The Automated Clearing House (ACH) is a US-based electronic system that connects financial institutions for domestic electronic funds transfers (EFTs).
This article explains what an ACH transfer is, how the system works, the different types of ACH transfers, how ACH payments can benefit your business, and what you need to set them up.
What is an ACH transfer?
ACH transfers move money between banks electronically through the Automated Clearing House network. More and more businesses are using the ACH system as a relatively inexpensive way for customers to pay their bills and to enable business-to-business payments.
ACH payments also include direct deposits and person-to-person payments. Many transfer providers, including banks and apps, use ACH when their customers send money to friends and family.
History of the Automated Clearing House
The Automated Clearing House (ACH) was established in 1974 and is managed by the National Automated Clearinghouse Association (NACHA). NACHA regulates the ACH network and writes the rulebook.
The ACH was created to handle the increasing number of paper checks in the 1970s, which was overwhelming the banking system.
Today, thousands of financial institutions are connected through the ACH network, processing more than 31 billion electronic transactions with a total dollar volume exceeding $80 trillion in 2023.
Types of ACH transfers
There are two types of ACH transfers:
ACH credit
ACH credit transfers are initiated by the person or organization that's doing the paying—in banking terms, the payor.
A company might use an ACH credit transfer to pay a vendor, pushing money from its account to the vendor's account.
ACH debit
ACH debit transfers are initiated by the person or organization that's being paid—the payee.
When you authorize your mortgage lender to take your mortgage payment directly from your bank account each month, that's an ACH debit.
The company that's being paid initiates each payment, but only because they have your standing permission to do that.
How ACH transfers work
ACH transfers are generally initiated through a bank or payment processing service. This is how employees who use direct deposit or workers who need expense reimbursement receive their payments.
Here are the essential steps of an ACH transaction:
Step 1. Making the ACH transfer request
An ACH transfer starts with an "Originator." This person or company (the sender) initiates an ACH transfer by authorizing the payment or withdrawal through a direct deposit forms, an online banking portal, or a merchant payment system.
Step 2. Sending the request to the ODFI
The ACH transfer request is sent to the originator's bank, known as the Originating Depository Financial Institution (or ODFI). That bank receives the transaction details, including the amount, account numbers, and routing numbers.
Step 3. Batching the ACH transfer requests
The ODFI batches the ACH transactions it has received throughout the day. ACH transactions are typically processed in batches at scheduled intervals rather than individually in real-time.
Step 4. Sending them to an ACH operator
The batched transactions are sent to an ACH operator. In the U.S., the two national ACH operators are the Reserve Banks and the Electronic Payments Network.
The operator sorts the transactions and uses the routing numbers to send them where they need to go.
Step 5. Receiving ACH payments at the RDFIs
The recipient's bank or credit union—the Receiving Depository Financial Institution (RDFI)—receives the transaction information through the Automated Clearing House Network.
Step 6. Posting the transactions
The RDFI posts the transaction to the receiver's bank account.
Step 7. Settling the funds
The ODFI and RDFI handle the final financial settlement. This is when the actual transfer of funds takes place between bank accounts. Both confirm the transaction, and the accounts are reconciled.
If any errors or issues are discovered (such as insufficient funds, incorrect account numbers, or unauthorized transactions), exception processes are initiated to resolve them.
What are the benefits of ACH transfers?
ACH transfers offer many benefits for both consumers and businesses.
- Speed: ACH transfers are faster than traditional mail and can sometimes be accessed instantly
- Cost: transfers often cost the receiver nothing, and they're relatively inexpensive for the payor as well
- Convenience: money is transferred online and deposited directly into the recipient's account—they can also be set up for recurring payments, making it easy to manage bills and savings
- Transparency: ACH payments can be tracked more easily than checks, with predictable deposit dates based on the date the payment was initiated
Small businesses often prefer to get paid by ACH for all these reasons.
They can get paid faster, they don't have to pay credit card fees, the funds are deposited automatically, the payments are easy to set up, and there aren't any awkward questions about whether a check was really mailed or when it might arrive.
Restrictions on external ACH payments
When using your bank to send an ACH transfer to an account at a different bank, it's important to ask about their ACH policies and any limitations that may apply.
These limitations could include daily and monthly amount limits, cutoff times for processing transfers, fees for insufficient funds in your account, restrictions on international transfers, and limits on transfers from savings accounts.
Some banks may also charge a fee for staff-assisted transfers.
How long do ACH transfers take?
ACH transfers typically take 1-3 days to process. The speed of a specific transfer depends on factors like business days and processing frequency.
ACH transfers usually only happen on business days during business hours, so if you submit a transfer after 5 pm or on a weekend, you may have to wait longer.
Banks and financial companies typically push ACH transfers in batches and at specific times of day, like 10 am, 1 pm, and 4 pm.
The receiving end of the transfer also needs some processing time before the funds reach their final destination.
How much is an ACH transfer fee?
Banks will often charge a fee for an external ACH—sending money to an account at a different bank.
The cost of ACH transfers can vary depending on the financial institution.
Some ACH transfers, such as payroll direct deposits, cost nothing to the individual receiving the funds. However, there may be fees for expedited payments or person-to-person payments through certain platforms.
Through a bill-pay platform like BILL, ACH payments often cost less than the cost of sending a check, and vendors get those funds electronically without any charge on the receiving end (unlike credit card payments).
How to automate an ACH transfer
BILL Accounts Payable is a quick, easy way to make ACH transfers while streamlining the bill-pay process.
- Import invoices into BILL with little to no manual data entry
- Automate approval routing based on your own business rules
- Pay by ACH—or choose credit card, check, or international wire—all from the same digital platform
- Use automatic 2-way sync with leading accounting systems to maximize efficiency
Learn more about BILL Accounts Payable here.
ACH transfers FAQ
What information is needed for an ACH transfer?
To make an ACH transfer, you'll typically need the recipient's bank routing number and account number, as well as your own account information. This ensures that the funds are transferred accurately and securely.
However, when using the BILL network, both payor and payee can enter and manage their own banking information—without the need to share that information with each other—for added security and convenience.
ACH transfer vs wire: what's the difference?
An ACH transfer is an electronic money transfer between banks through the ACH network, while wire transfers are faster but more expensive bank-to-bank transfers.
ACH transfers are commonly used for everyday transactions, while wire transfers are preferred for large-sum, time-sensitive transfers.
Are there any ACH transfer transaction limits?
While ACH transfer transaction limits do exist in the ACH network, very few ACH debit transactions or ACH credit transactions will feel these ACH payment limitations in a significant way.
On March 18, 2022, the ACH rules increased the dollar limit for same-day ACH money transfers to $1 million per payment.
The increased dollar limit applies to all eligible same-day ACH payments, including credits and debits for both businesses and consumers.
Can I send an ACH network payment from my bank or credit union?
Yes, you can send an ACH network payment from just about any financial institution, including banks and credit unions.
Bill pay services like BILL make bill payments easy, so businesses can pay bills or make vendor payments by ACH bank transfer, wire transfer, international wire transfer, and more, all through the same platform.
