What are ACH payments? Definition, Requirements and Benefits
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What are ACH payments?
ACH (Automated Clearing House) payments are electronic fund transfers that use the ACH network to move funds between bank accounts in the United States. This payment method is widely used for direct deposit of payroll, payment of bills, and business-to-business payments.
ACH payments are faster and more dependable than traditional paper checks, thereby streamlining account payable processes. It is important to note that ACH is a separate network from major credit card systems such as Visa, Mastercard, and American Express.
The history of ACH payments
ACH was built on the infrastructure of the first computers, long before the internet opened up instant communication. ACH is designed such that there are manual steps in the transaction process. Banks would compile ACH transfers onto tapes once per day, and ship the tapes to the clearing house to have the transfers distributed to the banks they are meant to go to. The clearing house was operated by people on business days only.
In the United States, ACH is not controlled by the government, but rather by a body known as NACHA (National Automated Clearing House Association) that is made of representatives from most banks in the US. NACHA is a non-profit organization that is self-regulating and responsible for supervisory and rule-making functions for ACH transactions.
A few years ago, NACHA held a vote to upgrade ACH and make same-day ACH the default method of payment. It got a majority vote in favor, including votes from the big banks. However, it did not go through because it needed a supermajority to pass, and many small banks voted against it because they do not have the money or the technology to actually support the upgrade.
There is a new system, Real Time Payments (RTP) that is slowly gaining popularity. However, RTP currently requires an even larger technical investment from banks, so only the largest or most technically advanced banks have adopted it.
ACH payment examples
Some examples of typical ACH payments are:
- Direct deposit from employers (for paychecks)
- Paying bills with a bank account
- Transferring funds from one bank account to another
- Sending money to the IRS
- Businesses paying vendors and suppliers
Further, there are two basic types of ACH transfers: ACH credits and ACH debits. Fundamentally, the meaning of both of these terms can refer to the same actual transaction.
The key difference between the two is that an ACH credit is the money that’s delivered into an account, while an ACH debit is the money that’s pulled out of an account.
In this post, we cover many of these examples and go into greater detail on how ACH payments actually work, their benefits and how you can get started.
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ACH payment requirements
To initiate an ACH payment, you need to provide
- The recipient's name
- The type of bank account the recipient has
- The recipient’s bank account number and ABA routing number
- The payment amount
You also need to authorize the payment, which can be done electronically through online banking or by signing a paper authorization form. To ensure a successful ACH payment, you must have a valid bank account, sufficient funds, and accurate information for the recipient's bank account.
How long does it take to process an ACH payment?
Although ACH transfers are reasonably fast, they are not instantaneous, and it usually takes 3-5 business days for the funds to be transferred. The time of day and day of the week also affect the transfer time, as well as the type of ACH payment. There are also Next Day ACH transfers and Same Day ACH transfers available.
Next Day ACH transfers typically settle within 1-2 business days, while Same Day ACH transfers can be completed on the same business day or the following business day, depending on when the payment was initiated. However, Same Day ACH transfers usually come with an additional processing fee for the same-day service.
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How much do ACH payments cost?
The National Automated Clearing House Association (NACHA), the governing body of ACH payments and transfers, states that the average processing fee for an ACH payment is around 11 cents. However, several factors can affect the cost per transaction.
The volume of transactions being processed is one such factor, with larger transaction volumes resulting in lower per-transaction fees. This is due to the availability of different fee structures that can be used.
Benefits of ACH payments
The focus of this discussion is on the benefits of ACH payments for businesses, but you (as a personal consumer) can also enjoy the benefits of using ACH. However, for organizations that need to issue payments or transfers (let's face it, that's every business including yours), ACH offers many advantages. Let's take a closer look:
When comparing the convenience of ACH to writing checks, ACH is undoubtedly more convenient. With ACH, there are no paper checks to handle, no file cabinets to store them, and no pens needed to sign them. It takes less time to process ACH payments and for vendors to have access to the funds. Although checks continue to be used in many industries, vendors are increasingly choosing ACH as their preferred method of payment.
2. Lower Cost than Credit
While credit systems offer similar convenience as ACH, they are often associated with higher costs, especially for businesses that process recurring payments. Credit card fees can be as high as 2.5% of the transaction value, in addition to flat-rate processing fees. In comparison, ACH transactions typically cost between 20 cents and $1.50 per transaction. For businesses that process a high volume of transactions, ACH can provide significant savings.
3. Works well Long Distance
ACH payments can be used for international money transfers, which can save several days or even weeks compared to using physical checks. Although there is no global ACH system, many countries have their own systems that interface with ACH. For example, SEPA (Single Euro Payments Area) is the equivalent system in Europe, while Australia uses "Direct Entry."
The integration of the bank with the electronic funds transfer simplifies accounting by eliminating the need to manually update two separate records, as you would do in the case of balancing a check-book. This also allows for seamless integration with numerous accounting tools and software services that provide comprehensive transaction histories through the ACH system.
How to set up ACH payments for your business
When starting the process of making ACH payments for your organization, it is important to familiarize yourself with a few (necessary) regulations. These are:
- Verification of account information – You must verify that your account information is up to date with ACH. This can be achieved by dispatching micro-deposits (typically ranging from 0.01¢ to 0.50¢) to another bank account, which, upon receipt acknowledgment, verifies that your account is properly linked and funded. These deposits will be refunded to you. You can use a validation tool offered by NACHA or a third-party tool.
- NACHA certification – This certification serves as a trust signal to your customers, indicating that your business adheres to the rules of the ACH network. Note that this certification is intended for third-party operators who handle the transactions, not your business. It is, however, better to select an operator with this certification. For further information, refer to the NACHA website.
- Guidelines for same-day ACH – The rising usage of ACH has resulted in a same-day payment alternative (which is pretty fast as far as business payments are concerned!). This option enables recipients to gain access to their funds at 1 PM local time, provided that the payment was processed that morning.
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