ACH Payments: What They Are and How They Work

Introduction

ACH payments have revolutionized how businesses and individuals handle financial transactions—offering a convenient and efficient alternative to traditional payment methods. They have become increasingly popular today. This article aims to guide you through ACH payments, how they work, and their benefits for your business.

By understanding ACH payments better, you can streamline your payment processes, save time, and offer a more convenient experience to your customers. Let’s get to it.

What is an ACH Payment?

ACH payments, regulated by NACHA, involve secure electronic transfers processed via the Automated Clearing House Network. They are crucial for transferring funds among U.S. banks, credit unions, and financial institutions. Studies state that about 94% of U.S. businesses pay their employees through this network.

The ACH network operates under two leading players:

1. The Electronic Payment Network (EPN)
2. The Clearing House, which includes 24 major banks

What Is an Automated Clearing House (ACH) Network? 

The Automated Clearing House (ACH) Network is a centralized system for processing financial transactions in the United States between banks and financial institutions. It allows businesses and individuals to send and receive payments like payroll, direct deposits, bill payments, and tax refunds.

Types of ACH Payments

ACH transactions are either ‘debits’ or ‘credits.’ In an ACH debit, the payer authorizes someone else to ‘pull’ funds from their account. In an ACH credit transaction, you ‘push’ funds to someone else’s account. Here’s the difference:

ACH Debit	ACH Credit
The payer (e.g., a customer) authorizes the payee (e.g., a merchant) to take funds from their account. For instance, an auto-pay electricity bill falls under this category.	The payer allows the payee to take payment from their account whenever due. This is typically used for direct salary deposits.
This type of ACH payment is beneficial as it ensures that your bills are paid on time without any manual intervention.	ACH credit transactions are advantageous as they negate the need for paper checks.

ACH Payment Uses and Examples

ACH payments are widely used across various industries for different types of transactions. They simplify everyday transactions and ensure secure, quick fund transfers. Due to its widespread use, ACH is a trusted payment method across industries and by different stakeholders

Some key examples and uses include:

• Businesses: Employers use ACH for direct deposits, efficiently transferring salaries into employees’ bank accounts. Additionally, businesses rely on ACH to pay vendors and to facilitate timely payments from customers through automated billing.
• Individuals: Consumers utilize ACH for personal transactions, such as paying bills and sending money through peer-to-peer platforms like PayPal and Venmo.
• Government Agencies: Federal and state entities use ACH to distribute benefits, including social security payments and tax refunds, ensuring quick access to funds for recipients.
• Financial Institutions: Banks and credit unions leverage ACH to manage account transfers and automate bill payments for their customers, enhancing service efficiency.

When Should You Use ACH Payments?

ACH payments are ideal for situations where cost efficiency, security, and recurring payments are needed. If you prioritize reliability, low costs, and recurring payment options, ACH is an excellent choice for handling your financial transactions.

Key use cases include:

• Recurring Payments: If you need to set up automatic payments for utilities, rent, or subscriptions.
• Payroll Processing: ACH is perfect for businesses looking to streamline employee salary distribution.
• Large-Volume Transfers: If you manage a business with frequent transactions, ACH provides a cost-effective way to handle bulk payments.

Low-Cost Transactions: ACH fees are generally lower than credit card processing fees, making it a great option for high-volume or large-amount transfers.

How Do ACH Payments Work?

An ACH transaction begins with a data file containing payment information. The process involves sending this file from the originator’s bank to the Automated Clearing House, which then forwards it to the recipient’s bank. This sequence facilitates the transfer of funds to the receiving account.

An ACH transaction involves:

1. The Originator: Initiates the transaction
2. Originating Depository Financial Institution (ODFI): Processes and transmits the payment
3. Receiving Depository Financial Institution (RDFI): Receives and credits the payment to the recipient’s account
4. The Receiver: The final recipient of the funds

The Originator initiates the transaction, which is processed by the ODFI and transmitted to the ACH network. The payment is then received and credited by the RDFI to the Receiver’s account.

How Long Do ACH Payment Take?

