Advanced Insights on ACH Transactions

ACH transactions are not as complicated as they sound. It’s just an easier and safer way to move funds. If you’ve ever signed up for direct deposit or paid a bill online, then chances are you’ve dealt with ACH transactions. When running a business, it’s important to understand the mechanics of ACH, including how it works, what could go wrong, and tips to streamline the entire process.

Fundamental Definitions for ACH Transactions

ACH stands for Automated Clearing House, a U.S. financial network used for electronic payments and money transfers. Also known as “direct payments,” ACH transactions are a way to transfer money from one bank account to another without using paper checks, credit cards, wire transfers, or cash. 

These transactions are called “ACH” because the electronic payments are processed by the National Automated Clearing House Association (NACHA). NACHA is a batch system that banks and other financial institutions use to aggregate and process all transactions for the business day. This typically happens three times during the day, with the last batch at 4:45p ET. 

An ACH transaction differs from an ACH transfer because it doesn’t always involve the immediate movement of funds. An ACH transaction may only send the remittance and proof of payment, and not the money itself. It can also be held by the payee.  

What is an ACH Transaction?

A simple ACH transfer involves a request made from the payor’s bank account. This prompts a transfer of funds sent via the ACH network to a recipient’s bank. This is a US-only network that is not available to payees outside of the United States. 

ACH transfers typically take a few business days to clear and can be used with either a savings or checking account. To complete a transaction and start the transfer, you must have the account number and routing number for both the sending and receiving parties. An ACH will not process without this information. 

What is a Global ACH?

A global ACH  is a cross-border payment made through international transfers. Unlike the US system, global ACH lacks any universal standard provided by NACHA. The institution strictly oversees the United States. That does not mean, however, that sending an ACH overseas is not possible, it’s just done through a different process.

Instead, an international ACH leverages the existing ACH capabilities of any particular country’s banking system. It looks for the best way to execute cross-border payments in a cost-effective and efficient manner. 

There are currently 98 other ACH systems around the world, outside the US, as identified by the World Bank.

ACH Fast Facts:

The ACH Network processes two kinds of ACH transfers: direct deposits and direct payments.

ACH Direct Deposits

An ACH direct deposit is any type of electronic transfer made from a government entity or business to a consumer. There are several kinds of payments that fit into this category. 

Examples of an ACH direct deposit include:

• Paychecks
• Government benefits
• Employer-reimbursed expenses
• Annuity payments
• Tax refunds
• Interest payments

ACH direct deposits are often used for recurring payments and are a great way for a small business to ensure all the bills get paid on time.

ACH Direct Payments

Direct payments can be used by individuals, organizations, and businesses to send money for anything. In an ACH direct-payment transaction, the sender sees an ACH debit appear in their bank account. This shows who the recipient is and the amount of the transfer. The individual or entity receiving the money registers it in his or her bank account as an ACH credit. 

One example of an ACH direct payment is when you’re paying a bill online using a bank account. Social payment apps and payment service providers also use the ACH direct payment method to transfer and receive funds. Popular brands include:

• Venmo
• PayPal
• CashApp
• Zelle

What is an ACH Debit?

This is initiated by the payment receiver and is the most popular type of ACH transfer. An ACH debit is often referred to as a “pull” transaction since the receiver is pulling funds from the payer’s account. 

An ACH debit transaction is different from an ACH debit card transaction. The reason for this lies in the cost associated with debit card transactions. In this case, businesses are paying at least 1% of the total transaction amount.

In order to perform an ACH debit, the receiver has to provide their bank account information (account number and routing number). This is often referred to as a “pull” transaction since the receiver is “pulling” funds from the sender’s account. 

This process makes ACH debit transactions less secure than an ACH credit transaction. However, the ACH debit method still remains extremely popular for companies paying recurring bills like a lease or utilities. 

In essence, ACH debit transactions give a vendor permission to pull what they are owed out of your bank account. ACH debits occur faster than ACH credits because NACHA rules state that debits must be completed within one business day. 

How Does an ACH Debit Work?

The process of an ACH debit is simple. The withdrawal is initiated by the payee who submits a request to the Automated Clearing House Network. Everything, between funds leaving one account and entering into another, is handled by the ACH platform. All that is required to make a successful transaction is bank account information. 

What is an ACH Credit?

Another type of ACH transfer is called an ACH credit. A digital transfer of funds is initiated by the payer from one bank to another. This is the most common type of payment method for direct deposit and receiving government benefits like Social Security or Disability. 

