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What is ACH Payment Processing and How Does it Work?


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ACH payment processing is a cost-effective method for making business and personal payments electronically. 

This article describes business payments made through the  ACH network. Automated Clearing House members in the network are U.S. financial institutions, including banks and credit unions. 

What is ACH Payment Processing?

ACH payment processing is electronically making a bank transfer between the payer’s and the payee’s bank accounts through the Automated Clearing House network of U.S. financial institutions, regulated by Nacha. ACH payment processing is used for recurring payments and one-time payments instead of paper check, wire transfer, credit card, or debit card payment methods.

The ACH payment method is a type of electronic funds transfer (EFT). 

Nacha was originally called the National Automated Clearing House Association. According to Nacha, “Nearly 27 billion ACH Network payments were made in 2020, valued at close to $62 trillion.”

The ACH network eliminates the need for paper checks. Instead, it processes two types of transactions: Direct Payments via ACH and Direct Deposits via ACH.

Types of ACH Payments

You may not realize it, but many types of electronic payments can be made, and you’ve probably already performed (or accepted) plenty. The different types of ACH transfers include:

  • Paying bills electronically out of a checking account
  • Direct payment via ACH transactions
  • eChecks
  • Recurring payments
  • One-time payments
  • Direct deposit paid from an employer to employees
  • IRS payments 
  • Moving funds from one account to another

The ACH network is typically responsible for processing all of these payment methods.

Direct Deposit

Direct deposit using ACH is for one of the following:

  • Funds for payroll
  • Employee expense reimbursement
  • Government benefits
  • Tax and other refunds
  • Annuities
  • Interest payments

This includes any ACH credit payment from a government or business to a consumer or another entity.

Direct Payment

The Direct Payment method is the use of funds to make an ACH payment. Businesses, non-profits, governments, or individuals can use an ACH credit or an ACH debit to make a direct payment. 

  • Direct payment processing by ACH credit will push the funds into a bank account. The payee makes an online bill payment through their bank or credit union, for example. 
  • Direct payment processing by ACH debit will automatically pull funds from a bank account for a recurring payment to pay the bills as they are scheduled for payment.

How Does ACH Payment Processing Work?

ACH payment processing works when ACH transfers go through a payment processor using either ACH credit or ACH debit. The ODFI  in the ACH network is the Originating Depositary Financial Institution, and the RDFI is the Receiving Depositary Financial Institution.  The ODFI submits same-day files to an ACH Operator. 

The payer can use eChecks for direct ACH credit to push the funds to the payee’s bank account. Or the payer can authorize recurring payments from their bank account via ACH credit by filling out a payee’s authorization form. When the financial institution pulls funds out of a bank account at the payee’s request, it’s an ACH debit. 

To process an ACH transaction for a direct payment and direct deposit, the payer needs to provide the ACH network with bank information, including contact information and the payer and payee’s routing number and account number. The bank accounts may be a designated merchant account or a checking account, or a savings account. 

The Automated Clearing House lets payers choose either standard next-day ACH processing time (which may take up to 2 to 4 days) or faster Same Day ACH processing for ACH settlement. Same Day ACH uses four time windows with Nacha cut-off times, depending on when ACH transactions are submitted to the ACH Operator by the ODFI. 

Standard ACH payments are often referred to as “three-day funding” because 72 hours is how long it takes typically in ACH payment processing time. It is during these three days that a verification process will take place. The purpose of the verification is to ensure the funds are available in the customer’s account; this mitigates the risk of the ACH processor crediting funds to your account and then having to debit your account because the funds are not available in the customer’s account.

Same Day ACH actually means same business day if an electronic payment is requested within the first three time windows or Next Day ACH if the ACH payment is requested after the established cut-off time. Next Day ACH means next business day. 

Effective March 18, 2022, Nacha will increase the per-transaction limit for Same Day ACH to $1 million from $100 thousand.

How to Make an ACH Payment via the ACH Network

Creating a business environment that supports ACH transfers is simple. Most vendors already accept them, especially online businesses. These payments are secure and reliable. You will first need to decide whether you want the ACH payment option to be single-entry or recurring. A one-time ACH payment can be made as an ACH debit or credit transaction. After you have provided your ACH operator with the vendor’s account information, you will be able to electronically transfer funds to its account.

You must give permission to the vendor to electronically withdraw funds from your account. If it’s going to be a recurring payment, you must provide authorization as to the date and the amount of funds that can be withdrawn. If the amount differs from one payment to the next, this will be outlined in the ACH enrollment form.

