What is ACH Payment and How Does It Work?
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More than 108.6 million credit card transactions occur in the U.S. every day.
People and companies are using online transactions for a variety of purposes and end up paying huge amounts to card networks.
What if there was a way to escape that?
ACH payments allow a direct electronic bank-to-bank transfer of funds without using these card networks and it's gaining popularity because it is easy to use, manage, and cheaper.
Let's dive in to read more about ACH payments and how businesses can use them.
What is ACH?
The Automated Clearing House network, or ACH, is a network used for electronically moving money between bank accounts across the United States. It is administered by an organization called NACHA (National Automated Clearing House Association).
NACHA was initially formed in 1974 and has overseen the development of ACH since then: in 2021 over $72.6 trillion worth of funds were transferred as ACH transactions, a year-on-year increase of over 17 percent.
ACH payment quantity is steadily thriving. One major advantage of ACH payments is that they are suited to multiple use cases - transaction types include government, consumer, and business-to-business transactions, as well as international payments.
The ACH network can also be referred to as the ACH payment system, scheme, or simply as ACH.
What is an ACH payment?
ACH payments are a direct transfer of cash from one account to another without using credit cards, wire transfers, cash, or paper checks.
If you reimburse your bills electronically (rather than entering a credit card number or writing a check) or obtain a direct deposit from your employer, the ACH network is at work.
Businesses use ACH payments because of the seamless electronic process, instant payment, and enhanced credibility as compared to credit cards. That's the reason it is becoming popular.
ACH payments are generally not processed in the UK, Eurozone, or anywhere outside the United States and associated territories. Although international ACH transfers are possible, typically they are sent via Wire (largely due to better speed). ACH payments are also referred to as ACH transfers or transactions.
The ACH network encountered substantial growth in 2021, with 29.1 billion expenditures estimated at $72.6 trillion, and Same Day ACH payment volume thrived by 74%.
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Types of ACH transfer: ACH Credit vs ACH Debit
Let's take a look into different types of ACH transfers, namely: ACH debits and ACH credits.
The major difference between them is how the funds are transferred. Let's take a look.
ACH debit
ACH debit is a pull transfer.
Basically, the money is taken from the account by the payee (merchant) with the payer's (customer) approval.
eg. When you turn auto-pay on for mortgage bills. After every month, ACH debit is used to pay the premium.
ACH credit
ACH credit is a push transfer.
Opposite to the ACH debit, here the account owner receives the amount from the merchant.
eg. Your company pays you a salary every month. In that case, the amount is automatically debited from the company's account and credited to your account.
We typically love such ACH credits!
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How do ACH payments work?
There are two main categories of ACH transactions: direct deposits and direct payments.
Direct Deposit is used for payments from a business or the government to a consumer, usually for things like payroll, government benefits, tax refunds, interest payments, and more.
Direct Payment refers to the electronic movement of funds to make or receive payments, both by individuals or businesses. Typical use cases include sending money to family, purchasing a product or service, paying bills to vendors, or supporting a not-for-profit organisation.
Now, let's see how an ACH transaction happens. Let's look at ACH direct payment — for example, to bill a customer.
Setup
The company needs to ensure they have proper permissions to start an ACH debit transfer. The customer needs to give you permission by filling out a form with their bank.
Initiation
Once that is sorted, you move to the next part, by sending data records detailing transactions to your bank. This is called the Originating Depository Financial Institution (ODFI).
These files comprise the transaction type (credit or debit), bank account details, and routing numbers.
Batching
The ODFI receives the details & forwards them to ACH operators - Federal Reserve Banks’ Automated Clearing House (FedACH) or the EPN (Electronic Payments Network).
Distribution
The files are then sent to your customer's bank. The bank here is called the Receiving Depository Financial Institution (RDFI).
Completion
The bank then pulls funds from the customer's bank account after verifying the details and everyone receives a notification when the payment is completed.
How long do ACH payments take?
ACH transactions typically take 3-4 business days to appear in your bank account. NACHA says that almost all ACH payments are eligible for same-day processing, but note that same-day ACH is a different service and you will have to pay a premium to have the transaction go through the same day.
How much does it cost to make ACH payments?
The average cost of an ACH payment in 2023 is $0.3 per transaction.
However, the total cost associated with ACH payments varies depending on a number of factors.
There are two routes available to businesses that would like to access ACH payments, direct and through a third-party payment processor. It can be costly to obtain direct access, due to fees, employee wages, and the time taken to implement.
A popular option is to pay for ACH access through a payment processor. This drastically reduces the time required to access the scheme, as well as simplifying ongoing costs and providing a payment solution that is ready to use immediately.
Nanonets for Payments Automation
Can you automate all your payments with one single platform?
Yes, Nanonets allows you to pay all your invoices from one single platform.
You can approve payments directly from the Nanonets platform. Here is how it works:
- You receive an invoice from your supplier/vendor
- Automatically source the details of the invoices & send the invoices to get them approved
- Once the invoice is approved, you can pay directly from the Nanonets platform
- Once you pay the invoice, your bank account is debited for the same amount and the supplier/vendor will receive the amount instantly.
Nanonets provides a complete end-to-end financial automation solution. You can automate
- Vendor processes - Vendor onboarding, KYC, document verification, vendor management
- Accounting processes - invoice data extraction, invoice matching, GL code mapping,
- Payment processes - pay vendors on time, payment notifications
- Approval processes - involve all stakeholders in approval workflows for speedy turnaround time
and more.
Nanonets is trusted by 500+ enterprises like AmTrust, P&G, Deloitte, Doordash, and more to automate their manual processes.
