costs business owners and individuals a lot in terms of time and money to fix the consequences of human mistakes that occur during processing of payments. The absence of human intermediaries in the processing of payments makes ACH a better payment option.
5. Recurring billing: ACH payments are a great option for businesses that offer subscription-based services and their customers. Companies can easily collect regular payments and customers can automate payment of bills and other recurrent payments to avoid the issues associated with late payments.
6. Faster processing time: NACHA rules of operation stipulate that ACH credits must be cleared within two work days and ACH debits the following day. Additionally, payment requests are typically initiated online and then processed by an electronic network which further cuts down on processing time.
7. User Preference: Both business owners and consumers tend to prefer paying through ACH instead of most other means of making payment. This has contributed to the steady rise in the number of ACH cash transfers which has increased by at least one billion each year for the past five years. And in the second quarter of 2020, ACH Network facilitated more than 6.6 billion transfers.

"ACH Payments are a cost-effective, highly secure, convenient and fast way to make and receive many types of payments. In the second quarter of 2020, ACH Network facilitated more than 6.6 billion transfers!"

Are there any problems when making ACH Payments?

ACH is the preferred payment option for many, and for good reasons. However, there are a few potential shortcomings to be aware of.

1. Limit on Transfers: Many financial institutions place certain limits on the amount you can move per transaction, per day/week/month and for transfers to other countries.
2. Transfer Timing Issues: Because payment requests are queued and processed in batches instead of instantly, it is necessary to initiate your transfer at certain times to be sure that they'll process for the following business day.
3. Possible Penalty for Frequent Transfers From Savings: If your transfers exceed the maximum stipulated for such withdrawals in the operating rules for savings accounts, you may be penalized. And depending on how frequent your transfers become, the bank may choose to convert your savings account to a checking account.

How to make/receive ACH Payments?

Below we list a step by step guide to make or receive ACH Payments.

1. Shop around for an ACH payment merchant/provider to use, starting with your current financial service provider.
2. Set up an account with a payment processor.
3. Learn about the various types of ACH cash transfers to help you select an appropriate entry class.
4. Do the required paperwork, either completely online or in person.
5. Carefully read through the terms & conditions, give your consent, and you are done.

Are Wire Transfers the same as ACH Payments?

The short answer is: "No". Even though wire transfers also involve electronic interbank cash transfers, they differ from ACH money transfers in the following key areas.

Speed and Processing: Whereas wire transfers can take place almost instantly as they go through real-time processing with the help of bank employees, ACH transfers can take between a few hours to two days as they go through batch processing. Hence, wire transfers are better suited to emergency movement of funds, while ACH is ideal for non-emergencies and recurring payments.

Cost: Wire transfers can be very expensive, costing an average of $25 for local transfers (up to $15 to accept) and up to $65 for international transactions. ACH transfers, on the other hand, are generally either free or very inexpensive.

Transaction Type: ACH allows users to make and request payments, but they can only send payments through wire transfer.

Conflict Resolution: A payment through ACH can be disputed once they meet certain requirements. But once a wire transfer is initiated, you cannot cancel or dispute it.

What are some good scenarios for using ACH Payments?

Anyone can use ACH either in the form of Direct Deposit or Direct Payment. They are relatively cheaper, support automation, plus it simplifies record-keeping.

ACH Direct Deposit for Organizations

• Annuities
• Rewards and commissions
• Paying money for child support
• Disbursing dividends and interests
• Pension disbursements
• Paying government benefits like Social Security
• Sending tax refunds
• Reimbursing employees for justified expenses like travel cost

ACH Direct Payments for Individuals & Businesses

• Payment of bills
• Donations to charity and recurring gifts
• Funding special investment accounts
• Paying taxes and premiums on insurance
• Mortgage and other loans repayment, paying for a vehicle
• Paying for subscription/membership
• Paying tuition
• Distribution or gathering of funds by moving them between banks
• Paying for supplies and vendor commissions
• Cash-transfers to relatives and other individuals

Personal ACH Payment Channels

Individuals can pay or collect money directly to/from an organization, but P2P ACH cash-transfers often require an intermediary.

Third-party Applications

Many online transfer services and social payment applications that people use in sending cash to relatives and others for free are powered by ACH.

Bank Services

Some banks or credit unions that offer P2P ACH transfer services may require the beneficiary to create an account with them (or at least submit some bank details including routing numbers).

Conclusion

ACH service providers enable the speedy transfer of cash electronically at little or no cost at all. For both individuals and enterprises, they can be much easier to use than processing payments through most common cash transfer methods. You too can begin to use ACH payments by shopping for merchants that support them. Visit the NACHA website for more information.