A business can also use an ACH credit to make a payment. For example, automatic bill pay is a form of an ACH credit. Another example is business owners who choose to pay state taxes through ACH credit. Although the word “credit” sounds like using a credit card to make a purchase, remember it can also be used to make a payment.

How Does an ACH Credit Work?

The process of an ACH credit is similar to an ACH debit, only the payer is the one who initiates the transfer (not the payee). Rather than funds being “pulled”, they are “pushed” into the receiving deposit account by the payer. If a company pays an invoice using the Automated Clearing House, this would be considered an ACH credit to the payee’s account.

Direct deposit is a prime example of an ACH credit transaction. In this case, an employer “pushes” a paycheck electronically into a worker’s bank account. This payment then shows up in the employer’s account as an ACH credit.

ACH Debit vs. ACH Credit   

The main difference between an ACH debit and an ACH credit is the availability of funds. In an ACH credit transaction, the bank will send funds immediately upon the request of the payer. 

In an ACH debit transaction, the bank will send funds upon the request of the recipient. So the main difference simply lies in who is asking for the money.

Although the difference is small, it is significant. One transaction is pushing funds and the other is pulling. This creates a unique level of security and processing for each transaction. 

ACH vs. EFT

An EFT and a digital check can both be a type of ACH, but an ACH isn’t always an EFT or e-check. Moving funds across the ACH network is one form of an electronic funds transfer (EFT). There are EFTs, however, that are not ACH transfers. 

Some examples of a non-ACH EFT include:

• Bank wire transfers
• Payment service providers
• Cryptocurrency payments

Unlike an ACH, many forms of EFTs don’t require the use of a bank account at all.

ACH vs. eChecks

The terms “e-check” and “ACH” can be used interchangeably, but there is an important distinction between the two. An e-check is a payment where a paper check is converted into an ACH debit. This can be done in a few different ways, like:

Point of Purchase

In this case, a payer presents a hardcopy check to a cashier at the point of sale. The payment is immediately processed as an ACH debit using the account information on the check.

Accounts Receivable Conversion

When a payer sends a paper check for payment of an invoice, the accounts receivable department can choose to process it as an ACH debit.

Back Office Conversion

In this instance, the check is processed as an ACH debit in the back office at a later time than payment.

The Cost of ACH Transactions

ACH transfers are known for having low fees. That’s why it’s such a popular method for online payments. Whether using an ACH debit or ACH credit, processing fees are very reasonable. 

Some banks do charge a fee as a way to discourage you from moving money out. That’s why a business may experience a fee for outgoing ACH transactions, while incoming transfers are free. In other words, putting money into the bank is encouraged and your reward is no fee. 

The average charge for ACH transaction fees is $3 for standard delivery and between $6-$10 for next-day delivery. Some banks will waive the fee if you send it online or sign up for automatic bill payments. 

If you want to avoid extra fees, a business should always be “pulling” money into a bank account, rather than “pushing” money out. It should be noted, that it’s not always possible to avoid fees when transmitting an ACH. The costs ensure funds are securely transferred through the ACH network. However, it will always remain one of the most affordable options available for sending money quickly.

The median internal cost for ACH payments is $.29, but the total cost associated with accepting ACH payments varies. One of the biggest factors involved with the cost of accepting ACH payments is the volume of transactions your business processes.  Much like anything else you buy, the more transactions processed, the lower the cost per transaction. 

When accessing ACH through a third-party payment processor (TPPP), there are a number of fees that may be involved. These typically include:

Be cautious. Service providers can charge any number of hidden or extra fees. Make sure you always read the fine print first, including all Terms and Conditions. Before doing business with any third-party provider, make sure you are fully aware of all charges upfront.

For larger enterprises who are capable of accessing ACH directly through their financial institution, the fees can be a lot lower.

Advantages of ACH Transfers

There are many advantages to using the ACH system to send money. Some of the top benefits for a business include:

Fast and Efficient

Sending and receiving ACH payments is quick. According to NACHA, the transfer of funds via the network typically happens the next business day after it is initiated. The rules require that ACH credits settle in one to two business days and that ACH debits settle the next business day. 

Wire transfers are known for speed and same-day service, but thanks to new NACHA rules, so are ACH payments. In addition, when making a global transaction, an international bank transfer may take longer. It can take several business days for the money to move from one account to another, and then a few more for the funds to clear.  

