What Is An ACH Payment? The Complete Guide to ACH Transactions: ACH Debit & ACH Credit

Not all that long ago, businesses and customers alike were used to making payments solely with cash, checks, and the occasional credit or debit card. No longer is this the case: Businesses from up-and-coming startups to nationwide enterprises can now enjoy alternative payment methods that make things much easier and more efficient for them and their customers.

Among the alternative payment methods that are attracting the greatest attention are ACH payments. ACH payments can make it so businesses can scale their operations by offering new ways for customers to pay conveniently. Simply put, ACH transactions can potentially offer businesses some of the greatest cost-saving methods that they can immediately put to use.

What Does ACH Stand For?

If you’re new to the subject of alternative payment methods, the first question you might have is what does ACH stand for? The answer to this is simple: ACH is the acronym for “automated clearing house.” And even if you have heard of automated clearing houses, you might still be wondering, “But what is an ACH payment, exactly?”

ACH payments are transactions that go through a wireless computer network to pull funds from a checking account. Bank-to-bank ACH payments can support direct debits and credit transfers.

ACH payments are similar to other alternative payment methods (such as echecks), and it can be easy to conflate the two. Unlike echecks, though, which actually start out as physical checks, ACH payments are entirely digitized methods of transacting funds. Rather than originating from a physical check, an ACH payment begins with a photo of the check to deposit it from the payor’s bank for transfer to the payee’s bank.

Types Of ACH Transfers

How does an ACH transfer work? Businesses and customers that need to understand what, exactly, an ACH payment is should become familiar with the types of ACH transfers that are available for use.

There are, generally speaking, two types of ACH transfers that are important to understand from a user’s perspective: ACH credit and ACH debit.

What Is An ACH Credit?

What is an ACH credit? You can think of ACH credit payments as sort of like “push payments.” They push funds from a checking account into the account of a recipient. For an ACH credit payment to process successfully, the sender of the funds first needs to authorize the transfer of funds they want to push out of their checking account and into the recipient’s account.

The process of an ACH credit payment makes it so that the transacting parties, as is the case with certain forms of other alternative payments, can accept ACH payments securely and without running the risk of losing or misrouting their funds. This process remains secure since the recipient of an ACH credit payment is responsible for providing the sender their personal bank account and routing number.

After this transfer of information is complete, the sender of the ACH credit payment must make sure that they forward their recipient’s sensitive information to their own bank along with specific instructions for paying a certain amount on a certain date. Only once this is done can the sender’s bank then batch the payment information and send it along to the central bank that settles the funds according to a daily schedule.

ACH credit payments make the most sense for businesses that run payroll or need to process the occasional bill payment since they provide a level of control that can let businesses decide when and how much they need to pay to a recipient.

What Is An ACH Debit?

What is an ACH debit, and how is it different from an ACH credit? Instead of the verb “push, think instead of the verb “pull” when it comes to making ACH debit payments.  With ACH debit payments, funds are “pulled” out of a checking account according to a set schedule, rather than pushed by a sender who authorizes the transfer of funds.

Consequently, ACH debit payments typically make the most sense for businesses or customers that don’t want to have to remember to manually pay their recurring bills for things such as utilities, subscription plans, or even payroll. The only thing that ACH debit payors need to do is send their bank account and routing number as well as payment authorization for a certain date of the month to the party owed payment.

The recipient of an ACH debit payment, on the established payment date of the month, is now responsible for sending their request for payment to their own bank. Their bank then sends the recipient’s payment request through the Federal Reserve and to the bank of the payor. The payor’s bank verifies that the payor has provided previous authorization and has sufficient funds available for transfer in their account. Once this process is complete, the payor’s bank can finally release the ACH debit payment to the recipient.

How Does An ACH Transaction Work?

ACH transactions process over an electronic computer network known as the ACH network, which connects US banks to the US Federal Reserve. The Federal Reserve is the hub of all transfers of funds between banks in the United States and processes these exchanges twice daily during business days. Each bank is responsible for keeping track of each customer who is exchanging funds as well as how much they’re sending and to whom at which bank.