Make website ACH payments: If you purchase items from vendors online, you may be able to make payments via an ACH WEB method versus PayPal. Most vendors prefer WEB ACH payments over PayPal payments due to PayPal’s high transaction fee. Accepting PayPal payments will cost a vendor a certain percentage of the total transaction. For example, if the percentage is 3%, then PayPal will keep $3 for every $100 transaction. With ACH WEB payments, the vendor is likely to only pay 25 cents to $5 a transaction, which is considerably less expensive when the transactions are large.

Use computer or terminal payments: For businesses that normally process payments over the phone or by mail, a virtual terminal or processing service can be used to process ACH payments. The virtual terminal can be accessed via a computer or mobile device. You type in the vendor’s account and routing numbers and initiate the transaction.

How to Accept ACH Payments 

If a business wants to start using ACH with customers, you need to partner with a payment processor. You may already have a relationship with a virtual terminal but are not using the ACH aspect of the platform. There are many different brands and processing solutions on the market, so it helps to know what you need.

You can start by inquiring with your existing service provider if they can enable ACH. This process would include:

  • The vendor or merchant services provider that already processes credit card payments
  • The bank where the business accounts are kept
  • Any accounting software provider (a good one will allow a company to create invoices and accept ACH payments)

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Which Businesses Should Use ACH Payment Processing?

Companies of all sizes, including small businesses, should use ACH payment processing and accept ACH payments from customers because it’s easy to use and costs less than other payment methods. Select the best ACH payment processing solutions for your business. 

It’s essential to take the time to look at the bigger picture. For example, it doesn’t cost anything to process a check. But how much are you paying someone to drive to the bank every day? Having a 360-degree view of the business will help you decide. 

What are the Benefits of ACH Payment Processing for Your Business?

Benefits from the ACH payment method include:

Cost Savings
ACH transaction fees for payment processing cost less than other payment options, including paper checks, wire transfers, credit cards, and debit cards. ACH payments are inexpensive. A small business can save and improve cash flow through a merchant account used in online ACH payment processing. 

Fewer Resources
Because these debit transactions are electronic, businesses use much fewer resources than with paper checks. They don’t need to purchase paper, ink, use fuel to transport checks, or incur time or labor costs to handle and deposit them. As a result, the business takes steps towards reaching its climate change goals when they eliminate paper and use less fuel. In addition, recordkeeping is always smoother with ACH.

Tracking
ACH makes it easier to track income and expenses in checking and savings accounts. With every transaction, banks will be creating an electronic record. Additionally, financial management and accounting tools can be used to access that transaction history.

Easy to Manage
When someone pays with a check, a business needs to wait for the mail to arrive. There is no instant payment. ACH is a way to streamline operations, and it’s much less of a hassle. Payments can also get lost in the mail, and if they are received, you need someone to enter them into the system. This check-paying process can be labor-intensive.

Electronic payments always arrive quickly and are automatically entered into the system. There’s no need to forward checks to the bank or enter transactions manually.

Automation
ACH payments can be automated. For businesses or consumers with bills, recurring payments can be set up. Companies can pay service providers on time to take early payment discounts.

Less Expensive Than Credit Cards
For businesses that generally accept payments by credit card, it often costs less to process an ACH transfer with lower ACH fees than credit card processing. Especially if you are collecting recurring payments, savings can add up. Automation only increases the benefit. However, ACH will not give you an approval in real-time like a credit card terminal.

Debit card transactions remove funds from a person’s account and place them in another account, much the same as an ACH payment. These transaction processes, however, are very different. ACH payments go through the Automated Clearing House, whereas debit card transactions do not.

There is no need for a debit card number with an ACH payment. Instead, four numbers are needed: the routing number and account number of the payer’s checking or savings account and the receiving party’s routing number and account number.

Debit card transactions are processed using a card network and can come with high processing fees compared to ACH payments. Merchants pay a percentage of the total transaction as a payment processing fee. The exact amount depends on the transaction size and whether the debit card was present. Offline pin-based transactions usually are cheaper to process than online pin-based ones. Still yet, offline fees can quickly add up and eat into a merchant’s profit margins.

Long Distance Payments
ACH can be accepted remotely. Although credit cards sometimes can as well, if a customer doesn’t want to give out that information, ACH is a great alternative.

Conclusion – ACH Payment Processing

ACH payment means electronic payments made from payer to payee bank account through the Automated Clearing House financial institution network overseen by Nacha. 

ACH payment processing is a cost-effective and easy method for vendor bill payments, employee and independent contractor payments, tax payments, consumer payments, and accepting payments from customers.  
ACH costs less than other payment solutions, including paper checks, wire transfers, debit cards, or credit card transactions.

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