What is an ACH payment?

Automated Clearing House (ACH) payments have transformed the landscape of financial transactions, providing a convenient, secure, and efficient alternative to traditional paper checks and cash.

At the core of ACH payments lies a robust network known as the Automated Clearing House. This network connects banks and other financial institutions, facilitating the seamless transfer of funds between accounts. 

Unlike wire transfers, which are processed in real-time, ACH payments are typically batched and processed on a scheduled basis, resulting in faster processing times compared to traditional paper checks.

Understanding how ACH payments work can help you make informed decisions about how to manage your finances. This article will walk you through what ACH payments are, their pros and cons, and how they can help your business grow.

What is an ACH payment?

An ACH (Automated Clearing House) payment is an electronic transfer of funds from one bank account to another. ACH payments are typically used for direct deposits of payroll and government benefits, electronic bill payments, business-to-business payments, and peer-to-peer payments. 

ACH payments are processed through a secure network that connects banks and other financial institutions. ACH payments are typically processed within one to two business days and are a convenient and affordable way to transfer money electronically.

What is ACH Network's role in the financial system?

The Automated Clearing House network is a critical component of the financial system, facilitating the efficient transfer of funds between banks and other financial institutions. 

The network operates on a batch processing system, meaning that transactions are grouped together and processed in bulk at specific times throughout the day. This allows for faster processing times compared to traditional paper checks, which can take several days to clear.

The ACH network plays a vital role in a wide range of financial transactions, including:

• Direct deposit of payroll and government benefits: The ACH network allows employers and government agencies to deposit payroll directly into employees' and beneficiaries' bank accounts, providing a convenient and secure alternative to paper checks.
• Electronic bill payments: Many consumers use the ACH network to pay their bills electronically, either through their bank's online bill pay service or through third-party bill payment providers. ACH bill payments are typically processed within one to two business days, making them a convenient and timely way to pay bills.
• Business-to-business payments: Businesses often use the ACH network to make payments to suppliers, vendors, and other business partners. ACH payments can be used to pay invoices, purchase orders, and other business expenses.
• Peer-to-peer payments: The ACH network also enables peer-to-peer (P2P) payments, which enable individuals to securely send money to each other electronically. P2P payments can be made through bank-based services or through third-party P2P payment providers.

While other payment options, such as credit card transfers, are faster, they also come with the burden of higher fees and greater potential for fraud.

By comparison, the ACH network is a safe and secure way to transfer funds electronically. ACH transactions are subject to strict security standards and protocols, and banks and other financial institutions are required to implement measures to protect consumer data. 

How do ACH payments work?

ACH payments work through a secure network that connects banks and other financial institutions. The process involves several steps:

Initiation:

• The sender (originator) initiates the ACH transaction through their bank's online banking platform, a third-party ACH provider, or accounting software.
• The originator's bank sends the transaction to the ACH network.

Processing:

• The ACH network validates the transaction and routes it to the receiver's bank.
• The receiver's bank receives the transaction and validates it.
• The receiver's bank debits the originator's account and credits the receiver's account.

Settlement:

• The ACH network settles the transaction with the originator's bank and the receiver's bank.
• The originator's bank and the receiver's bank update their respective accounts.

Completion:

• The transaction is complete, and the funds are available to the receiver.

ACH credit payments

ACH credit payments are a convenient and efficient way to transfer funds from one bank account to another. They are typically used for direct deposits of payroll and government benefits, electronic bill payments, and business-to-business payments.

The process of an ACH credit payment is as follows:

• The sender (originator) initiates the transaction by providing the receiver's bank account information and the amount to be transferred.
• The sender's bank sends the transaction to the ACH network.
• The ACH network validates the transaction and routes it to the receiver's bank.
• The receiver's bank credits the receiver's account with the funds.
• The ACH network settles the transaction with the sender's bank and the receiver's bank.
• The transaction is complete, and the funds are available to the receiver.

ACH credit payments are a safe and secure way to transfer funds. They are processed through the ACH network, which is a highly regulated and secure system.

ACH debit payments

ACH debit payments are another type of electronic payment that allows funds to be transferred from one bank account to another. They are typically used for recurring payments, such as utility bills and mortgage payments.