Although ACH payments can seem confusing to manage successfully and process, there are, in fact, only a few simple steps that go into making them work. Let’s take a look at the complete step-by-step process to transact funds using an ACH payment successfully: 

1. Authorize a payment. The first step of the transaction begins with an authorization for ACH direct payment or deposit that the payment originator initiates. An ACH transaction originator can be a bank, a business or corporate entity, or just an individual customer.
2. The payment processor submits an ACH entry. After payment has been authorized, the ACH payment originator’s bank, otherwise referred to as the Originating Depository Financial Institution (ODFI), submits the entry for an ACH payment on behalf of the originating party.
3. Send an entry batch. The originating bank now sends entries for ACH payments in multiple batches to an ACH operator in adherence to a set schedule. The ODFI sending these entries is responsible for ensuring their submissions reach a verified ACH operator.
4. ACH operators sort entry batches. An ACH operator working on the computer network filters through batches of entries for payment to separate ACH direct deposit entries from direct payments.
5. ACH operators send payment entries. Once entries for payments have been categorized and sorted by type, the ACH operator can now submit batches of entries to each Receiving Depository Financial Institution (RDFI).
6. The recipient bank validates funds. For ACH direct deposits that “pull” funds from an account, the receiving bank must first ensure that there are sufficient funds in the payor’s account before transmitting an ACH payment. Once the receiving bank verifies an adequate amount of funds is present in the ODFI, the ACH payment can proceed to the crediting or debiting phase.
7. RDFI debits or credits the receiver’s amount. The receiving bank can finally debit or credit the originating bank. Depending on the type of ACH payment transaction, the RDFI will either debit or credit the final amount.

Upon completion of an ACH transaction, the US Federal Reserve is responsible for processing the actual transfer of funds between the banks of the payor and the payee. Keep in mind that if you’re interested in adopting ACH payments to process recurring transactions regularly, ACH transfers can successfully process between a US bank and a foreign bank as well. In the case of US-foreign exchanges, an ACH transaction instead processes through a different computer network (typically the SWIFT network) that hosts the majority of US-foreign exchanges of funds.

What Happens If An ACH Transaction Fails?

It’s certainly not an ideal scenario, but ACH transactions can potentially fail if payments can’t go through due to insufficient funds in a sender’s account or an incorrect routing number. In this case, merchants can still have their ACH transfers turned to them by following a few steps.

If an ACH transfer does fail after it has been processed due to payment disputes, incorrect banking information, or insufficient funds in a payor’s account, the RDFI can initiate a credit or debit entry for an ACH return. The RDFI is responsible for adhering to time frames established by the National Automated Clearing House Association (Nacha) to return an entry for ACH debit or debit that has already been originated.

ACH returns can easily be mistaken for disputes or chargebacks, which are terms relevant to transactions that involve a third-party entity that helps adjudicate a fund dispute or chargeback. Disputes and chargebacks, however, are terms exclusive to the credit card industry; ACH returns rely on nearly 70 ACH return codes to process and return an ACH debit or credit to an originator.

ACH Payment Processing Times

Nacha oversees all ACH debit and credit transactions that are processed three times per business day in bulk. ACH transactions are processed in bulk for efficiency and have different processing times depending on whether they’re debit or credit payments.

• Standard ACH debit transactions typically process within three to four business days. After a transfer for a debit transaction begins to process on the first day, the sender’s bank submits the debit transactions over the ACH network. Once the transaction becomes visible to the receiving bank, it debits the recipient’s account.
• For ACH credit transactions, banks can process them and have them delivered within one to two business days, whereas ACH debit transactions always process the following business day.

ACH transfers can technically clear the same day they’re initiated, but you’ll need to pay a fee to expedite your request. Without paying this fee, the financial institution can decide when to initiate your transfer request, which takes at least 24 hours.

ACH instant transfers in 2021 are available with certain money transfer services, which allow for an ostensibly “instant” transfer of funds after you set up an account with them. These transfers don’t actually exchange money and instead credit your account with funds; the real exchange is processed over the ACH network a few days later.

