What are ACH payments?
The Automated Clearing House (ACH) payment system facilitates the movement of billions of dollars every day, operating behind the scenes in the U.S. financial system.
It’s a sophisticated system that many of us have benefited from, whether by using online bill pay or receiving direct deposit pay checks.
In this article, we’ll explore the ACH network and ACH payments, how ACH payments function, and the ways in which it impacts our daily financial transactions.
What is ACH?
The Automated Clearing House Network, or ACH, is a network used for electronically moving money between bank accounts across the United States.
The National Automated Clearing House Association (Nacha), which was established in 1974 to enhance the U.S. payments system, administers and manages the ACH network.
The ACH network has become an integral part of how consumers manage their finances. It also offers benefits to businesses that use it to receive payments from customers, make payments to vendors, and transfer funds between accounts held at different banks.
According to statistics released by Nacha, the ACH network was used to transfer $72.62 trillion in 2022 alone. Transaction types include government, consumer, and business-to-business transactions, as well as international payments.
What are ACH payments?
ACH payments are electronic fund transfers that use the ACH network to move funds between bank accounts in the United States. ACH payments are sometimes referred to as ACH transfers or transactions.
This payment method is widely used for direct deposit of payroll, payment of bills, business-to-business payments, and other recurring payments.
ACH payments are faster and more dependable than traditional paper checks, thereby streamlining accounts payable processes. Unlike wire transfers, paper checks, or cash, ACH payments don’t go through card networks. ACH is a separate network from major credit card systems such as Visa, Mastercard, and American Express.
The ACH network operates for more than 23 hours every business day and processes payments four times a day. ACH payments can be credited as quickly as the same day, or within one to two business days.
ACH payment categories
The ACH system processes two main categories of transactions: direct deposits and direct payments.
Direct deposit is a method of payment commonly used by businesses and government agencies to deposit funds directly into a consumer’s bank account. Common examples of ACH direct deposits include salary or payroll, government benefits or transfers, tax refunds, interest payments and more.
Direct payment, on the other hand, refers to the electronic transfer of funds used for making (or receiving) payments by individuals or organizations. Common examples of ACH direct payments include bill or credit card payments, sending money to friends or family members, donations to non-profit organizations, and purchasing goods or services.
Types of ACH transfers
Further, there are two basic types of ACH transfers: ACH credits and ACH debits. Transactions are categorised as either ACH credit or ACH debit transfers, depending on which way the money moves.
ACH credits “push” money into an account. Such a transfer is initiated by the payer to the payee.
ACH debits “pull” money from an account. Such a transfer is initiated by the payee to the payer, and needs to be authorised/confirmed by the payer.
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How long does it take to process an ACH payment?
Although ACH transfers are reasonably fast, they are not instantaneous, and it usually takes 3–5 business days for the funds to be transferred. The time of day and day of the week also affect the transfer time, as well as the type of ACH payment.
There are also Next Day ACH transfers and Same Day ACH transfers available.
Next Day ACH transfers typically settle within 1–2 business days, while Same Day ACH transfers can be completed on the same business day or the following business day, depending on when the payment was initiated. However, Same Day ACH transfers usually come with an additional processing fee for the same-day service.
How much do ACH payments cost?
According to an AFP survey, the median cost of initiating and receiving an ACH payment for all businesses is between 26 cents and 50 cents.In comparison, the median cost of issuing and processing paper checks is between $2.01 and $4.
The average processing fee for an ACH payment is around 11 cents. However, several factors can affect the cost per transaction. Here are a few:
- The volume of transactions being processed is one such factor, with larger transaction volumes resulting in lower per-transaction fees.
- Faster or instant ACH transfers attract a premium.
- Accessing ACH indirectly through a third party payments processor can attract additional fees
Benefits of ACH payments
The focus of this discussion is on the benefits of ACH payments for businesses, but you (as a personal consumer) can also enjoy the benefits of using ACH.
For organizations that need to issue payments or transfers ACH offers many advantages:
1. Convenience
When comparing the convenience of ACH to writing checks, ACH is undoubtedly more convenient. With ACH, there are no paper checks to handle, no file cabinets to store them, and no pens needed to sign them. It takes less time to process ACH payments and for vendors to have access to the funds. Although checks continue to be used in many industries, vendors are increasingly choosing ACH as their preferred method of payment.
2. Cost effective
While card networks offer a similar convenience as ACH, they are often associated with higher costs, especially for businesses that process recurring payments.
Credit card fees can be as high as 2.5% of the transaction value, in addition to flat-rate processing fees.
In comparison, ACH transactions typically cost between 20 cents and $1.50 per transaction. For businesses that process a high volume of transactions, ACH can provide significant savings.
3. No more late payments
With an ACH Debit in place, late vendor payments are no longer a possibility. And ACH payments rarely fail unlike cards!
4. Easy to set up
ACH payments can be set up through your bank, an ACH operator or a payables automation service like Nanonets.
5. Can be used for international money transfers
ACH payments can be used for international money transfers, which can save several days or even weeks compared to using physical checks.
Although there is no global ACH system, many countries have their own systems that interface with ACH. For example, SEPA (Single Euro Payments Area) is the equivalent system in Europe, while Australia uses “Direct Entry.”
6. Integration with accounting software
The integration of the bank with the electronic funds transfer simplifies accounting by eliminating the need to manually update two separate records, as you would do in the case of balancing a check-book.
This also allows for seamless integration with numerous accounting tools and software services that provide comprehensive transaction histories through the ACH system.
Downsides of ACH payments
Despite its overwhelming benefits, ACH payments also have a few drawbacks:
ACH payment limits
ACH transfers may have limitations set by banks, such as per-transaction, daily, weekly, or monthly limits. Limits may differ for different types of ACH transactions. Furthermore, transfer destinations can also be restricted by banks.
ACH payment timings
Timing is crucial when sending an ACH transfer as not all banks process them at the same time. There may be a cutoff time, and initiating a transfer after that could result in a delay, which can be problematic if you’re trying to avoid late fees.
ACH transactions usually take one to three business days to complete, which is considered slow compared to the fast-paced fintech industry. However, the introduction of Same-Day ACH processing has been a solution to this problem!
Takeaway
ACH transfers offer a convenient and straightforward method for sending and receiving money. However, it’s crucial to be aware of your bank’s policies for ACH direct deposits and payments, whether you are sending or receiving money.
The ACH network is an impressive technological system designed to improve the efficiency and security of banking. It significantly improves the daily lives of millions of people, though its benefits are often overlooked.
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Originally published at https://nanonets.com on April 15, 2023.