What are ACH Payments And How Do They Work?

What is an ACH Payment?

An ACH payment is an Electronic Funds Transfer (EFT) that takes place between two accounts at different banks. The funds move from one bank account to another through the Automated Clearing House (ACH) network, and the transfers typically occur within a few days.

ACH transfers are used for direct deposits and other electronic transfers. These payments are much safer, faster, and more efficient than paper-based checks or wire payments for transferring money electronically. ACH transaction involves two banks: The originating bank (which sends the payment) and the receiving bank (which receives payments).

What is the Automated Clearing House (ACH Network)

The Automated Clearing House Network is an electronic payment system facilitated by the National Automated Clearing House Association (NACHA)

Established in 1974, by the National Automated Clearing House Association (NACHA), with the goal of providing a secure and reliable means for businesses to make payments.

The ACH Network enables customers to electronically transfer funds from one type of account to another, such as transferring money between banks, business payments to contractors, or direct deposit of payroll.

Types of ACH Payments

There are many types of ACH payments available as they range from basic bank-to-bank transfers to complex automated transactions that you can use for your recurring payments and collection needs.

When it comes to understanding how each transfer work, an originating depository financial institution (ODFI) is the bank or other financial institution that is responsible for initiating ACH transactions.

Here are the five most common types of ACH payment:

1. Direct Deposit: Also known as salary payments or pay wages, this type of payment enables employers to transfer salaries directly into employees' bank accounts without going through any third-party intermediary.

2. Prearranged Payment Plans: This type of ACH payment allows you to preauthorize lenders or financial institutions to collect payments from your bank account on a regular basis, without any effort on your part.

3. Automated Clearing House (ACH) Payments: These are the most common online payment methods used today, leveraging digital networks to facilitate money transfers between two entities through the banking system, instead of cash or checks.

4. Electronic bill payments: This service combines electronic invoicing with ACH payments so that companies can deliver customer invoices electronically and allow customers to pay them via ACH Network automatically each month.

5. Point-of-Sale (POS) Transactions: POS transactions use an ACH system that processes payments made by credit and debit cards in real-time at the point of sale.

How do ACH payments work?

In order to initiate a payment using ACH, the sender must provide the routing number and other required information, including the account holder's name and bank account number. The clearing house network then processes this information and sends it to the recipient's bank in order to complete the transfer.

Once all of the necessary information is provided and confirmed, an ACH payment typically takes 1-2 business days to complete the transaction, depending on where the funds are sent. This can take longer if there is an error or issue with either the sender's or recipient's account. Additionally, some banks may charge fees for transferring funds using ACH, however, most do not.

It is predicted that Automated Clearing House (ACH) payments will be utilized increasingly due to their faster processing time and lower costs when compared to other payment options. For these reasons, many are choosing ACH payments over traditional money transfer methods.

How to make an ACH Payment?

ACH payment is a process that allows you to electronically transfer funds from your bank account to another party in a seamless way.

1. Ensure that both parties have the necessary accounts - The first thing to keep in mind when setting up an ACH payment is that either party must have the proper bank accounts required by your financial institution, in order to make the transaction work.

2. Consult your financial institution for instructions - Contact your financial institution directly and ask them for instructions on making an ACH payment, as every bank or credit union has its own set of requirements and procedures regarding this type of electronic payment platform.

3. Set up online access - Once all the necessary details are provided by your financial institution, it’s important that you make sure that you can access the specific accounts that you wish to initiate the transaction from within their online banking system (this might require setting up additional security features, such as two-factor authentication).

4. Fill in all the necessary information - After setting up an online suite, fill out all mandatory fields such as recipient’s name, address, and account number and accurately follow the exact given instructions depending on what kind of payment you are trying to make, such as domestic or international payment.

5. Confirm and review – Once everything is filled out, double-check all information provided before hitting the submit button to confirm the transfer(after a successful confirmation message). Keep in mind that some institutions may charge certain fees based on the amount transferred or types of international transfers, and thus you should always review such changes prior to initiating any transferred-related processes.