The process of an ACH debit payment is as follows:

• The receiver (recipient) initiates the transaction by providing the sender's bank account information and the amount to be transferred.
• The receiver's bank sends the transaction to the ACH network.
• The ACH network validates the transaction and routes it to the sender's bank.
• The sender's bank debits the sender's account with the funds.
• The ACH network settles the transaction with the sender's bank and the receiver's bank.
• The transaction is complete, and the funds are transferred to the receiver's bank.

ACH debit payments are a convenient way to make recurring payments. They allow you to set up automatic payments so that you don't have to worry about missing a due date.

What are the benefits of ACH payments?

ACH payments offer numerous benefits to businesses and consumers alike:

• Convenience: ACH payments can be initiated online, through a mobile app, or through accounting software, making them a convenient option for making and receiving payments.
• Speed: These payments are typically processed within one to two business days, which is faster than traditional paper checks.
• Security: ACH payments are processed through a secure network that is subject to strict security standards and protocols.
• Affordability: One of the primary benefits of ACH payments is they are typically less expensive than other electronic payment options, such as credit card transfers.

Examples of ACH payments

Imagine a small business called "ABC Company" with 50 employees. Every month, ABC Company uses ACH payments to deposit employees' salaries directly into their bank accounts.

• Step 1: Initiation - The payroll department at ABC Company initiates the ACH payment process by sending a file to their bank. This file contains the employees' names, bank account numbers, and the amount of each employee's salary.
• Step 2: Processing - ABC Company's bank validates the ACH file and sends it to the ACH network. The ACH network routes the file to the employees' banks.
• Step 3: Settlement - The employees' banks receive the ACH file and validate it. They then debit ABC Company's account and credit the employees' accounts with their salaries.
• Step 4: Completion - The ACH payments are complete, and the employees' salaries are available in their bank accounts on payday.

How long do ACH transfers take?

ACH transfers typically take one to three business days to process. This is because ACH payments are processed in batches and are not processed in real-time like wire transfers. The time it takes for an ACH transfer to complete can vary depending on the banks involved and the time of day the transfer is initiated.

ACH payment transfer times can be affected by weekends, holidays, different banks, cut-off times, bank holidays, system maintenance, and technical issues. To ensure timely processing, initiate transactions well in advance, especially if involving weekends, holidays, or different banks.

The recently introduced same-day ACH transfers allow electronic payments by allowing immediate fund transfers between bank accounts on the same business day, for an additional fee. These transfers offer several benefits, including faster payments, improved cash flow, and enhanced customer satisfaction. 

What happens if an ACH payment is returned?

In the event that an ACH payment is returned, it is typically due to one of the following reasons:

• Insufficient funds: The originator's bank account does not have enough funds to cover the payment.
• Account closed: The receiver's bank account has been closed.
• Incorrect account information: The receiver's bank account information provided by the originator is incorrect.
• Stop payment: The receiver has placed a stop payment order on the payment.
• Fraud: The payment is suspected to be fraudulent.

When an ACH payment is returned, the originator's bank will typically notify the originator of the reason for the return. The originator may then attempt to retry the payment after correcting the issue that caused the return.

ACH vs Wire Transfer: which should you use?

Wire transfers and ACH transfers seem similar on surface. However, there are some significant differences between the two, with ACH payments usually being the more secure and convenient.

Cost comparison: wire transfers vs. ACH payments

ACH payments are generally more cost-effective than wire transfers, particularly for recurring payments. Here's a breakdown of the cost differences:

Speed comparison: wire transfers vs. ACH payments

Wire transfers and ACH payments are two common methods of electronic fund transfer, but they differ in terms of speed and efficiency.

Use cases for ACH and wire transfers

Using ACH payments to boost your business 

In today's financial landscape, understanding ACH payments is crucial for businesses seeking efficient and secure payment solutions. ACH payments offer numerous advantages, including cost-effectiveness, speed, flexibility, and security. They streamline processes by facilitating direct deposits, electronic bill payments, and business transactions.

With Chaser's accounts receivable software, you can let your debtors make ACH payments and direct debit payments via a dedicated payment portal, which you can link them to within personalized, automated payment reminders. For more information about how Chaser can support your organization, speak to an expert, or try the software for free for 10 days.