Convenient and Reliable

A business can use ACH payments for recurring billing. It’s a safe and reliable means to ensure your bills and employees get paid on time. Using an electronic system with a built-in schedule is easier and less time-consuming. A business can save money on labor costs and automate the entire payment process. 

Cost-Effective

ACH transfers are incredibly cost-effective, especially when receiving money. They have lower processing fees compared to bank wires, which can save a business hundreds, if not thousands, of dollars. With an ACH, there’s no need to waste money on stamps or paper checks. Everything is done electronically.

Other Advantages

• ACH can be used with vendors that don’t accept debit cards or credit cards
• There’s no need for PayPal or other third-party service providers
• Can be used to process e-checks (not possible with other payment options)

Disadvantages of ACH Transfers

Although an ACH sounds good for just about any type of payment, there are some instances where it could work to a disadvantage. When running a business, consider these cases where an alternative to ACH may be best:

Transaction Limits

Many banks and financial institutions will impose limits on how much you can send via an ACH transfer. Limits can include:

• Per-transaction limits
• Daily Limits
• Amount
• Monthly limits
• Weekly limits

There could be one particular limit for bill payments and another for transfers altogether. This is hard to track when running a business and trying to control costs. Banks can also choose to impose limits on where a business sends money. Some financial institutions might prohibit international transactions altogether.

Transferring Frequency

Many people may not know this, but transferring from savings too often could trigger a penalty. Savings accounts are governed by Federal Reserve Regulation. This limits certain types of withdrawals to six per month. If a business exceeds this limit with multiple ACH transfers from savings to another bank, you could be hit with an “excess withdrawal” penalty. If this becomes routine, a bank may convert the savings account into a checking account.

Time Limits

Unlike a wire transfer, which is done on an individual basis, ACH is processed in batches. That means, if you need an ACH transfer sent the next business day, there is a cutoff time. If you initiate a transfer after the cutoff time, this could result in a delay. That may cause an issue for a business trying to pay bills on time, which could incur late fees. 

Discounts and Rewards

Some business credit cards offer great rewards and cashback programs that increase with spend. This isn’t something offered through ACH transactions. There is no incentive to send or receive payments and no rewards program for using the network. Credit cards can accumulate points for a business that can later be traded for things like travel, hotels, and dining. 

ACH and Wire Transfers

People often confuse these two transactions because they are both a form of electronic payment. ACH and wire transfers are two common ways to transfer money from one financial institution to another. 

ACH differs from bank transfers in security, speed, and international capabilities. While wire transfers are generally preferred for international payments, ACH transfers can be more secure and less costly. 

What is a Wire Transfer?

A wire transfer is an electronic, interbank payment that’s used to send funds from one bank to another. In order to complete the payment processing, you must include the bank account number and ABA bank routing number for the payee receiving the money. 

Each bank has its own cutoff time for sending same-day bank wires. With bank wires, funds are available within 24 hours in the payee’s bank account. 

Once funds have been wired, recalling any mistakes is near impossible. Additionally, when sending a large volume of wire transfers, the transaction fees can be high. However, wire transfers are well-suited for cross-border payments to countries where an ACH infrastructure is unstable. In this instance, the closer a transfer can happen in real-time, the more secure it will be. 

Comparing ACH vs. Wire Transfers

A direct comparison of the two payment methods can help a business determine the best route. Here are a few key considerations before sending your money electronically:

Cost of Processing

There is a big difference between the cost to send an ACH vs. a wire transfer, no matter if it is sent domestically or internationally. Receiving an ACH transfer is generally free and the average cost of sending one is around $3. 

A wire transfer is a different story. Since it is more privatized and focused, a bank wire transfer will set a business back anywhere from $20 to $35 to send one and $10 to $20 to receive one. International transfers can add to this cost considerably. 

Domestic vs. International

Bank wires tend to have a wider range of acceptability on a global scale. ACH has a few cross-border limitations that wire transfers don’t encounter. ACH is a US-based system while wire transfers rely on individual bank relationships. 

A global ACH can be performed between banks that are in agreeance with the NACHA rules and accommodations. That being said, another country’s definition of an “ACH” network might greatly differ from that in the United States. That’s why a bank wire transfer can present as a more secure option. It’s a slightly more privatized connection between two entities transferring funds across the world. 

Transaction Speed

If a customer submits a bank wire transfer request by a same-day deadline in the US, the money must be sent by the bank on the same day and received in the payee’s bank account, within 24 hours. If it’s after the cutoff time for sending wire transfers, the originating bank will transfer the money on the next business day. An international wire will take a little longer to complete.

