How to Set up ACH Payments

No matter the industry you are operating in, making ACH payments has the potential to increase revenue. ACH payments usually come with lower transaction fees when compared to wire transfers.

Making ACH payments is particularly beneficial when important suppliers and partners. For example, offering a choice of payment method to preferred partners can improve the relationship and result in better retention.

Before you can set up an ACH payment account, however, you will need to choose a payment processor, which takes us to the next step.

Check with your bank to determine its ACH processing fees. You may find it’s more efficient to connect with an ACH operator or payables automation solution. Comparing the details of features and the workflow from three to four different operators is an excellent way to choose one that can best meet your needs.

You are going to learn a lot about how ACH payments work when you fill out the accompanying paperwork to make them.

To put it simply, ACH payments work by electronically transferring money from one account to another. If you are already paying suppliers by check or wire transfer, offering ACH is simply an improvement to your current process.

ACH payments save a lot of time when paying for services. For those accepting the payments, it can result in reduced processing time and fees when compared with wire transfers or checks. As the payer, it gives you the benefit of being able to make payments to vendors without having to enter the vendor’s account information again and again. You can make ACH payments on a one-time or recurring basis.

Here’s an overview of how ACH payments work:

• The payment originator initiates the ACH payment by providing permission for the transaction to take place.

• The Originating Depository Financial Institution (ODFI), which is your bank or ACH operator, records the ACH transaction entry.

• Sometime throughout the day, the ODFI will send a batch of ACH requests to the Automated Clearing House or the Federal Reserve. Most ODFIs send anywhere from one to three batches a day.

• Whichever entity received the batches will accept the requests and process them. Once processed, the requests are transmitted to the Receiving Depository Financial Institutions (RDFIs); these are your vendors or employees.

• A credit appears on the RDFI account within one to two days, and a debit will appear on the payer’s (your) account to show that the funds have been deducted.

There are four basic types of ACH transactions. In the financial industry, these types are referred to as entry classes. As a small business, you will need to be aware of these types to ensure you have a thorough understanding of how ACH payments work.

1. PDD: This means there has been written permission from the payer to have funds electronically debited from his or her account. Writing a check will not qualify as permission when conducting a PDD transaction.

2. WEB: When the payer gives permission over the Internet to have the funds electronically debited, this is known as a WEB ACH transaction. Specific authorization language will be used in the permission process, and this language must be easily and clearly understood by the payer.

3. TEL: With this type of transaction, the payer gives permission over the phone for monies to be debited from his or her account. When a TEL ACH payment takes place, the permission must be recorded for verification purposes.

4. ARC and BOC: With these types of ACH payments, a written check does constitute permission — however, the payer must be notified that the paper check has the potential of being converted for the purpose of conducting an ACH transaction.

Businesses must familiarize themselves with the various entry classes before processing ACH payments. It is usually best to choose a service provider who will acquaint you with how to process the payments correctly.

For example: If a payer provides a valid check and it is processed as a PDD payment and the transaction is disputed, the payment processor will side in his or her favor because the correct entry class was not used. Instead of PDD, it should have been processed as an ARC or BOC ACH payment. There are more than a dozen other entry classes than the ones listed above.

Another way to learn how ACH payments work is to read through ACH payments terms and conditions. If you choose to partner with an ACH operator, there will be a detailed piece of writing in an easy-to-understand language that fully outlines how the process works and what you can expect. It will also detail the steps you can take to learn more if you have questions or concerns.

Now that you have a better understanding of how ACH payments work and how to set up ACH payments, you will need to pinpoint which vendors accept them. For most businesses, making ACH payments is an excellent way to reduce payment processing expenses.