An automated clearing house (ACH) transfer is a computer-based electronic network for processing transactions. This is usually domestic low-value payments, between participating financial institutions. It may support both credit transfers and direct debits.
The ACH system is designed to process batches of payments containing numerous transactions, and it charges fees low enough to encourage its use for low-value payments.
There are various usages of ACH systems, and the terminology related to different types of transactions varies in different countries. Most ACH payment systems support the following types:
- Credit Transfer, which is the non-immediate transfer of funds between accounts at different financial institutions for payments by retail customers and non-urgent business-to-business payments.
- Direct debit payment of consumer bills such as mortgages, loans, utilities, insurance premiums, rents, and any other regular or membership-style payment. These types of payments are usually used by businesses that collect ongoing payments from the same customer.
What is ACH?
ACH transfers are electronic, bank-to-bank money transfers processed through the Automated Clearing House (ACH) Network. According to Nacha, the association responsible for these transfers, the ACH network is a batch-processing system that banks and other financial institutions use to aggregate these transactions for processing.
The Automated Clearing House (ACH) is the primary system that agencies use for electronic funds transfer (EFT). With ACH, funds are electronically deposited in financial institutions, and payments are made online.
ACH is used for all kinds of fund transfer transactions, including direct deposit of paychecks and monthly debits for routine payments. Merchants often enable consumers to pay bills via ACH by providing an account number and bank routing number. A number of online payment services also conduct transactions via ACH, including most banks and credit unions’ online bill payment services.
You may be using ACH transfers without even realizing it. Getting your pay through direct deposit or paying your bills online through your bank accounts are just two examples of ACH transfers. You can also use ACH transfers to make single or recurring deposits into an individual retirement account (IRA), a taxable brokerage account, or a college savings account.
Business owners can also use ACH to pay vendors or receive payments from clients and customers.
Types of ACH Transfers
ACH transfers can make life easier for both the sender and recipient. Gone are the days when you had to write out and wait for a check to clear, or when you had to walk your bill payment down to the electric company before the due date. While these options are still available, there are now more options.
ACH transfers allow you to send and receive money conveniently and securely without ever having to leave your home. The ACH Network processes two kinds of ACH transactions: Direct payments and direct deposits.
Direct Deposits and Direct Payments are the smart and convenient way for businesses, individuals, and government entities to safely send and receive payments. Also known as direct debit, EFT, electronic bank transfer, and eCheck, these types of payments move on the ACH Network – a payment system that reaches all U.S. bank and credit union accounts – and give both the sending and receiving parties the confidence that funds will be accurately and securely delivered on time.
ACH payments can be processed in a matter of hours on the same business day or scheduled the following day or two business days away.
The modern ACH Network has been continually advancing since its inception, adding new capabilities and transaction types, improving processing speeds, and expanding operating hours. Same Day ACH went live in 2016 and has grown in popularity as innovation continues. With a $1 million per payment limit, more businesses from a wide spectrum of industries, government entities, and consumers are able to utilize and benefit from the ACH Network.
ACH Direct Payments
Direct payments can be used by individuals, businesses, and other organizations to send money. For example, if you’re paying a bill online with your bank account, that’s an ACH direct payment. Social payment apps such as Venmo and Zelle also use the network when you send money to friends and family.
In an ACH direct-payment transaction, the person sending the money sees an ACH debit appear in their bank account. This debit shows to whom the money was paid and for what amount. The person or entity receiving the money registers it in their bank account as an ACH credit. The former pulls money from an account while the latter pushes it to another account.
ACH Direct Deposits
An ACH direct deposit is any kind of electronic transfer made from a business or government entity to a consumer. The kinds of payments that fit in this category include direct deposits of:
- Paychecks
- Employer-Reimbursed Expenses
- Government Benefits
- Tax Refunds
- Annuity Payments
- Interest Payments
With ACH direct deposits, you receive money. When you send one, you make an ACH direct payment.
How do ACH transfers work?
An ACH transaction basically consists of a data file containing information about the desired payment. Processing a transaction consists of sending that file to the originator’s bank, then to the clearing house, and finally to the recipient’s bank, where the funds are transferred to the receiving account.