Most of our customers see the benefits mentioned below:
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Why are some ACH payments denied?
What to do if your ACH payment is denied?
In such a case, your bank generates a reject code which sheds light on what happened. Here are the 4 most widespread reject codes:
R01 - Insufficient funds
This implies the customer did not have sufficient money in their report to cover the quantity of the debit entry.
When you receive this code, you are possibly going to have to rerun the transaction after the customer transfers additional money into their account or delivers a distinct payment method.
R02 - Bank account closed
This occurs when a customer had a formerly active account that they shut down. It is likely they forgot to inform you of the change.
R03 - No bank account or unable to locate the account
This code is triggered when you've entered the wrong bank account details in the transaction file. You'll have to check the customer's bank details again.
R29 - rejected
This means that one of the banks doesn't allow for the b2b transfer.
In this instance, the customer is required to deliver their bank with your ACH Originator ID for ACH withdrawals by your company. Then you are required to rerun the transaction.
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Benefits of using ACH payment
Lower processing costs
ACH payments generally have the lowest processing payments of any category of payment. If you utilize a provider with a flat rate, doing ACH payments will amount your business way smaller out of pocket than processing credit cards.
Fewer declines due to expiration
Scanning accounts do not have things that “expire” like debit and credit cards. So you handle far fewer reductions when processing ACH payments.
More convenient for you
No further paper invoices, time-consuming trips to the bank and paper checks.
More convenient for your customers
Providing several payment alternatives makes for a reasonable customer experience. With ACH payments, customers do not have to scan their chequebooks every month. They can just “set it and forget it” by enlisting for recurring billing.
Drawbacks of ACH payment processing
ACH payment processing is accessible and convenient, but there are some restrictions.
Speed
ACH payments can take many days to process — commonly between three to five business days.
Caps
There can be everyday and monthly caps on the amount of money you can move. The Same Day ACH per transfer threshold is set at a maximum amount of $25,000.
Cutoff times
After a particular time of day, a transfer won’t be done until the next day (or Monday, if it is prior to a weekend).
U.S-only
It is likely your bank does not enable ACH transfers to and from global bank accounts.
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Are ACH payments right for your business?
Should you use ACH payments?
Try to answer these questions:
- Do you take/make a lot of recurring payments?
- Do you/customers use checks or credit cards for payments?
- Will you save a substantial amount by shifting the processes?
- Are your customers willing to shift to ACH payments?
If the answer is yes, go for ACH payments.
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Wire transfer vs ACH transfer
Wire transfers and ACH payments are both excellent means to transfer money between two accounts, but there are a number of disparities between them.
Wire transfers are made in real-time, as opposed to ACH payments, which are made in batches 3 times a day.
Let's compare wire transfers and ACH payments to get a closer look.
Which is better?
Because of their increased cost and speed, wire transfers are adequate for large, either within the US or abroad. But if time sensitivity is not an issue, an ACH payment delivers a substantial benefit over a wire transfer, because of its lower cost.
Why ACH Payments is the way to go for businesses?
Easy to Handle
When customers compensate by check, industries need to wait for the email to come, and then they are required to deposit the check to a bank. Sometimes, payments get lost, and reaching those payments into the system for recordkeeping is labor-intensive. Electronic payments come reliably and quickly, and there is no necessity to forward checks to the bank and stay a few days to discover which checks bounced.
Less Expensive Than Plastic
For industries that ratify payments by credit card, it frequently costs less to make an ACH transfer than to process a credit card payment. Particularly when collecting several recurring payments, those savings are calculated. Automating those payments only enhances the benefits. Nonetheless, ACH does not provide you with a real-time approve or deny reaction like a credit card terminal would.
Long-Distance Payments
Industries can ratify payments by ACH remotely, although the similarity is real for credit cards. If the customers do not have credit cards or they choose not to deliver their card data regularly, ACH can deliver a solution.
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Conclusion
ACH payments are hassle-free. With time, the technology will become more secure and the process will become efficient in terms of costs and time. However, until then ACH transfer seems like a good bet for businesses to save some extra cash on money transfers.
Editor’s note: This article was first published July 7, 2022 and last updated 15 March 2023.
FAQs
What is an ACH Bank Transfer?
An ACH transfer is the electronic action of cash between banks through the ACH (Automated Clearing House) network.
What is an ACH routing number?
An ACH routing number is a nine-digit, unique numeric ID appointed to each banking organization in the US.
It is required for banks to specify where payments should be seized from and sent to. The routing number is utilized in an intersection with an account number to receive or send an ACH payment.
What are typical ACH payment processing times?
ACH payments generally take multiple business days (the days on which banks are open) to go. The ACH network does payments in bundles (as opposed to wire transfers, which are done in real-time).
As per the protocols set forth by NACHA, financial organizations can select to have ACH credits delivered and processed either within a business day or in 1-2 days. On the other hand, ACH debit transactions must be processed by the following business day.
After obtaining the transfer, the other bank may also retain the transferred accounts for a holding period. All in all, you are glancing at an average 3-5 day processing time for ACH payments.
Nonetheless, a recent rule by NACHA (which went into effect in September 2016) compels that the ACH process debits 3 times a day rather than just one. The modifications (which are arising in phases) will make feasible widespread usage of same-day ACH payments by March 2018.
Is there any penalty fee with ACH payments?
Unfortunately, rejected ACH payments can result in a penalty fee for your business. So if you receive a rejected code, it is significant to shortly correct the problem to prevent incurring extra fees on each recurring billing cycle.
To avert the hassle of ACH rejects, it may be worth only ratifying ACH payments from trusted customers.
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