ACH Payments Meaning: A Simple (but Complete) Guide
Check out our extensive guide on ACH payments or keep reading to learn how these payments can benefit your company.
AHC payments allow businesses to make electronic payments to vendors for products and services. This type of payment can occur as a single entry, or it can be set up on a recurring basis. For example: You can authorize your utility company to electronically debit funds from a checking or savings account to pay for an electricity bill each month. You will then provide permission as to which account you want the funds to be deducted from.
Businesses can also leverage ACH payments to pay freelancers, enhance the payment reconciliation process, and even streamline the supplier management process.
No matter if the ACH transaction is single-entry or recurring, your permission must be obtained or the transaction can be voided.
The Automated Clearing House is the financial network through which the funds are transferred, thus the reason they are called “ACH payments.” Many businesses refer to ACH transactions as direct payments. The funds are directed from one account into another.
The upside to making ACH payments stems from having no need to involve a paper check, wire transfer, cash, or a credit card. In 2016, $43 trillion were transferred using ACH payments. Out of the more than 25 billion ACH payments that took place in 2016, 4.7 billion of them were Internet ACH transactions. Click here to learn more about the different types of ACH payments.
Making ACH payments is an effective way to process payments quickly. Generally, businesses can determine on the spot whether or not to accept your payment. If a return code is given when processing the payment, this alerts them to ask you for a different form of payment.
How Do ACH Payments Work?
There are many entities involved in processing an ACH payment. It starts with the Originating Depository Financial Institution (ODFI) initiating the payment. The ODFI will tap into the ACH network and request that the funds be credited to the Receiving Depository Financial Institution (RDFI).
Instead of processing each ACH payment separately, however, the payments are sent in batches to the ACH operator. These batches are sent to the Automated Clearing House; this is the entity that actually processes the payments and then sends them to the RDFIs. The clearinghouse acts as a middleman. Wire transfers do not use the Automated Clearing House to process payments. Instead, the involved banks are the middlemen.
The Automated Clearing House processes batches at different intervals throughout the day. During batch processing, the processor sorts through each transaction and makes them available to the appropriate RDFIs. Once an RDFI receives the transaction, it is then considered reconciled and the payment process is complete.
The average length of time that it takes to settle an ACH payment is typically between 24 to 48 hours. So, while it may be apparent that funds are available when the payment is initially started, there is a chance the funds will no longer be there when they are actually deducted from the account.
When a payment has been initiated but has not gone through the complete ACH transaction process, a payer will normally see an “AHC pending transfer” on his account; this means the funds are being held to complete the transfer, but they haven’t been deducted. Not until the funds have been cleared does the transaction achieve full reconciliation. The transaction is not considered settled until the funds actually move electronically from the ODFI to the RDFI, which, as mentioned before, could take up to 48 hours.
In September of 2016, same-day ACH payments became available and roughly $17 billion were processed via this method through the rest of the year. 52% of the same-day ACH transactions were comprised of same-day direct deposits. 32% of the total volume consisted of same-day business-to-business transactions. 13.5% were directed toward same-day person-to-person payments, and 2% consisted of same-day ACH consumer bill payments.
Do ACH Payments Differ from Credit Card Payments?
Because ACH payments take up to 48 hours to process, the funds are not guaranteed. The ODFI simply makes a request for funds to be transferred to the RDFI, or the RDFI makes a request for the funds to be transferred from the ODFI. Once the transaction is completed, there is a chance that the funds present in the account when the transaction was first initiated will no longer be available. There is also a chance that an ACH payment could be rejected because the account is no longer open, and the receiving entity will not know this until a couple of days later.
With credit card payments, the transaction is instant. Funds are automatically charged to the card. If the cardholder is exceeding the limit on the credit card, a return code will be provided and the receiver of the funds will know to ask for a different form of payment.
Are ACH Payments Different From Wire Transfers?
Wire transfers are much like ACH payments in that funds are being moved electronically from one account to another. However, wire transfers tend to take place much quicker. They are not sent in batches, like ACH payments.
A standard wire transfer can cost $60 or more. A credit card transaction will normally cost a business around 2.9% of the total charge. ACH payments, on the other hand, normally cost anywhere from 25 cents to $5 per transaction. As you can see, ACH payments provide a great way for businesses to lower the expense of processing payments.
Examples of ACH Payments
ACH payments come in two forms: credit and debit transactions. When businesses process a credit transaction, this means funds are being pushed into their accounts from the payer’s account. When ACH debit transactions are processed, this means money is being pulled from your account and placed into another account.
An example of an ACH debit transaction is when a company pays its suppliers or vendors. The payments are deducted from the business’ account (ODFI) and electronically moved into the vendors’ accounts (RDFIs).
Direct deposit is another form of an ACH debit transaction. For employees to receive direct deposits into their accounts, they will need to provide you with a voided check. If no check is available, the employees can provide their bank account and routing numbers.