ACH transactions can take anywhere from a few hours to three business days. The timeline largely depends on the initiation time and whether same-day processing is requested. ACH credits—are often completed within one business day, in contrast, ACH debits generally require 1-3 business days to process.

Still, with same-day ACH payments, the process can be completed within the same day if the transaction is initiated early enough— Transactions and batches must be submitted before the 10:30 AM ET or 2:45 PM ET processing times window. However, same-day ACH incurs additional costs and requires a separate Originating ID.

ACH Batch Times and Settlement

Understanding ACH batch times is essential for predicting when transactions will be processed, and funds will be available. ACH operators typically have specific cutoff times for submitting batches of transactions, which can vary depending on the financial institution.

Once submitted, ACH transactions undergo a processing period before being settled. While the exact duration can vary, ACH payments generally take 1-2 business days . However, same-day ACH services are also available for faster transactions, albeit at an additional cost.

ACH Card Payments and Remittance

In addition to bank account transfers, ACH services also support card payments, allowing businesses to accept payments conveniently. ACH remittance refers to the electronic transmission of payment details accompanying a transaction, streamlining reconciliation processes for businesses.

How Much Does ACH Payment Processing Cost?

The internal cost for processing an ACH payment averages $0.29 (ranging from $0.20 to $1.50) per transaction. Factors influencing the cost include the bank, the processor or ODFI, and the transaction volume. Notably, larger volumes often translate to lower costs per transaction.

Cost vs. Transaction Volume:

Small businesses typically pay $0.20 to $1.50 per ACH payment

Medium to large businesses can negotiate rates as low as $0.01 per transaction

ACH payments are more cost-effective than checks and credit cards due to lower transaction fees. For instance, a $5,000 ACH transaction might cost a maximum of $5, versus $100-$150 via card networks that charge the typical 2-3% fees.

Credit cards and wire transfers, ACH fees are significantly lower. For instance, for a $500 transaction processed through Stripe, you could save over $10 by choosing ACH over credit cards.

For businesses with high-volume transactions, such as those that process monthly billing cycles for their customers, using ACH instead of credit cards can provide significant cost savings.

Benefits of ACH Payments

ACH payments offer several key benefits that make them a preferred method for businesses and individuals alike, providing cost efficiency, security, and convenience. Here are a few:

• High transaction success rate
  ACH reduces payment churn as customers use their bank account rather than a credit card. On average, a bank account is held for 14 years compared to only 3 years for a credit card, making the bank account a more stable payment method.
  
• Fewer errors and returns
  Bank account information only needs to be entered once to link an account for ACH payments, reducing the chances of errors. In contrast, other payment methods, like credit cards and wire transfers, often require information to be entered repeatedly for each payment, increasing the likelihood of errors and returns.
  
• Safer from fraudulent activities
  According to the Federal Reserve Payment Study, ACH has the lowest fraud rate (averaging only $0.08 of fraud for every $10,000), representing only a fraction of 1 percent of the total value or number of all payments in the U.S.
  
• Convenience
  One of the key benefits of using ACH services is the convenience they offer. Instead of relying on paper checks or manual bank transfers, individuals and businesses can automate their payments, saving time and reducing the risk of errors.
  
• Cost-effective
  Additionally, ACH payments boast cost-effectiveness compared to traditional methods. With lower transaction fees and faster processing times, businesses can save money and improve their cash flow management.
  
• Flexibility
  Another advantage of ACH payments is their flexibility. Whether scheduling recurring payments, making one-time transfers, or processing bulk transactions, the ACH system can accommodate various needs and preferences.
  

Challenges of ACH Payments

ACH is among the safest payment rails available, but that doesn’t mean it comes without risk. The most common risks and challenges associated with ACH are:

• Insufficient fund returns
  

  ACH payments don’t settle immediately, so purchases made without sufficient funds can go unnoticed until rejected by the ACH network.

  
  
• KYC/AML requirements
  

  Businesses must fulfill Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements before starting with ACH, which can take time and effort.

  
  
• Customer expectations
  

  Most customers are accustomed to instant settlements, so adjusting to the time frame of ACH payments may take some.

