What Is An ACH Payment & How Do ACH Transactions Work?
ACH transactions form the backbone of money transfers for businesses of all sizes. Read on to discover the benefits and challenges of ACH payments.
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Expert Analyst & Reviewer
UPDATED
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ACH payments are electronic transactions that shift money from one bank account to another. Are ACH transactions safe and reliable? In this post, we’ll explore all things ACH to help you decide if your small business should be accepting ACH payments.
ACH stands for Automated Clearing House, a financial network used to transfer money from one bank account to another. ACH payments are both safe and effective, as well as convenient.
But is ACH right for your business and your customers? What are the advantages of ACH payments, and are there any risks? And how do you get started using ACH transactions? Let’s find out!
Table of Contents
What Is An ACH Payment?
ACH payments use a wireless network to pull funds from one bank account and push them into another account. ACH is a safe, secure, and efficient payment method that lets users avoid using credit cards, writing checks, or arranging complicated wire transfers. ACH transactions are available at almost all US-based bank and credit union accounts.
In short, ACH payments are:
- Cost-Effective
- Digital
- Automated
- Reliable
- Safe
- Fast
Benefits & Drawback Of ACH Transactions
Despite the advantages of ACH transactions, this payment method won’t be right for every small business or for every payment. Let’s take a look at some situations where you should — and shouldn’t — rely on ACH payments.
Advantages To ACH Transfers
When you use ACH payments to both receive and send out funds, your small business can enjoy the benefits of ACH payments that include these:
- Lower Fees: When customers use a credit card to pay their invoices, that payment is processed by a third-party payment processor or through your business’s merchant services account. You’ll pay a percentage of each transaction to that third-party provider, and though the amount you’ll pay depends on a number of factors, including who you use and what terms you’ve negotiated, the industry average ranges from 1.5%-3.5% of the total transaction amount, according to Bankrate data. (Your costs could be significantly less, as you’ll see in the Fees section below.) The costs of depositing a paper check or taking payment via ACH instead of wire transfer can be significant too. Receiving a check can cost your business as much as $4 in fees, according to data from Nacha (the governing body of ACH payments). Compare that to the cost of receiving an ACH payment, which Nacha says ranges between $0.26-$0.50, and you see that ACH payments can result in serious savings.
- Faster Processing: Business bank accounts typically hold funds from deposited checks for two or more business days. And that doesn’t even account for the time it can take for a paper check to travel through the mail and be processed by your accounts receivable team. Additionally, ACH payments receive preferred funding from banks, meaning they are processed before check payments. Nacha even supports same-day ACH, under some circumstances, to move payments even faster.
- No Bank Limits: Even the best business bank accounts put some deposit limits in place. Many business banks don’t accept cash deposits at all, for example. Others place limits on the number of checks you’re allowed to deposit each month. Many business bank accounts allow for unlimited electronic deposits, such as ACH, and if they do impose limits, those limits are probably relatively high and have lower fees for excessive transfers than for similar cash or check transactions.
- Increased Security: Any payment method is susceptible to fraud, and traditional payment methods such as paper checks are especially vulnerable. Your customers may hesitate to send payment via check, and your business may be reluctant to take payment via check, especially if the customer relationship is new. Although ACH fraud is becoming more frequent at the same time that check fraud is declining (probably due to lower use of checks), payment via ACH still is almost 30% less likely to involve fraud than check payment, according to a fraud report created by the Association for Financial Professionals and backed by JPMorgan Chase & Co. The AFT report also notes that larger companies are more susceptible to ACH fraud than small businesses are.
- Easier Recurring Payments: ACH payments are great options for recurring billing for merchants and their customers. Whether your customers are on a subscription plan or paying for a monthly service or utility, ACH payments can be an easy, safe, and cost-effective way to automate recurring payments. A bonus for customers is that when they set up recurring payments via ACH, they can eliminate late charges and the service disruptions that can happen if they forget to pay on time. And as the vendor, you won’t have to worry about credit card charges being declined for any reason, including expired cards and over-limit transaction denials.
- Customer Convenience: We’ve covered some reasons why ACH is good for your business. Paying via ACH is good for your customers, too. The number of bank transactions processed by ACH payments is growing steadily and reflects an increasing customer preference for safe, non-traditional payments. ACH payments accounted for almost 14 billion transactions in 2021, with $8.89 trillion transferred. Compared to writing a check, it’s easy to make an ACH payment and, with integrated banking and accounting functions, it can be easier to track ACH payments compared to credit card transactions. When customers send you a check, they can’t be sure when (or if) you receive the check or when the money will be taken out of their bank account. ACH payments eliminate much of that uncertainty.
