ACH is used for all kinds of payments, including paychecks, insurance payments, disaster relief payments, social security payments, and tax refunds. If you have a bank account and receive direct deposits, chances are you regularly participate in ACH processing.
This article explores what ACH processing is and how it works, including the types of ACH payments, processing time, and benefits of ACH processing over other payment methods.
What is ACH processing?
ACH processing refers to processing an electronic payment sent through the ACH network. ACH stands for the Automated Clearing House, which follows rules and regulations established by the National Automated Clearing House Association (NACHA).
What is the ACH network?
The ACH network connects banks to each other electronically in the United States. Using the ACH network, an individual or organization with a bank account at one financial institution can quickly send money to an individual or organization at another institution.
On the user end, ACH transfers are sent or requested individually—using bank routing numbers and account numbers. However, when funds are sent, they’re distributed in batches, through clearing houses.
If you sign up for autopay with a utility company, for example, the utility company’s bank can send a request to your bank to transfer the money you owe. As long as there are enough funds in your bank account to complete the transaction, the transfer is processed.
How does ACH processing work?
ACH technology is actually 1960’s technology still in use today. Other terms for ACH payments are electronic checks, E-checks, electronic funds transfer (EFT), direct pay, or bank drafts.
Instead of writing a check, a customer provides their account number and routing number to a business or vendor.
ACH transfers involve several institutions:
- Originating depository financial institution (ODFI): This is the financial institution that originates the payment. They must abide by NACHA rules and regulations.
- Receiving depository financial institution (RDFI): This is the financial institution that receives an ACH transaction. It’s qualified by NACHA.
If you bank with an online bank that doesn’t have a branch, ACH processing is key. Without ACH processing, you’d have to mail checks to the institution for deposit, and pay hefty wire transfer fees to send money. Banks also may have daily limits for ACH transfers.
Types of ACH payments
ACH transactions can be initiated by the party sending the money, or the party receiving the money. These ACH payments vary in delivery speed and cost to you:
- ACH debits occur when money is pulled from an account. When you arrange a monthly subscription or payment to be pulled from your account, the organization you are paying can initiate a debit to pull what it’s owed from your account.
- ACH credits involve pushing money from an account. If for instance you have an account at Wells Fargo and want to send money to another account you have at Chase, this transfer could be done via an ACH credit.
According to the Federal Reserve, the ACH network was initially primarily used for recurring payments such as bill payments. Today, however, it’s very often used to process one-time transfers.
Costs for ACH transfers vary. There’s usually no cost or fee to receive an ACH transfer. You may be charged to send money, either a small percentage or several dollars.
Expected ACH processing time
ACH payment processing is an alternative to paper checks, credit cards, wire transfers, and cash. ACH transactions are faster now than ever before, thanks to new rules established by NACHA. But even with same-day ACH payments available, not all payments are processed at the same speed. There are several factors that can determine how long it takes an ACH payment to process:
- When the payment is submitted: ACH payments are submitted in batches several times a day. If your transfer is submitted right after a batch is submitted, it’ll be delayed till the next batch, which could be the next day.
- Whether the payment is expedited: Financial institutions may charge fees to process a same-day transfer.
- Whether your financial institution holds received funds: Banks and credit unions are permitted to hold funds for a reasonable time period to ensure the funds are available. ACH payment processing timeframes are incorporated into account agreements.
Many financial institutions publish sample ACH processing times for ACH transfers on their website.
Benefits of ACH processing
There are numerous ways to move money between individuals, organizations, and financial institutions. While there are similarities between payment methods, there are differences as well.
Unlike wire transfers where money is sent between financial institutions, ACH transfers use a third-party clearing house and offer a number of benefits:
- Processing ACH payments typically costs less for businesses than processing credit cards.
- Direct deposits can eliminate paper checks, paper invoices, and paper records. Customers don’t have to write a check every month, and merchants don’t have to wait for checks to arrive in the mail.
- Bank accounts don’t expire like credit or debit cards, so there won’t be declines due to expiration.
Disadvantages of ACH payment
Many of the original disadvantages of ACH payment processing no longer apply. While standard ACH transfers can take 2-3 business days (or more) to clear through the Automated Clearing House (ACH) system, same-day payment processing is often available between bank accounts today.
Whether it's an ACH debit or an ACH credit, the ACH payment process can be much faster for direct payments by ACH direct deposit than it used to be.
If anything, the main downside of the Automated Clearing House network as a payment method is that these money transfers can be less familiar to some customers. However, with the growing prevalence of ACH payments for things like utility bills, rent payments, and Social Security benefits, more and more people are getting comfortable with ACH transactions as a way to pay bills.
When to use ACH transactions
So, when does ACH payment processing work well? ACH direct deposits are excellent for recurring vendor payments or really just about any payment. They're generally less expensive than accepting a credit or debit card, and same-day ACH transfers arrive, well, on the same business day.
Better yet, you can use them just as easily to receive payments as you can to pay bills.
ACH processing with BILL
At BILL, we offer efficient solutions for ACH payments. Plus, our accounts payable and accounts receivable solutions integrate with your accounting software to keep your books up to date automatically.
For small and midsized businesses, BILL’s ACH processing is a fast, cost-effective way to pay and get paid.
