What Is An ACH Payment & How Does It Work?

The cost of receiving an ACH payment ranges from $0.26-$0.50 per transaction, according to Nacha (the governing body of ACH payments. That’s significantly less than the cost of receiving either a credit card payment or a check.

How big are the savings?

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 pay a percentage of each transaction to your processor, and the industry average ranges from 1.5%-3.5% of the total transaction amount, according to Bankrate data.

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 Nacha.

ACH payments receive preferred funding from banks, meaning they are processed before check payments. Nacha also supports same-day ACH, under some circumstances, to move payments even faster.

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 to be processed by your accounts receivable team.

Many business bank accounts allow for unlimited electronic deposits, including ACH. 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.

Compared to other payment options, ACH looks pretty good. Many business banks charge fees for cash deposits or don’t accept cash at all, for example, and others place limits on the number of checks you’re allowed to deposit each month.

Any payment method is susceptible to fraud, and traditional payment methods such as paper checks are especially vulnerable. Although ACH fraud is becoming more frequent, 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.

ACH payments are great for recurring bills. If your customers are on a subscription plan or paying for a monthly service, rent, or utility, ACH payments are easy, safe, and cost-effective.

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.

Paying by ACH is good for customers, too. When customers send you a check, they can’t be sure when (or if) you’ve received the check or when the money will be taken from their bank account. ACH payments eliminate much of that uncertainty.

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.

The most common cause (30%) of credit card chargebacks is identity theft, where an unauthorized user makes a charge. That’s not likely to be a factor in recurring ACH payments.

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.

Nacha requires ACH payments to be processed 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 be processed until the next business day.

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.

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 their 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.

To clear up any confusion, let’s take a look at the differences between ACH credits and ACH debits. The main difference between these two types of ACH transactions is who initiates the transaction.

What Are ACH Credits?

An ACH credit takes money from one account and “pushes” or deposits it into another. A typical ACH credit is a direct payroll deposit from your employer or a tax refund from the government.

Customers could use ACH credit transactions to authorize a one-time payment of an invoice, too. ACH credits allow customers to decide how much and when to pay you.

What Are 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. ACH debit transactions are initiated by the person receiving the funds, with the payer’s consent.

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.

The terms echeck and EFT 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 mimics 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.

Note: 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, check out our complete echeck payment guide.

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 (known respectively as the ODFI and the RDFI). Don’t worry: Once you have the banking information, 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
• A 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 get the required information, you can gather it however makes sense for your business.

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.)

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.

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.

ACH operators receive the ACH requests 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).

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.

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.

The federal government regulates ACH and works with Nacha to offer internal controls to merchants. Nacha manages the electronic ACH network and advises customers on safeguarding their account numbers and routing numbers when they make their ACH transactions. Transactions are facilitated by the Federal Reserve and are secure.

ACH transactions are much safer than traditional paper checks. It’s impossible for ACH payments to be lost in the mail or intercepted and used fraudulently, because ACH transactions are entirely electronic.

Both ACH transactions and wire transfers are types of electronic fund transfer, or EFT. The main differences between ACH and wire transfers are fees, speed, and security capabilities. ACH typically are less expensive and more secure, while wire transfers can more easily be sent internationally.

ACH transfers are bank-to-bank payments processed over a secure network. An organization called Nacha oversees the ACH network that processes ACH payments in batches, which banks can use to manage ACH transactions for processing multiple times each business day.

Zelle uses a payment network that processes instant ACH transfers between banks. These ACH transfers credit funds to an account while the actual exchange of funds between banks resolves several days later.

PayPal uses electronic ACH payments that are processed over the PayPal network. PayPal is technically not an ACH transfer service but a digital wallet, although it uses ACH transfers to move funds from its digital wallet to user bank accounts.