  
  

How to Set Up ACH Payments

While getting started with ACH payments can feel overwhelming, many organizations are already using this system, and the ACH infrastructure is well-established for newcomers.Here’s a step-by-step guide for businesses to set up ACH payments:

1. ACH enablement and verification: 

To begin with ACH payments, businesses need to verify account details and routing numbers with banks or payment processors.

2. Update your software: 

Many accounting or payment processing software support ACH payments. You may need to update or configure your software to enable this feature.

How to choose the right payment processor for ACH payments?

Many businesses choose a payment processor that integrates with their authorization methods. When deciding which ACH processor to use, it’s important to ask the right questions, such as:

1. How quickly do I need to go live?
2. How fast do I need to process payments?
3. How much control do I need to have? 
4. What are this processor’s fees compared to others?
5. What kind of fraud prevention capabilities do they have?
6. How robust is their compliance process?

3. Add ACH to the payment flow: 

How a business adds ACH to its payment flow will depend on the use case, which could be recurring subscription payments, new customer account funding, accepting one-time payments, or something else. Run a test transaction to ensure everything is set up correctly.

Understanding ACH payments and their benefits is crucial for any business. With lower costs, high transaction success rates, and enhanced security, they offer a significant edge over traditional payment methods. ACH payments offer a reliable, cost-effective, and efficient way to handle financial transactions. By leveraging the ACH system, individuals and businesses can streamline their payment processes, improve cash flow management, and experience greater convenience. The key to leveraging this efficient payment method lies in choosing the right payment processor and integrating it seamlessly into your payment flow. 

ACH Payments vs. Wire Transfers

Sometimes, people get confused between ACH and wire transfer, so before initiating an ACH transfer, it’s important to understand how it differs from a wire transfer. Though both methods transfer funds electronically, they differ in cost, speed, and safety. 

ACH Payments	Wire Transfers
Cost	Cheaper ($0.20 – $1.50 per transaction)	More expensive ($15 – $35 per transaction)
Speed	Slower (offers same-day options)	Faster (almost instant)
Safety	Reversible in case of error or fraud	Irreversible once sent

ACH Payments vs. EFTs 

Aspect	ACH Payments	EFTs (Electronic Funds Transfers)
Definition	ACH payments are a type of EFT that processes payments in batches through the Automated Clearing House network.	EFT is a broader term that refers to any electronic transfer of funds between accounts, including wire transfers, ACH, and credit/debit card payments.
Speed	Typically 1-2 business days for processing (some ACH payments now offer same-day settlement).	Can range from instant (e.g., wire transfers) to 1-3 business days, depending on the type of EFT.
Cost	Generally low cost, often free or with minimal transaction fees.	Costs vary widely; wire transfers and card payments usually carry higher fees compared to ACH.
Transaction Types	Recurring payments like payroll, bill payments, tax refunds, and vendor payments.	Includes a wider range of transfers like wire transfers, credit/debit card transactions, and online banking payments.
Use Cases	Primarily used for domestic transactions like B2B payments, direct deposits, and personal bill payments.	Used for various payment types, including domestic and international transfers, online purchases, and ATM transactions.
Security	Highly secure with compliance to NACHA standards and encryption protocols.	Varies based on the EFT method, but generally secure, with encryption and fraud protection in place.
Volume of Transactions	Processes high volumes of transactions in batches.	Can handle both single, high-value transactions (e.g., wire) and high-volume transactions (e.g., card payments).

Future of ACH Payments

The future of ACH payments looks promising as the system continues to evolve and adapt to new technological advancements. Several trends are likely to shape its future:

1. Faster Payments
   

   The introduction of same-day ACH payments is expected to expand, reducing the time for transactions to settle from 1-2 days to nearly instant transfers. This will make ACH more competitive with real-time payment networks.

   
   
2. Increased Adoption in B2B Payments
   

   ACH is becoming the preferred method for B2B payments due to its cost-effectiveness and efficiency, particularly in automating recurring payments and accounts payable.

   
   
3. Enhanced Security
   

   As fraud prevention becomes a priority, ACH networks will continue to implement more robust security protocols, including stronger authentication and encryption standards, to ensure secure transactions.

