What is ACH (Automated Clearing House Network)?
ACH payments account for more than $76 trillion in transactions annually, making the ACH network one of the most utilized payment methods in the country. However, as real-time payments become more prevalent within many businesses in the US and abroad, the ACH network faces potential challenges to its reputation as the leader of US bank-to-bank transfers. Understanding an ACH payment and how it works is essential for companies seeking the best bank-to-bank transfer options.
So, what is an ACH payment? This guide explores ACH payments, how they work, their benefits, their disadvantages, and why they're still relevant to modern businesses. Read ahead to learn more about bank-to-bank transfers and their impact on the contemporary payment landscape!
What is an ACH Payment?
So, what does ACH stand for? An ACH payment is an electronic bank-to-bank transfer facilitated by the Automated Clearing House (ACH) network. Instead of using card networks to process transactions, ACH payments utilize the ACH network to deposit money from one bank account to another. The ACH Network is administered by the National Automated Clearing House Association (Nacha), an independent organization owned by some of the United States' largest banks, credit unions, and payment processors. The ACH network is a clearinghouse for the various payments transferred between accounts, and it began operating in the 1970s when the Federal Reserve System established it.
Usually, using the ACH network is more affordable than using the major card brand networks. Traditional ACH payments take one to three days to process. However, in 2016, Nacha introduced Same-Day ACH, which deposits funds into recipient accounts multiple times daily, speeding up the process.
Although the ACH network offers slower processing times than other payment options, such as real-time payments, it remains a popular payment method in the United States. Between 2014 and 2023, the ACH network's payment volume experienced a compound annual growth rate (CAGR) of 5.57%.
How Does ACH Work?
While businesses of all sizes rely on ACH payments for payroll, settling bills, and other payments, few understand how the system works.
To process an ACH payment, the originator (the company or individual sending the money) contacts a payment facilitator offering ACH payments. The originator provides its bank details, the recipient's bank details, and the amount of money it wants to transfer using the ACH network. The payment facilitator batches the payment with ACH payments from other originators and submits them to the ACH network.
Next, the recipient's bank receives payment instructions to debit the originator's account and credit the receiver's account. If this is a traditional ACH payment, processing will take one to three days. If it's a same-day ACH payment, it will be completed the same day, provided it is transferred before the last payment batch at 4:45 PM (ET). The ACH payment provider facilitates the transaction, ensuring the payment arrives.
If you need help processing an ACH payment, contact your payment provider. Most providers have easy-to-use ACH interfaces, simplifying transferring money over the ACH network.
What are the ACH payment types?
There are two types of ACH payments: ACH credits and ACH debits. Both ACH credits and ACH debits offer efficiency, cost-effectiveness, and convenience advantages compared to traditional paper-based payment methods. They are widely used by businesses, financial institutions, and individuals for various financial transactions, contributing to the seamless flow of funds in the banking system. Let's explore each payment type in more detail:
ACH Credit
An ACH credit occurs when the payment originator sets up the payment. The originator requests that money be removed from their account and transferred to a recipient. As the originator credits the recipient's account, it's an "ACH credit." For example, if a homeowner receives a water bill in the mail with an ACH payment option, they initiate an ACH Credit when they log into their bank account and set up a payment to settle the bill.
ACH Debit
On the other hand, an ACH debit occurs when money is withdrawn from the payment recipient's account rather than sent from the payment originator's account. For example, your water company automatically charges your bank account for your bill on its due date. This is popular with utility companies, as bills may vary monthly.
Advantages of ACH Payments
There are numerous benefits to using ACH payments, both for consumers and businesses. Here are some ACH payment advantages:
Cost-effective
ACH payments benefit from being one of the most affordable payment options available to businesses and individuals. However, while ACH payments are often cheaper than other payment methods (such as credit cards), the price you pay depends on the financial institution. Always compare ACH payment fees before selecting a provider.
