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The Total Guide to ACH Payment


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ACH payments allow businesses to make electronic payments to vendors for products and services. Businesses can also leverage ACH payments to pay freelancers, enhance the payment reconciliation process, and even streamline the supplier management process.

An ACH payment can occur as a single entry, or it can be set up on a recurring basis with your bank account information, including routing number and bank account number. 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.

No matter if the ACH transaction is single-entry or recurring, your permission must be obtained or the transaction can be voided.

This guide covers ACH payment meaning, how an ACH payment works, including ACH payment processing time and the safety of an ACH payment, including FAQs.

What is an ACH Payment?

An ACH payment is electronic payment processing in the U.S. using the Automated Clearing House. Funds are removed from the originating bank account and transferred into the receiving bank account. The Automated Clearing House network members are financial institutions, including banks and credit unions, through which funds are transferred. Nacha regulates the Automated Clearing House.

Many businesses refer to ACH transactions as direct payments or e-checks. The funds are directed from one account into another. The U.S. government and consumers also use ACH payments. A global ACH payment is somewhat similar to a U.S. ACH payment. 

An ACH payment involves several entities. You have the payer, the entity receiving funds, and at least two financial institutions: the Originating Depository Financial Institution (ODFI) and the Receiving Depository Financial Institution (RDFI).

According to Nacha, in 2020, $62 trillion was transferred using ACH payments. Out of the 26.8 billion ACH payments that took place in 2020, 7.7 billion of them were Internet ACH transactions. Of the total ACH transactions in 2020,15.2 billion transactions valued at $21.7 trillion were ACH debits and 11.6 billion transactions valued at $40.2 trillion were ACH credits. 

In 2020, 30% of the total ACH transactions were comprised of direct deposits. 16% of the total ACH volume consisted of business-to-business transactions. 1% were directed toward person-to-person payments, 1% toward healthcare payments, and 29% were Internet transactions.

In September of 2016, same-day ACH payments became available. In 2020, $460 billion and 347.2 million transactions were processed via this same-day ACH method. Daily same-day ACH volume in 2020 was 1.4 million payments per day with a total daily value of $1.8 billion. 

What Is the Meaning of ACH Payments?

The ACH payment system was created as a way to reduce the number of paper checks that were used to pay for goods and services. The ACH network allows businesses to accept funds from customers using an electronic format. The funds are debited from a customer’s account and credited to the business account. You have likely heard of ACH payments being referred to as “e-checks.”

One of the most common uses of ACH payments can be seen among businesses that electronically deposit funds into the accounts of their vendors and suppliers. Some take advantage of ACH payment processing by having utility payments automatically deducted from their checking accounts. Over the past few years, ACH payments have become increasingly popular for business-to-business electronic monetary transfers.

What Is Nacha?

Nacha is an abbreviation for the National Automated Clearing House Association, which is a payments network entity responsible for making sure consumers and businesses are fully aware of how ACH payment processing works and establishing rules and regulations for the governance of ACH payment transactions in the U.S. between bank or credit union accounts. 

Nacha strives to ensure everyone is provided with educational resources and tools that not only show them how ACH payments work, but that enhance the safety and speed up the processing of the payments.

How Does ACH Payment 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 (originator) will tap into the ACH network and request that the funds be credited to the Receiving Depository Financial Institution (RDFI). 

The ODFI and RDFI may be different banks or the same bank if both the ACH payer and funds receiver have bank accounts in the same financial institution. 

When your business pays its suppliers with an ACH payment, a debit entry request will be sent by the ODFI to the RDFI. Your permission is required to have funds debited from your bank account. The ODFI and RDFI will then communicate with one another to ensure the requested funds are available. If they are, then the ACH payment process will continue. If there is a middleman involved — like an ACH operator — then communication will take place with this entity as well. When sufficient funds are not available, the ODFI will provide a return code, which will outline why the payment was not processed.

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. 

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.

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. 

What are Examples of ACH Payments?

Any time money is being transferred between two entities, ACH payments can be of value. Whether it be receiving payments from customers or paying employees, ACH payments offer low transaction costs and can expedite the entire payment process.

Common reasons businesses often make use of ACH payment processing include:

Accepting payments from customers

• Paying suppliers

• Paying freelancers

• Paying publishers

• Paying affiliates

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 the employer or payroll service with a voided check. If no check is available, the employees can provide their bank account and routing numbers.

Which ACH Rules Do You Need to Know?

There is a long list of rules and regulations that businesses should be aware of regarding ACH payments. When businesses do not comply with these rules, there are massive fines that can be enforced. It can also lead to ACH payments being voided, which translates into business ACH payments being voided. Here’s a look at several ACH payment rules businesses should know.