- Fewer Disputes: It’s also much more difficult for a payer using ACH payments to dispute a payment or decide to pull it off the network once it’s been finalized, compared to other payment methods. The most common cause (30%) of chargebacks is identity theft, where an unauthorized user makes a charge. That’s not likely to be a factor in recurring ACH payments.
Disadvantages To ACH Transfers
Although ACH transactions deliver strong benefits, there are some disadvantages to ACH transfers as well. Factor these into your ACH planning:
- Cutoff Times: Nacha requires ACH payments to process by the next business day. Note that ACH processing does not happen on banks’ non-business days, such as weekends and holidays. (The receiving bank may also hold funds for a limited time before making the money available in your account.) ACH transactions are processed at set intervals every business day, using Eastern time. If you’re in a later time zone, your payments may not process until the next business day.
- Geographic Limits: Nacha’s ACH network operates only in the US, though Nacha has worked to support international electronic payments. Other countries have similar payment systems, but your bank may not allow international payments. If you do frequent business overseas, make sure you choose a bank or ACH processor that can accommodate your needs.
- Non-Sufficient Funds: A customer who pays via credit card is using the credit card company’s money, temporarily, to pay the bills. With ACH, the customer needs to have the necessary funds in her bank account, or the ACH payment will not go through. When you’re counting on having that money available to your business, a failed ACH payment can cause disruption similar to the effects of a “bounced” check payment.
Types Of ACH Payments
You may encounter two types of ACH payments:
1) Direct Deposits
Direct deposit refers to electronic deposits made automatically into your bank account. Types of direct deposit include:
- Salary
- Government payments such as Social Security and stimulus payments
- Reimbursements
- Disbursements
- Annuities, dividends, and interest payments
- Refunds
2) Direct Payments
Direct payment refers to the electronic transfer of funds to make payments. This term applies whether you’re the one sending or receiving the payment because there are two types of direct payments: ACH credits and ACH debits.
Some examples of direct payment are:
- Paying a bill
- Covering recurring subscription costs
- Making a donation
- Purchasing things
- Sending money to a friend
Although your business may use ACH to make direct deposits, especially for payroll, you’ll probably use direct payments more often. When customers pay for their purchases, including subscription fees, recurring payments, and one-time expenses, you’re both using direct payments.
To clear up any confusion, let’s take a look at the difference between ACH credits and ACH debits. The main difference between these two types of ACH transactions is simple: It depends on who initiates the transaction.
Differences Between ACH Credits & ACH Debits
- ACH Credits: An ACH credit is a type of electronic transaction that takes money from one person’s account and “pushes” or deposits it into another account. ACH credits are completely electronic, involving no paper whatsoever. A typical ACH credit is a direct payroll deposit from your employer or a tax refund from the government.
Your customers might use ACH credit transactions to authorize a one-time payment of an invoice, for example. ACH credits allow customers to decide how much and when to pay you.
- ACH Debits: An ACH debit is an electronic transaction that “pulls” money or takes it from one person’s account and moves it to another. These types of ACH transactions are initiated by the person receiving the funds, with the payer’s consent, of course.
Examples of ACH debits include payments on regular or recurring invoices, such as automatic bill payment, where you and the customer have a standing agreement that they will pay an agreed-upon sum at a recurring set time. Recurring donations and subscription fees are also examples of ACH transactions that your company can use, with authorization, to pull money from customers’ accounts into your business account.
Are ACH Payments The Same As eChecks?
The terms echeck and EFT (electronic fund transfer) are often used in discussions of ACH payments. But are ACH payments the same as echecks and EFTs?
Here’s a quick explanation of EFTs and echecks and how they relate to ACH transactions:
EFTs
EFT stands for electronic fund transfer, and it refers to the process of transferring money electronically from one bank account to another bank account. EFTs are initiated by the payer, such as the customer, and not the payee. ACH payments and echecks are both forms of EFT. In fact, EFT is a broad term that also includes wire transfers, point-of-sale transactions, telephone bill-pay plans, and even ATM transactions.
eChecks
eChecks refers to a specific process of moving money electronically from one bank account to another. There’s one key difference between echecks and ACH transactions, however. An echeck is designed to mimic the process of paying by paper check, just without the paper check. During the processing of an echeck, funds typically are transferred via an ACH transaction. In other words, echecks generally are a type of ACH transaction — but not all ACH transactions are echecks.
eChecks are an especially important form of payment for high-risk businesses that may not be able to use other payment methods. If you’d like to dig deeper into how echecks work and learn how they can benefit your business, we recommend you check out our complete echeck payment guide for more information.
Who Can Use ACH Transfers?