Why Use ACH Payments?

Why use ACH for your business? ACH payments are arguably the most logical form of alternative payments that can manage recurring transactions for things such as utilities, subscription plans, payroll, or any type of schedule of payments in installments. From the standpoint of a merchant or individual customer, ACH payments can make a lot of sense for transactions that would otherwise require tedious manual input.

What’s more, ACH payments tend to cost less to process than charges on credit cards. It’s also much more difficult for a payor using ACH payments to dispute a payment or decide to pull it off the network once it’s already been finalized. In this case, ACH payments are enormously attractive to companies and customers interested in adopting alternative payment methods but are concerned about the potential security risks they carry.

Benefits Of ACH Payments

ACH payments can be more secure and cost-effective transaction solutions compared to traditional checks and credit card payments. With ACH payments to both receive and send funds to their customers, merchants can enjoy benefits of ACH payments that include:

• Increased Security: Traditional payment methods such as paper checks can be easily compromised due to fraud and can make customers hesitant to use them with merchants. ACH payments get rid of the vulnerabilities associated with transaction methods such as paper checks and increase the likelihood of your customers continuing to rely on your payment methods.
• Easier Recurring Payments: ACH payments are great options for recurring billing for merchants and their customers. Subscription plans that merchants use to bill their customers on a recurring basis can include high processing costs that steadily climb to compensate for monthly processing requirements as well as late fees. ACH payments can reduce processing costs to increase cost-effectiveness for merchants and customers who automatically pay recurring payments and avoid being charged late fees due to forgetfulness.
• Faster Processing: Traditional paper checks travel through the mail and take a relatively long time to clear compared to online ACH payments. ACH payments drastically cut down on processing time and enjoy preferred funding from banks. This means that banks typically process ACH payments before paper checks so that merchants and their customers receive payments much faster with ACH transactions.
• Customer Preference: The number of bank transactions processed by ACH payments is growing steadily and reflects an increasing customer preference for non-traditional payment. As of 2018, ACH payments began to outpace the number of check payments made for the first time.

Frequently Asked Questions About ACH

Are ACH Payments Right For My Business?

ACH payments are just one form of payment processing available to small businesses. Deciding to add ACH as an option makes sense for many businesses because of the advantages of electronic bank-based payments:

Flat transaction fees make ACH cheaper than checks. A single paper check carries an average cost of $3 to $20 and costs another $20 to $30 if you want to cancel it. ACH payments can give merchants a cheaper way to get paid since they can count on a flat transaction fee, typically around half a dollar.

Increased security is essential to merchants considering alternative payments to paper checks such as ACH transfers. ACH transfers are safer than paper checks and keep account and routing numbers confidential when they pass through different hands. Increased security also helps merchants make customers feel more at ease using ACH transactions than they would with paper checks, which caused more than two-thirds of all organizations to experience check fraud in 2018.

Automate your accounts payable with electronic ACH payments to improve cash flow management. ACH makes it simple for merchants to automate recurring payment collections and save on administrative costs so that payment options are more cost-effective.

Customer relationships and increased conversions of leads can improve with ACH payments, making payment processes simpler for customers than paper checks. ACH can increase the chances of converting sales and improving customer relationships through simplicity so that a merchant’s customers don’t need to track a bill until they receive it and worry that it’s lost in transit.

Final Word On ACH Payments

What does ACH mean for you? Are ACH payments the best option for your business? Like most things in life, one size doesn’t fit all. ACH payments are well-suited to routine and recurring payments, while credit and debit cards still make more sense for retail purchases.

ACH payments tend to cost less for merchants to process when compared to card payments and are often much more secure than paper checks. Once they’re scheduled, ACH payments can continue to process electronically without the payor having to track them. To top it off, ACH payments are more difficult to pull back, so merchants don’t need to grapple with chargebacks.

Have more questions that this article hasn’t answered about ACH payments? Get a more in-depth comparison between ACH transactions and other alternative forms of payment to help you decide if ACH payments are your business’s best payment option.