Discover How ACH Payments Work

ACH payments are electronic funds transfers that use the Automated Clearing House Network (ACH). 1 The funds move from one account to another using a centralized network that sends the money to its final destination. Computerized payments have benefits for both consumers and merchants. They are cheap, automated and easier to record.

Many people are already familiar with ACH payments. However, you may not know the technical jargon. ACH payments are often made when employers make direct deposits of wages or when consumers pay their bills electronically from checking accounts. Nacha, the Electronic Payments Association that runs the ACH Network, reports that consumers and businesses made more than 23 billion ACH transactions in 2018.

Basics of ACH

ACH payments are electronic transfer from one account to another. Several examples include:

• A customer pays the service provider.
• Employers deposit money into employee checking accounts.
• The consumer transfers money from one bank into another.
• A business pays its supplier for the products.
• A taxpayer transfers funds online to the IRS or local organisations.

Employers need to know the following information to set up direct deposits.

• Name of the credit union or bank receiving funds
• What type of account is it?
• The bank’s ABA Routing Number
• The account number of the recipient

Using this information, you can create payments and direct them to the correct accounts. The same information is needed by billers to pre-authorize withdrawals from customers’ accounts.

ACH payments can be electronic all the way through. Sometimes, however, merchants will convert paper checks into electronic payments and then the funds are transferred through the ACH system. 4

The Benefits are All Around

There are many reasons why electronic payments are so popular.

• ACH payments are less resource-intensive than paper checks because they’re digital. You don’t need paper, ink or fuel to transport the checks. Nor do you need time to deposit and handle them.
• Electronic transactions allow you to easily keep track of your income and expenditure. Banks create a record of every transaction. This transaction history can be accessed by accounting and personal financial management software.

Why businesses like ACH payments

Simple to handle

Businesses must wait for the check to arrive in the mail before they can deposit it at a bank. It’s not uncommon for payments to be lost and the process of entering them into a system can be laborious. Electronic payments are reliable and arrive quickly. There’s no need for you to send checks to the bank to wait a couple of days to see which ones bounced.

Costs Less Than Plastic

It is often cheaper to use an ACH payment than to accept a credit-card payment for businesses who accept credit cards. These savings are especially significant when you collect recurring payments. Automating these payments increases their benefits. ACH, however, does not provide a real-time approval/rejection response like a terminal for credit cards.

Paying Long Distance

Businesses can accept payments remotely via ACH, but the same applies to credit cards. If you have customers who don’t use credit cards, or prefer to not provide card information on a regular basis, ACH is a good solution. 5

Why consumers prefer ACH payments

ACH payments aren’t just for businesses.

Easy Payments

Consumers don’t need to order checks, or reorder them when they run low. They can also get their checks delivered at the right time. The funds are not charged to their credit card, but directly deducted from their bank accounts. 6

Autopilot

When using automatic ACH payment, customers don’t need to pay attention to bills or take action when they are due. Everything runs automatically, for better or worse. 7

Accepting ACH payments from customers

You need to work with a payment processing company if you want to accept payments via ACH. If you already have a payment processor, but are not yet using ACH services, then it’s time to get one.

Ask your current service providers if you can make ACH payments, such as:

• Your business account at the bank
• You already have a vendor who processes your credit card payments (or any other type of payment)
• Popular accounting software allows you to accept payments via ACH and create invoices.

Payment processors are constantly entering the market. They may be a great fit for small business owners who only make ACH payments infrequently. Plooto, for example, allows you to receive or send payments with just a $25 fee per month. This includes 10 free transfers.

The cost per transaction for ACH may be lower for large businesses, but it might still be competitive if your business only makes a few transactions each month.

What is the cost?

ACH can be used by businesses of all sizes. If you pay more, it’s natural to get a lower rate. But the same goes for credit card payments. For sending and receiving ACH transactions, the average cost is around $0.29. 10 Service providers may charge more for small businesses. Some service providers charge per transaction fees while others take a monthly fee, or a percentage from each payment. These costs may still be competitive if you have a large average transaction.

Consider the overall picture when evaluating alternative solutions. Accepting checks might not be expensive, but what is the trade-off?

Setting up ACH might not be worth the trouble for some businesses. For example, consultants who receive only one or two checks a month and whose cash flow isn’t an issue. Others may benefit from having more time. You can do more when you automate your payments.

Paying by Personal ACH

Individuals can receive or send payments using ACH if a company or another organization is the recipient. It’s difficult to make a direct ACH payment from one person to another, but you can easily send money to someone else through an intermediary.

Third-Party Applications

You can send money to family and friends for free using several apps. These apps are a front end to your bank account and use ACH for deposits and withdrawals. 

Bank Offerings

You may be able to send money through your bank or credit union’s P2P service. These services can be bank-branded or part of Popmoney or Zelle.

It’s difficult for an individual just to punch in someone else’s banking information and complete a payment. According to the service, the recipient or sender may have to open a bank account with the service provider in order to make a payment.

Pay the same day

Weekends and holidays may slow down the process. This is too slow for today’s electronic payments, and especially in an on-demand environment. In 2016, same-day ACH payment began. The functionality is growing, so expect faster payments in the near future.

FAQs (Frequently Asked Questions)

What is an ACH debit card?

A debit is an entry on your savings or checking account. A debit card, unlike credit cards which charge your credit line, draws directly from your account. ACH debit can be used to debit your account in other ways. An ACH debit is when money is taken from your account through an ACH transaction.

When do ACH transactions post at?

ACH transactions are processed at any time, but only during business hours. All transactions settle weekday mornings, at 8:30 am EST. Same-day payments have an additional three settlement windows, between 8:30 and 6:30 pm. 12