Businesses Must Verify Their Account Information
You should regularly check your business’ account information on ACH payment forms to ensure it is correct. You can take advantage of the ACH validation test tool to check account information. This test requires you to send a negative transaction to your bank to make sure your business’ account information is correct. You can also use a third-party validation tool. If preferred, you can issue micro-deposits or use a customer sign-in tool to check account information.

The purpose of micro-deposits is to ensure the payer is the owner of the provided account information. The micro-deposit workflow involves providing your bank account and routing number. You may have to provide the name of your bank as well. An ACH operator can send a request to the Automated Clearing House for micro-deposits to be deposited into your account. Once you verify them, the funds will then be deducted. Micro-deposits usually range anywhere from one to 50 cents.

To learn more about the ACH verification process, read the linked page. 

Get Nacha Certification
When you obtain Nacha certification, you are showing customers that you value their business and privacy. Whether you are accepting ACH payments from customers or conducting business-to-business ACH payments, this certification highlights your commitment to payment security.

Nacha certification is for businesses who act as a third party for processing ACH payments. You should look for an ACH operator with Nacha certification, or if you are this third-party, you should obtain it. In order to acquire the certification, you must have a company background check performed. Additionally, you’ll have to prove your compliance with Nacha ACH rules and any applicable risk management guidelines.

Same-Day ACH Payment Rules
In 2016, Nacha made same-day debit ACH payment processing available. This method of electronic payment has been a huge success and has significantly increased in popularity.

In 2021, Same Day ACH schedules and funds availability processing time windows are accessible on the Nacha website. This schedule includes three Same Day ACH time windows and a fourth window for Next Day ACH. 

A Nacha rule provides a $100,000 cap on same-day transactions; under an earlier rule, the cap was $25,000. This considerably helps businesses process same-day ACH transactions.

Effective March 18, 2022, same-day ACH payments will be available for each transaction up to $1,000,000 per day.

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How to Set up ACH Payment Processing?

As a business owner, you should do all you can to increase revenue and decrease expenses. Since payments are at the core of your success, you should take measures to reduce transaction costs, and it starts with making ACH payments. Check out how to set up ACH payments and preparing an ACH transfer or keep reading below for a brief overview of setting up and accepting ACH payments, including needed information. 

Choose an ACH Merchant

The next step in making ACH payments is to speak with your bank to see if they are an ACH merchant provider. If not, you will need to compare transaction fees among three or four merchants and choose one that can best meet your needs. It’s pertinent to choose a merchant with Nacha certification.

Make sure to evaluate the level of support provided by each ACH merchant provider. Does the provider offer invoice automation? Can the ACH payment processing be integrated with your accounts payable software as a way to pay vendors electronically with automation?  What type of security does the provider offer surrounding ACH processing? How does the service offered make your backend processes more efficient?

When you’re choosing an ACH merchant, this is the entity that is going to serve as your ODFI. It will also be the entity to which you send debit entries. The ODFI will, in turn, send the entries to the Automated Clearing House or the Federal Reserve (another entity that clears ACH payments). Once processed, the funds will be debited from your account and sent to the appropriate RDFIs. This applies if you are paying your employees. If you are receiving payments from customers, the ACH merchant will act as the RDFI.

Onboarding

You will go through an onboarding process when you first team up with an ACH operator. It will likely be carried out through a secure online portal. The onboarding process is usually referred to as the corporate enrollment process.

The onboarding process from your ACH vendor covers a range of topics, including how to enter vendor account information, how to initiate transactions, and how to set up recurring debit transactions. You’ll learn how to bring payments and remittance together to streamline your vendor payment process for ACH payments to vendors.

It is a unique transformation that takes place when you start making an ACH vendor payment, and an ACH operator can guide you through the entire process.

Acquiring Permission

No matter the type of ACH payment being processed — debit or credit — permission from both parties must be provided. It is always a good idea to collect and store permissions in an electronic format. This way if you ever need to dispute a charge, you can easily locate the applicable permissions that were given.

When giving permission, check to ensure the vendor’s account information is correct, along with your account information. You don’t want your funds being deposited into someone else’s account because you entered the account information incorrectly when you pay vendors by ACH.

Take Advantage of Your Operator’s Portal

After you have finished the onboarding process, you can access your operator’s portal to proactively view payment status updates, view rejected payments, make an ACH payment adjustment, re-issue payments,and more.

Depending on your operator, you may be able to use the online portal to produce reports and visual charts that give you a clear overview of where your payments are going. This allows you to refine your budget.

Furthermore, you can pinpoint vendors that provide early payment discounts and then adjust your payment dates from ACH accounts payable to ensure you take advantage of these discounts.