Any business with a bank account within the Automated Clearing House network can receive ACH payments. Top industries include but are not limited to the following:
- Hospitality
- Healthcare
- eCommerce
- Utilities
- Colleges & Universities
- Manufacturing
- Payroll
- Accounting
- Property Management
- Membership Services
- Associations
Whether or not your business falls within one of those business categories, you may be able to use ACH transactions to make it easier for customers to pay what they owe you. In fact, you can use ACH through your business, including ACH in banking and loan payments, to simplify all your business finance tracking.
Here are some specific suggestions for smart ways to put ACH to work for your business:
- Bill Payment: Whether bills are occasional or recurring, invite your customers to set up ACH payments. ACH payments are particularly well suited to utility bills, medical expenses, and tuition payments.
- Payroll Services: Using ACH in accounting to manage payroll via direct deposit is one of the easiest ways to simplify your business bookkeeping.
- Tax Payments: Individual taxpayers who make electronic payments are using ACH payment processing. In business, you can use ACH in accounting to help you make state and federal tax payments easily — and on time.
- Loan Payouts: ACH payments are one of the easiest ways to handle business loan repayment.
- Memberships & Subscription Cost: From software to professional organizations and everything in between, think about the subscriptions your business relies on to keep things running smoothly. You probably can set up ACH transactions to make sure payment is made on time, with no lapses or interruptions.
- Rent Payments: Whether you’re the tenant or the property owner/manager, ACH payments are a simple and easy way to pay the rent. You can set up automatic payments, so you don’t have to think about the rent (or mortgage) each month.
- Services: Freelancers, coaches, therapists, and contractors don’t have time to track down payments. Let your clients know they can pay quickly via ACH and they may be more inclined to pay.
- Donations: Most of this information has related to sales and subscriptions, but nonprofits can use ACH payments for their benefit as well. If you rely on one-time or recurring donations, invite your patrons to send funds to you via ACH instead of check or credit card.
- Merchant Accounts: You probably already have a merchant account set up that allows you to accept credit cards and other forms of payment, like PayPal. Check with your processor to see if you can also accept ACH payments under your existing account. It’s one more payment option that some customers may appreciate.
- B2B Payments: Just as you should encourage your customers to pay invoices via ACH transaction, you should look into setting up ACH payments for your own business bills.
- eCommerce Sales: Your customers are used to paying online with a credit card or a service like PayPal. But steering them toward ACH payments can save you a lot of money in payment processing fees.
- Account Transfers: You can use ACH payments to move funds from one bank to another.
How Do ACH Transfers Work?
ACH transfers take slightly different forms, depending on whether it’s an ACH debit or an ACH credit. However, in both cases, the process is almost completely automated once it’s initiated. So ACH transactions can be mostly hands-off and easy to manage.
Let’s look at the steps involved in any ACH transfers:
1) Gather Or Share Information To Authorize Payment
Before you can process or initiate an ACH payment, you’ll need the account and routing information for both the payer’s account and the receiver’s account (the ODFI and the RDFI). Because that information is not usually shared publicly, you’ll need to ask your customer or the business you wish to send payment to.
Once you have banking information, you’re ready to initiate the ACH transaction. Fortunately, the banks do all the work from here. The payer will need to complete an ACH authorization form that includes:
- The payer’s name and contact information
- The payee’s name and contact information
- Payment details, including payment amount and schedule (one-time or recurring)
- Authorization statement
- Recourse statement that explains how to cancel the agreement and how much notice is required to do so
- The payer’s bank details
- Date of agreement
- Signatures (if using a physical paper form)
The easiest way to collect this information usually is online, and as long as you gather the required information, you can gather it however makes sense for your business.
2) Forward Payment Information to the ODFI
Nearly all banks and credit unions in the US are connected to Nacha. (Nacha is the governing body of the ACH network and sets the rules within the payment space.) When a payment request is received, the payer’s bank (the ODFI, or originating depository financial institution) reviews it, verifies that funds are available in the payer’s account, and then submits the payment request to the ACH.
3) ODFI Sends Payment Files To The ACH
Banks and credit unions don’t submit each ACH payment request as it comes in. Instead, ACH payment requests are grouped in batches and processed at set times each business day. ACH payments are not processed on days when banks are not open, such as weekends and holidays.
4) The ACH Sends Files To The Payer’s Bank
ACH operators receive the ACH request and sort them into credits and debits, to make sure that funds are transferred in the right direction. After sorting, the ACH forwards each request to its appropriate RDFI (receiving depository financial institution).
5) Funds are Withdrawn & Sent To the ACH
The RDFI again verifies that the funds are available to cover the transaction and then either credits or debits the bank account. Funds are sent back to the ACH.