An ACH usually takes up to three days to process in the United States. However, NACHA operating rules provide faster funds availability for specific same-day and next-day ACH credits received. 

If you choose same-day ACH, RDFIs (Receiving Depository Financial Institutions) are mandated to make funds available from same-day ACH credits (such as payroll direct deposits) to their depositors by 5:00 PM at the RDFI’s local time. 

NACHA enables the option for same-day ACH payments through additional ACH Network functionality, without affecting previously available schedules and capabilities. Here’s more on NACHA rules and transaction speeds. 

What is the Difference Between an International ACH Transfer and an International ACH Transaction

The main difference between an International ACH transfer and an International ACH transaction is that one is the actual transfer of funds, while the other is simply the transfer of financial information (pertaining to the funds). 

An IAT is an extension of an ACH. It is designed for U.S. banks to monitor and report international transactions. An IAT does not have a remittance function to directly deposit funds into a foreign bank account. NACHA requires the IAT format for all ACH payments coming in and going out of the United States. 

The intent of an IAT is to ensure all cross-border payments are legally compliant. If you see a bank that offers IATs, it may only mean they comply with legal reporting and not that they offer the actual service. You should always double-check that the service is available before signing up with any bank. 

It’s very easy to confuse an IAT with an international ACH transfer. Only specific financial institutions offer global ACH transfers to the public. Most banks prefer to offer bank wire transfers because they make more money. 

If you need to send or receive a cross-border payment, always shop around and compare bank fees. Some brands offer a discount for certain things like signing up online or for recurring payments. You can also look at a money transfer service if bank fees are too high. 

NACHA Rules for ACH Transactions

NACHA works with the Office of Foreign Assets Control (OFAC) to ensure all global transfers are secure. Specific formats and rules make compliance easier for RDFIs and respondent banks. These standards help to streamline international payments and improve global relations.  

IATs are regulated under a NACHA rule with two major points:

• The ACH transaction must include information on all parties involved
• Gateway operators must classify all payments that are transmitted or received from a financial institution outside of the United States

This rule makes it easier for NACHA to determine if an ACH transfer is domestic or international. It also helps them facilitate inbound screening and intercept unlawful transactions. It’s a good reminder to all financial institutions that they must comply with the law or their money goes nowhere.

*These changes to the ACH format and rules for cross-border payments were made in response to the Office of Foreign Assets Control (OFAC) and the Financial Action Task Force (FATF) Special Recommendations VII. 2. 

Is My Transfer an IAT?

Always communicate with your vendors and customers on the final destination for inbound transactions. Knowing the exact location can help you decide the best (and most affordable) way to send money overseas. 

This transaction chart from NACHA may help you decide whether your transfer will classify as an IAT or not. 

How to Make an International ACH Transfer

If a business needs to make an ACH payment, it is generally done through a bank. Some financial institutions will allow you to set up a transfer online or via phone, while others require you to visit a branch.

If you need more information, here is a global ACH guide with a step-by-step process for making international ACH transfers using both a bank and AP software.

To ensure your transfers go through quickly and securely, always double-check all transaction data and recipient details.

Collecting Recipient Data

One of the first steps to ensuring the success of an ACH transaction is to collect all recipient data. In most cases, you will need domestic bank details. However, if you are sending a global ACH, you will want to double-check with the receiver’s country for specific ACH rules. 

If you’re using accounting software, it may request recipient data you’re not used to collecting. If you normally use a SWIFT code and account number, you may need to check in with the recipient for a local equivalent. Where you send funds will determine the exact data needed.

Common international banking codes include: 

• Canada – Institution and Transit Number
• UK – Sort Code
• Australia – BSB Code
• India – IFSC Code
• Mexico – CLABE code
• Europe – IBAN code

In places like Europe and Mexico, only one number is needed. It represents both the bank account and routing number. 

The Future of ACH Transfers

As modern business disrupts global banking systems, more standards and rules are being developed to accommodate it. In September 2016, NACHA released the same-day rule for ACH credits. The next year, it was done for ACH credits. 

In March 2020, same-day ACH dollar per transaction limits was increased from $25,000 to $100,000. This year, the window for same-day ACH transfers is being extended to accommodate cross-border transactions. Every new rule is facilitating global commerce.

Independent contractors and the global economy are forcing banks and financial institutions to take a different approach to ACH processing. The traditional rules no longer apply. To get ahead of the game, we will see the United States ACH system continually evolve into a more efficient and global-friendly entity.