Enjoy ACH Payments

Once you give the paperwork to your bank or ACH merchant, the information will be submitted and the payment process will begin according to the date and time you provided. Keep in mind that it generally takes anywhere from two to five days for the ACH payment process to complete. You can expect to see funds deducted from your account within 24 hours if you have set up a same-day ACH payment and meet time window deadlines.

How Long Does an ACH Payment Take to Process?

The average length of time that it takes to settle an ACH payment is typically 24 to 48 hours. The transaction is not considered settled until the funds actually move electronically from the ODFI to the RDFI. The timing of Same Day ACH transfers depends on the submission and processing time window.

The time that it takes for the transaction to complete can sometimes be a downside. It also presents a problem in that an ACH payment can lead to costly overdraft charges.

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. 

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. 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.

ACH payments definitely have their advantages, particularly for businesses because they come with low transaction fees. However, the time that it takes for the transaction to complete can sometimes be a downside. It also presents a problem in that an ACH payment can lead to costly overdraft charges.

Compared to debit and credit card transactions, ACH payments take considerably longer. If all three types of payment transactions are conducted electronically, why is there such a difference in the time that it takes to process an ACH transaction? Here’s a detailed answer to that question.

First of all, there are numerous entities involved in an ACH payment process. A vendor’s payment processor (RDFI) will collect necessary payment data from the payer and send it to the customers’ bank (ODFI). The ODFI, in turn, will send the entry request to the Automated Clearing House, alerting it to release the funds to the RDFI. Many times, the processing takes anywhere from two to three days and the settling of the transaction does not occur until the fourth day.

The lengthy process of ACH transactions often stems from risk management. Unlike credit and debit transactions that take place immediately, a customer can dispute an ACH transaction during the three days that it takes to process, thus preventing the RDFI from receiving the funds.

When making ACH payments, you will not be alerted when the transaction has completed. You can log into the ACH operator’s web portal to see which transactions have completed. To ensure a payer isn’t going to reverse the payment, the ODFI will often prolong the settlement process.

Another factor that impacts the long processing time of ACH payments is their processing in batches. A merchant will not submit an ACH payment one at a time. Instead, it will send batches to the Automated Clearing House or Federal Reserve anywhere from one to three times a day. To be processed overnight, the payments must be received by a certain time. When batches are sent after the cutoff time on Friday, they are not looked at again until the next business day, which will normally be Monday, unless it is a holiday.

Any time there is an error in the data, this will delay the processing time. For example, you send your account and routing information to the receiving entity, and due to human error, it is entered incorrectly into a virtual terminal that processes ACH payments. If this was to happen, the Automated Clearing House or Federal Reserve would reverse the transaction. The ODFI checks to see if any of its initiated transactions have been reversed. It will also check for return codes to get a thorough understanding of why the transaction did not go through the ACH system.

What are Payment Alternatives to an ACH Payment?

Paper checks and wire transfers have their drawbacks. From high transaction costs to slow processing times (for paper checks), these payment methods boast numerous inconveniences. ACH and Wire payments, on the other hand, have become a preferred choices among businesses looking to lower payment processing fees and streamline their vendor payment processes. The wire transfer fee, which is much higher than the ACH fee, is used mostly when the high value of the transaction justifies its cost or speed is very important. 

What is the Difference between ACH Payments and Credit Card Payments?

ACH payments are bank to bank transfers through the Automated Clearing House that take up to 48 hours to settle. 

A credit card payment transaction is instant. Funds are automatically charged to the card. If the cardholder exceeds 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. A credit card transaction will normally cost a business around 2.9% of the total charge.

What is the Difference between ACH Payments and 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. Recipients can typically receive a wire transfer in less than 24 hours. They are not sent in batches, like ACH payments. An ACH payment will take one to five days to process.

Wire transfers do not use the Automated Clearing House to process payments. Instead, the involved banks are the middlemen.

Wire transfers are generally more expensive, with the transaction cost being anywhere from $40 to $60+ for a standard wire transfer. ACH payments, on the other hand, usually have a transaction cost ranging from 25 cents to $5. The wire transfer, which has a much higher fee than the ACH fee, is used mostly when the high value of the transaction or speed required justifies a wire transfer’s processing cost.  

When time is of the essence, it is important to initiate a wire transfer in the morning to ensure it is received by the RDFI before the end of the day.

A key difference between ACH payments and wire transfers is that the latter cannot be initiated unless the funds are in the sender’s account. An ACH payment can be initiated regardless, but it will not clear if the funds are not available.

It’s also important to note that a wire transfer cannot typically be reversed; this is why it is imperative to ensure you have provided the recipient’s true account details. An ACH payment, on the other hand, can be disputed and reversed. For example, A vendor receives a direct deposit ACH payment, but you accidentally overpaid. In this type of instance, the overpaid funds could be refunded to you.