Widely used
The ACH network processes billions of payments every year. It's currently the most popular business-to-business payment method, with 39% of US businesses using ACH credits. As this payment method has more than 50 years of history, it's widely understood by all major financial institutions and businesses in the United States. Likewise, it means many payment processors offer ACH payment services to businesses, making it simple to switch ACH payment providers without hiccups.
Secure
ACH payments offer security benefits not found in many other bank-to-bank transfer platforms. For example, due to the stringent regulatory requirements and authentication processes, ACH payments are often considered more secure than international wire transfers. ACH transactions are subject to strict verification procedures, including authentication of sender and recipient identities. At the same time, international wire transfers may involve higher risks of fraud and unauthorized access due to varying regulatory standards and potential vulnerabilities in cross-border banking systems.
Easy to Scale
The ACH system is easy to scale for businesses of any size. It can handle whether you need to make a single payment to a vendor or pay thousands of employees their salaries. The ACH network is always suitable if you seek a payment system that can adapt as your business grows.
Same-day payments are now an option
While traditional ACH payments take one to three days to process, a same-day ACH system now facilitates same-day bank transfers. With same-day ACH, payment batches are deposited multiple times throughout the day, ensuring your transfer arrives the same day it leaves your account if you submit it by 4:45 PM (ET).
Disadvantages of ACH Payments
Here are the details of the downsides of this payment option:
Slow processing times
Traditional ACH payments usually take one to three days to process, making them unsuitable for businesses or individuals seeking instant payments. Not only is this inconvenient, but it can cause cash flow issues for business owners, freelancers, and other parties requiring timely payments.
While same-day ACH has made it possible to send money quicker, it's still not in real-time. Same-day ACH submits multiple payments daily, with the last submission at 4:45 PM (ET). Anything submitted after this deadline will not reach the recipient's account until the first payment submission the following day.
Limited overseas functionality
The ACH system isn't suitable for overseas payments — its primary function is facilitating transactions within the United States. Businesses with overseas customers or employees must also use wire transfers or other fees to send or receive payments from different countries.
A Quick Breakdown of ACH Fees
If you're researching ACH payments, you've probably read a lot about their low cost. ACH payment providers usually charge a fixed fee or a percentage fee. If your business transfers large sums of money, a fixed fee is more affordable than a percentage fee; however, a percentage fee structure will likely be cheaper if you make small transfers. The exact figures vary depending on the ACH provider you work with, so comparing processing rates is essential to get the best value from your money transfers. Here's what you can roughly expect to pay:
- Fees for flat-fee ACH providers: $0.20 to $1.50 per transaction
- Fees for percentage-based ACH providers: 0.5% to 1.5% per transaction
Although many credit card processors use a fee structure with a fixed and percentage-based charge, ACH pricing is much more affordable. However, you must also consider other fees when choosing an ACH provider
- Account fees: Some ACH providers charge monthly fees for account servicing and other costs.
- Setup fee: ACH providers may charge businesses or individuals a one-time setup fee or origination fee.
- Batch fees: ACH providers may charge batch fees for businesses that transfer multiple payments simultaneously (such as payroll).
- ACH return fee: If an ACH payment is returned to the payment originator, ACH providers may charge a fee. Hence, it's crucial to ensure a recipient's bank details are correct before sending a payment.
ACH Payments: Key Takeaways
Recent developments in the payment landscape have challenged the ACH network's position in the market. Real-time payments, Open Banking, and other methods are making headlines for their advantages over the ACH network. Still, the ACH network continues to benefit from year-over-year growth for many reasons: it's low cost, convenient, secure, and widely used throughout the United States. As the ACH network now offers same-day payments, there's no longer a need to wait one to three days to settle transactions.
Your business must partner with a payment provider to use the ACH network. Most providers can offer ACH payments using other payment methods, such as credit card processing, international money transfers, etc. Modern consumers expect businesses to offer their payment method of choice, so providing a broad range of options is critical. Contact a payment provider today to learn about the benefits of ACH payments and other leading payment methods.
FAQs About ACH Payments?