How long do ACH Payments take to process?

An ACH payment typically takes 2 business days to process. However, it can take up to 5 business days, depending on when the payment is initiated.

If a payment request is submitted on a Friday, the funds may not be available until Wednesday or Thursday due to banking holidays and weekends.

The swiftness at which the money is transferred will rely on transaction limits set by the banks involved in the transfer. For smaller transactions, such as payments under $5,000, both banks may complete the transfer within a single business day; however, with larger transactions or international transfers, it may take longer for the actual funds to be delivered. 

In some cases, the money transfer might take longer if there are not enough funds in the sender's account; also known as an overdraft. Essentially, if the information provided is incorrect, such as wrong numbers or typos, this can also hinder the process and delay the transfer. As a result, when there are insufficient funds or incorrect information, it will take longer for ACH transfers to complete.

ACH payments are direct payments that enable businesses to quickly transfer money from their accounts to another party’s account without using checks or cash. Outbound transfers processed through an Automated Clearing House (ACH) system use Electronic Data Interchange (EDI) protocols to move funds from one bank account to another. Businesses also use ACH payments as an alternative way of making online payments without using a credit card.

Ultimately, when sending and receiving money via ACH payment services, it’s best to plan ahead and make sure you have sufficient time for the transfer of funds process prior to making any transactions.

Benefits of ACH payments

ACH payments offer businesses numerous benefits, making it an ideal way to pay vendors and collect on customer accounts.

Frictionless and Secure

ACH payments are secure, efficient, and fast — reducing the amount of time your team needs to spend on processing payments. Moreover, they remove a lot of the manual steps associated with other payment methods such as checks or cash. ACH Payments also possess strong authentication measures, so you can be confident that any payment made is secure.

Automated and Recurring Payments

For businesses that need to process regular bills or payments across multiple vendors in a timely manner, ACH is especially helpful. It supports recurring payments and allows users to set up automated scheduled payments throughout the month so that bills and invoices do not get neglected. It can also be used for one-off transactions or for services, for instance,  paying taxes in bulk or making large purchases from large vendors who may not accept other payment methods such as credit cards.

Cost-Effective and Time-Sensitive

ACH is also incredibly cost-effective compared to other popular payment options like wire transfers and checks — potentially saving your business thousands per year. On top of this, approving ACH transactions can take fewer steps than traditional direct deposits — meaning less time wasted for everyone involved and more time available to grow your business.

Additionally, ACH payments are a fast and secure way to make authorized payments such as tax payments, vendor payments, and employee payroll. Unlike cash or check transactions, which typically take days to clear, ACH transactions usually take only 24 – 48 hours unless they are delayed due to a holiday or weekend. This makes ACH payment an ideal option for businesses that need fast, secure, and reliable payment methods.

Drawbacks of ACH Payments

While ACH payments are incredibly efficient, there are a few drawbacks that you should consider before opting to use them for transactions.

First, there is always a risk associated with any type of payment method, and ACH payments are no different. Some of the risks include fraud from unauthorized payments and an increased chance of processing failure if a transaction is made between multiple countries or currencies. Furthermore, incorrect information on a customer's account or bank routing number can lead to potential delays in processing payments and may result in extra fees.

In addition, it can take several days for an ACH payment to be processed and cleared within the banking system. This means customers may have to wait several days until they receive their payment, which could cause disruption and confusion if they were expecting the money right away.

Overall, ACH payments have advantages such as cheaper transaction fees and increased efficiency. While this is the case, there are some cons that need to be considered when deciding whether this is the optimal choice for your business.

Conclusion

To summarize, ACH payment is an ideal option for most businesses due to its low costs, security, and reliability. Nowadays, since competition is always increasing, it is important for businesses to adapt to the latest methods to keep their customers coming back. If your business currently takes recurring payments then your business will likely benefit from accepting ACH payments.

However, it's always good to consider which method is best for your business model. If you want to learn more about payments, we also have other articles that you might be interested in below.