Processing ACH Transfers and ACH Payments

When it comes to B2B payments, the trend is clear: ACH transfers are well on their way to being the leading form of B2B payments in a few years. With paper check remittances steadily decreasing each year while ACH transactions are on the rise, it’s evident that an increasing number of companies are realizing the benefits of issuing ACH transfers for payments. When your accounts payable workflow is nimble, your business can process not only ACH transfers but also various types of payment methods that meet the evolving needs of your business. Let’s take a look at the basics of ACH transfers and how you can map out an ACH-friendly accounts payable workflow.

Check out the infographic below to learn more about the scale of ACH as a payment method:

What you need to know about processing B2B payments as ACH transfers 1

What does ACH mean?

ACH is short for Automated Clearing House, a network that serves as an infrastructure for transactions, payments, and transfers among U.S. banks. Payroll, direct deposit, government disbursements, B2B payments, and accounts payable (AP) all rely on the ACH network to process both debit and credit transactions.

The ACH network is administered by the NACHA (National Automated Clearing House Association) and the Electronic Payments Association, a multifaceted organization that stewards the ACH network while also acting as a non-profit association supporting the payments industry through a wide range of programs.

What is an ACH Transfer and an ACH Payment?

The term ACH also describes a specific type of Electronic Funds Transfer (EFT). Terms like ACH transfer or ACH payment refer to transactions that rely on an electronic clearing system (i.e., the ACH network) to batch process debit and credit transfers between participating financial and depository institutions. Breaking the terms down a little bit more, the phrase “ACH transfer” is an umbrella term that encompasses ACH payments, ACH credits, and ACH debits.

Processing ACH transfers and ACH payments is a task split between the public and private sector. The Federal Reserve Bank and its subsidiary FedACH process about 60 percent of domestic ACH transactions while the Electronic Payments Network process the remaining 40 percent.

What’s the difference between ACH Debit vs. ACH Credit?

ACH credits and ACH debits are both types of EFTs processed through the ACH network; however, their differences lie in how they handle transactions:

  • An ACH credit withdraws funds from the payer’s account and deposits those funds to the payee’s account. In other words, an ACH credit is a transaction initiated by the payer. ACH credits are common for making one-time payments and B2B payments.
  • An ACH debit authorizes the payee to withdraw money from the payer’s account. ACH debits are common for recurring charges like auto bill pay.

How does ACH processing work?

An ACH transfer starts with an originator, also known as the payer. Once the originator submits a payment request, the originator’s bank becomes the Originating Depository Financial Institution (ODFI) that sends an ACH entry, meaning a request for an ACH transaction. Then the ACH operator (either the Federal Reserve or privately operated clearing house like the Electronic Payments Network) receives these entries in batches and makes the ACH transactions available to the payee’s bank, known as a then Receiving Depository Financial Institution (RDFI). The RDFI credits the payee’s account. ACH credits are usually settled in within one to two business days while ACH debits take one business day.

Can accounts payable process a B2B payment as an ACH transfer?

With technology becoming ubiquitous across most industries and omnipresent in day-to-day activities, it’s no surprise that electronic payments are experiencing massive growth in usage and adoption. According to a 2017 survey of finance professionals, ACH transactions make up 32 percent of B2B payments, an increase from 22 percent in 2014. The survey, which was conducted by NACHA and the Credit Research Foundation (CRF), also found that paper check B2B payments declined from 63 percent in 2014 to 50 percent in 2017. By 2020, ACH will account for 45 percent of B2B payments while checks are expected to only account for 34 percent.

Rather than using checks to pay vendors and suppliers, businesses can make efficient payments without the burden of paper-intensive processes by originating an electronic payment through the ACH network. Some companies process ACH transfers by having their accounts payable log into bank portals to initiate an ACH transfer; however, this extra step can make your AP workflow less efficient. Instead, look for an automated accounts payable system that can serve as an intermediary between your company and your bank. The automated accounts payable system initiates ACH transfers by communicating to the bank on your behalf, which makes it easy for you to issue mass ACH payments since you can configure the payment within the system instead of logging into a bank portal.

When it comes to accounts payable, the business workflow should be flexible and adaptable to evolving business needs. A streamlined electronic-based process can handle various types of payment methods, enabling your company to scale without reinventing the workflow to accommodate a larger platform.