   
   
4. Integration with Fintech
   

   ACH will likely see deeper integration with fintech solutions, allowing for seamless, automated transactions across platforms like mobile apps, digital wallets, and online banking systems.

   
   
5. Global Reach and Competition
   

   While ACH is primarily used in the U.S., international equivalents or expanded cross-border functionality could emerge, creating more opportunities for ACH to become a standard in global payment systems.

   
   

   The ACH network is positioned to remain a key player in the payments ecosystem, particularly as more businesses and individuals seek efficient, secure, and low-cost payment solutions.

   
   

How Highradius Can Help Your Business with ACH Payments

Payment gateways serve as essential infrastructure for modern electronic transactions, enabling businesses to securely and efficiently process payments. Serving as intermediaries between merchants and banks, these gateways ensure the seamless transmission of transaction data while safeguarding sensitive financial information. They play a crucial role in supporting various payment methods, including credit card transactions and ACH payments, providing businesses with a versatile solution for their payment processing needs.

HighRadius offers a leading payment gateway software designed to optimize electronic payment processing for businesses of all sizes. The payment gateway empowers businesses to streamline their payment processing operations and elevate the overall customer experience by prioritizing security, efficiency, and cost-effectiveness.

One of the standout features of HighRadius’ payment gateway software is its robust support for ACH payments, presenting businesses with a cost-effective alternative to traditional payment methods.. HighRadius helps businesses reduce processing costs by up to 90% by validating bank accounts and securely processing ACH payments. This substantial cost-saving capability enables businesses to optimize their payment processing expenses and allocate resources more effectively, thereby driving bottom-line growth and profitability. Embracing HighRadius’ solution equips businesses to remain competitive and foster sustainable growth in today’s digital economy.

FAQs

1. Is ACH and direct deposit the same?

ACH and direct deposit are not the same but are closely related. ACH (Automated Clearing House) is the network facilitating electronic transfers, while direct deposit is a specific type of transaction within the ACH system, typically used for payroll deposits directly into a recipient’s bank account.

2. What is the difference between ACH debit and ACH credit? 

ACH debit withdraws funds from an account initiated by the receiver, like when you set up auto-pay. ACH credit deposits funds into an account initiated by the sender. An ACH credit is when you push funds into an account like your employer depositing your salary. The key distinction lies in the direction of the transaction: debit pulls funds, while credit pushes funds.

3. What is an example of an ACH debit transfer? 

A classic example is setting up auto-pay for bills like your electricity bill. The funds get pulled from your account automatically, ensuring timely payments.

4. What are ACH Routing Numbers?

ACH Routing Numbers, also known as ABA Routing Numbers, are a 9-digit number, used to identify the financial institution involved in an ACH transaction and facilitate the routing of funds between accounts. You can find your ACH routing number by contacting your bank or credit union.

5. What is an example of an ACH credit transfer?

A perfect example is payroll direct deposit. Here, your employer pushes or deposits your salary directly into your bank account.

6. How much does it cost to set up ACH payments?

The cost of setting up ACH payments varies. Many banks and financial institutions offer ACH services for free or at minimal cost. Small businesses pay around $0.20 to $1.50 per ACH transaction. However, third-party service providers may charge fees based on transaction volume or service features.

7. Are ACH Transfers Secure?

Yes, ACH transfers are secure, using encryption and NACHA compliance to protect financial data. Financial institutions also employ fraud detection systems to monitor unusual activity. However, as with all electronic transactions, users should remain cautious about phishing and fraudulent schemes.

8. What Are the Downsides of ACH Payments?

ACH payments can be slower than other methods, typically taking 1-2 business days to process. Same-day ACH is available but might come with additional fees. Additionally, They are limited to domestic use and have daily transfer limits. Instant confirmation isn’t always available for businesses.

9. Can You Reverse an ACH Payment?

Yes, ACH payments can be reversed in certain cases, such as unauthorized transactions, errors, or duplicate payments. Reversals must typically be requested within a specific timeframe (usually 60 days). However, the process isn’t immediate and may take several days, depending on the situation.