Another key difference between wire transfers and ACH payments is the chargeback procedure. Funds exchanged between a wire transfer are verified when the transaction takes place, meaning there are no chargebacks. This type of payment also does not go through the Automated Clearing House like ACH payments. Since ACH payments are not verified during the initial processing phase, there is always a chance a chargeback could occur.

What is the Difference between ACH Payments and EFT Payments?

The difference in EFT vs ACH payment is that EFT(electronic funds transfer) is broader term for electronic payments than ACH. An ACH payment is an electronic transfer of funds between two bank accounts using the Automated Clearing House organization of U.S. banks and credit unions. EFT payments include ACH payments, wire transfers, and other digital payment types. 

How Much Does it Cost to Process an ACH Payment?

Most ACH processors will charge a flat rate ranging from 25 cents to $5 for each transaction. Some processors charge a percentage of the transaction, but unless your average transaction is below $2.50, it is usually best to opt for a processor that charges a flat rate.

Compared to processing debit and credit card transactions and wire transfers, ACH payments are very cost-efficient. ACH payments provide a great way for businesses to lower the expense of processing payments. ACH payments are affordable for small businesses and large corporations or organizations, including government payers.

What are the Types 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.

ACH payments are processed according to various entry classes. If a payment isn’t processed correctly, you can dispute it. Please note, the entry classes listed below are only a few of the standard entry class codes used for processing ACH payments.

Accounts receivable entry (ARC): When a payer makes an ACH payment using a check, it may be processed using the ARC entry class code.

Customer initiated entry (CIE): Payers can use an online bill payment service provider or their online banking account to initiate a CIE payment.

Prearranged payment and deposit entry (PDD): This entry class code can apply to direct deposit and pre-authorized bill payment debits. Many times, PDD payments are reoccurring.

Re-presented check entry (RCK): This method is used to re-present a check to the Automated Clearing House in an attempt to process a check that has been returned due to insufficient funds.

Internet-initiated entry (WEB): WEB ACH payments can be individual or reoccurring. Permission is given over the Internet by the payer to debit funds from his or her account.

As there are numerous entry class codes for processing ACH payments, there are also many return codes. Any time you attempt to process an ACH payment and it does not go through, you will receive a return code, which provides helpful insight as to why the payment failed. The return code number correlates with the reason.

For example: If you receive a return code of R02, this means the account has been closed. Knowing this information allows you to determine whether you should try processing the payment again. With the R02 return code, there would be no sense in trying to submit payment from the provided account. In this instance, you would take measures to process the payment using a different method.

Five of the most common return codes are:

R01: Insufficient funds

R02: Account closed

R03: Unable to locate the account

R04: Invalid account number

R20: Non-transaction account — the account entered has a restriction against it and cannot be used in an ACH transaction.

What are the Benefits of ACH Payments?

The upside to making ACH payments stems from having no need to involve a paper check, wire transfer, cash, or a credit card as payment options.

Sending money electronically using an ACH payment has numerous advantages. Not only does it expedite the payment process, but it allows businesses to lower costs by reducing payment processing expenses. ACH payments create faster authorizations and translate into simplified reporting.

Making ACH payments is an effective way to process payments quickly. Generally, businesses can determine on the spot in real-time 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.

It’s usually simple to void or refund ACH payments. You will need to provide a reason as to why the transaction should be voided, and if it qualifies as a valid reason, the transaction will be stopped. For example, a payer has set up recurring payments to pay for a utility bill. The payer decides he or she no longer wants the funds to be automatically deducted from his or her account and contacts the ACH operator to stop the transfer.

Almost all brands will benefit from making ACH payments. The low transaction cost makes these payments incredibly favorable when compared to credit and debit card processing. ACH payment processing is particularly advantageous for brands that make payments on a recurring basis.

For example, a company that has a high number of suppliers will find it beneficial to make ACH payments. This company can enjoy low transaction fees on each payment made, and it’s also possible to set the payments up on a recurring basis. Instead of having to issue the payment to a supplier each month, the funds can be automatically deducted from the payer’s account.

Is ACH Payment Safe?

Sending money electronically is a safe and secure method, especially when compared to sending cash through the mail. Electronic payments come with automated record-keeping and are easy to track. 

Because ACH payments involve bank accounts, you should use available security methods provided by your bank, including two-step verification and transaction notifications. 

Conclusion

Automating an organization’s payables operation involves much more than just making payments. ACH payout processing can be enhanced by payee and supplier onboarding, refined invoice automation, and proactive fraudulent activity detection.

There are a ton of rules and regulations surrounding ACH payments. It is often best to team up with an ACH operator to ensure your ACH payment processing activities are in compliance with laws and regulations — and more importantly, to ensure your ACH framework is enhancing your operational activities, rather than hindering them.

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