For instance, here is how to initiate an ACH direct payment to bill a customer:
- Setup: Before starting the transaction, make sure you are allowed to pull money from your customer’s bank account. Your customer can give you permission by filling out an authorization form with their bank.
- Initiation: As the Originator, you start by sending data files about the transaction to your bank, which is called the ODFI (Originating Depository Financial Institution). These files include the transaction type (debit or credit), routing numbers, and bank account details.
- Batching: Your ODFI collects all transaction files sent to them and forwards them at regular intervals to an ACH operator, either FedACH (Federal Reserve Banks’ Automated Clearing House) or the Electronic Payments Network (EPN).
- Distribution: The ACH operator then sends the data files to your customer’s bank, which is called the RDFI (Receiving Depository Financial Institution).
- Completion: The RDFI in turn pulls the funds from your customer’s bank account. You will know that the transaction has been completed when you receive your payment.
Benefits of ACH payments
Generally speaking, ACH payments are more efficient than card, wire transfer, check, or cash payments. Because they pass through a single clearinghouse without a lot of intermediate steps, ACH payments offer lower transaction costs, better security, and more convenience than other payment methods.
Inexpensive
ACH payments are known for their low transaction cost compared to credit card and wire payments. Whereas credit card transactions cost around 2% of the payment amount, and wire transactions cost $10-35 each, ACH payments cost under $1, regardless of the amount paid.
Secure
Every financial transaction comes with a concern about how secure it is. This is because payment errors such as bounced checks, misused credit card information, wire transfers sent to the wrong recipients, and cash theft can do serious damage to your business. ACH provides secure payments by allowing direct transactions between two parties with no mediator in the middle.
Unlike with other electronic payment methods, you can set up a recurring payment without asking your customer to provide their bank account information every time. By sending private information less frequently, ACH reduces the chances of fraud or erroneous payments.
Reversible
Although wire transfers are quick, they are irreversible. During a wire transfer, there is no way of verifying the sender or recipient’s identity. Since these payments cannot be reversed, it’s easy to pull off a wire transfer scam using fake identities. With ACH, payments are reversible and users are authenticated to prevent fraud.
Repeatable
ACH and recurring payments go well together. Here are a few reasons why:
- Recurring ACH payments allow you to spend less time on each transaction. Once you and your customer set up a recurring payment, every transaction made after that is automated.
- Your customer doesn’t need to worry about missing a payment, because they are taken care of automatically.
- Likewise, you don’t need to chase late payments or remind customers to pay.
Better for retention
A common reason behind customer churn is payment failure. Payments made with ACH have lower failure rates than those made with credit cards, because credit cards have the possibility of expiring. Since ACH payments are made directly from bank account to bank account, they reduce the chances of payment failure and therefore customer churn.
The ACH network is a secure and economical way for your business to send and receive funds, especially if you handle recurring payments. Its simplicity and ability to reduce customer churn make it an appealing alternative to conventional payment methods like cash, check, card, and wire transfer.
If you want your business to have the best possible footing, then switching to ACH payments is a good move.
Downsides to ACH Transfers
ACH transfers are convenient, but not necessarily perfect. There are some potential drawbacks to keep in mind when using them to move money from one bank to another, send payments, or pay bills.
Transaction limits
Many banks impose limits on how much money you can send via an ACH transfer. There may be per-transaction limits, daily limits, and monthly or weekly limits. There might be one limit for bill payments and another for transfers to other banks. One type of ACH transaction may be unlimited but another may not.
Banks can also impose limits on transfer destinations. For example, they may prohibit international transfers.
Frequent transfers from Savings may trigger a penalty
Savings accounts are governed by Federal Reserve Regulation, which may limit certain types of withdrawals/transfers to six per month. If you go over that limit with multiple ACH transfers from savings to another bank, you could be hit with an excess withdrawal penalty.
And if frequent transfers from savings become routine, the bank may convert your savings account to a checking account.
Timing
When you choose to send an ACH transfer, the time frame matters. That’s because not every bank sends them for bank processing at the same time. There may be a cutoff time by which you need to get your transfer in to have it processed for the next business day.
Initiating an ACH transfer after the cutoff could result in a delay, which may be an issue if you’re trying to hit a due date for one of your bills to avoid a late fee. ACH takes an average of one to three business days to complete and is considered slow in the era of fintech and instant payments.
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