6) The ACH Sends Funds To Your Bank
Once the ACH receives the funds, the US Federal Reserve manages the process of transferring funds between the payor bank and the payee bank. Once the funds are received in your account, you’re free to access them, transfer them, or spend them however you’d like.
How Long Do ACH Payments Take?
No matter what kind of electronic payments you rely on, you can expect a lag time between when the customer pays and when the money is available for you to access. ACH payments are no different in that sense. However, ACH has a few differences from other payment methods, including ACH batch times, that you should know about. Here’s an outline:
- Transaction Processing: Nacha requires banks to process ACH payments by the next business day after the payment requests are received. Note that key phrase “business day.” That tells you that ACH payments won’t be processed on any days that banks typically are closed, such as weekends and holidays.
- Batch Times: Banks hold ACH payment requests as they come in and then process them in batches. Batch processing times change sometimes, but are set by Nacha and are consistent across all banks. All ACH batch processing is set to Eastern time, so if you’re in a different time zone, your late-day transactions may not process until the next business day.
- Bank Holds: When your bank receives funds from an ACH payment, the bank may hold funds for a short time before making them available to you. Typically, this hold time will be no more than one or two days, with most ACH payments processed by the next business day. If you’re wondering if ACH payments post on weekends, the answer is No. ACH payments are processed on business days only.
- Same-Day ACH Processing: If you’re wondering how long it takes to process ACH transactions, the answer is, typically, three to four business days. If you just can’t wait that long, Nacha enables same-day ACH processing for most types of ACH payments. However, not all US banks and credit unions participate in the same-day program, and there’s no support for international transactions.
If you want to access same-day ACH processing, your expedited transactions may be subject to additional fees. Nacha also imposes a $1 million-per-transaction limit on same-day ACH processing. Your business bank may also impose limits on ACH transactions by day, week, or month, so check with your bank for details.
ACH Fees & Pricing
We’ve discussed how using ACH can improve your business’s payment process by making it easier for customers to pay, especially for recurring payments and subscriptions. But does an ACH transfer cost money, and if so what are ACH fees that you need to be aware of?
ACH pricing is not a set amount. ACH transfer fees can depend on how your ACH payments are processed, and by whom. For example, if you use a payment processor, you may be charged a percentage or a set fee — or both.
Check out our list of the best ACH payment providers to compare the fees they charge.
If you run ACH payments through your bank, you may pay lower fees. In fact, many of the best business banks offer no-fee ACH transfers. However, the way you process ACH payments may be dictated by your way of doing business and how customers prefer to pay. Talk to your business bank and specific payment processor for the information you need to make the best choice.
Be aware that the types of fees may vary depending on how you process ACH payments. Ask about flat fees, percentage fees, setup, and monthly fees. Ask about ACH return or reversal/chargeback fees, too.
RELATED: If you’re looking for a business bank account or feel ready to upgrade to a business bank that meets your current needs, the following top-rated business bank accounts come with low or no ACH processing fees.
| Account Provider | ACH Processing Fee |
|---|---|
| Novo | $0 for standard ACH, 1.5% for Express (min. $0.50, max $20) |
| Square Business Banking | 1% per transaction |
| BlueVine | $0 for standard ACH |
| Chase for Business | $0 for standard aCH |
| Wells Fargo Business Banking | Varies by account type |
| Bank of America Business Banking | $0 for standard ACH |
| Capital One Spark Business | 100 transactions/month; additional at $0.50 |
| Relay | $0 for standard ACH |
| NBKC Bank | $0 for standard ACH |
| Live Oak Bank | $0 for standard ACH |
| North One | $0 for standard ACH |
| Silicon Valley Bank | $0 for standard ACH |
| Digital Credit Union | $0 for standard ACH |
Key Takeaways For ACH Payments
ACH payments are fast, safe, reliable, and convenient. And, because ACH goes by several different names, whether you’re aware of it or not you’re probably already using ACH in your business, whether for payroll, recurring bills, rent, or subscription fees.
If you’re not already encouraging your customers to utilize ACH payments, rather than paying invoices by check or credit card, you’re missing an opportunity to save money and receive payment not only faster but also more reliably. If your business model relies on subscriptions or any other kind of recurring payment, that’s especially true for you.
Ready to get started with ACH payments? Check out our complete guide to learn how to accept ACH payments so you and your customers can get started setting up and benefiting from this payment method.
ACH Payment FAQs
Kate Hoots
Expert Analyst & Reviewer at Merchant Maverick
An expert in business banking, consumer finance, and online payments, Kate Hoots has been writing about small business commerce since 2020. A former journalist for the West Linn Tidings and the Wilsonville Spokesman, Kate boasts wide experience in business leadership and communication. She has a degree in English Literature from Lewis & Clark College.
View Kate Hoots's professional experience on LinkedIn.
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