ACH Payments: A Guide

ACH stands for Automated Clearing House, a U.S. financial payment method used to transfer bank-to-bank funds and make electronic payments over the ACH Network. 

ACH transfers include receiving your pay by direct deposit and paying your bills online through your bank accounts. 

You may also utilise ACH transfers to make one-time or regular contributions into an IRA, a taxable brokerage account, or a college savings account. Business owners may also use ACH to pay vendors or accept payments from clients and consumers.

Types of ACH Transfers

ACH facilitates two types of payments — Direct Deposits and Direct Payments, just like BACS.

Direct Deposit

Direct deposit transactions are entirely automated. The payer sends an electronic payment to the payee, which is then deposited straight into the payee’s checking account. The fund will be transferred without a physical cheque or the need for either side to go to the bank.

Direct Payments

Direct payments are sent and received both electronically. Consumers can use Direct Payment to pay bills, donate to a charity, make purchases, or send money electronically.

How do ACH payments work?

There are two basic concepts in ACH payments.

• Originating Depository Financial Institution (ODFI): It is a financial institution that initiates transactions on behalf of its customers (ODFI).
• Receiving Depository Financial Institution (RDFI): An RDFI is a financial institution that has a contract with an ACH Operator to receive entries on behalf of their customers.

Let’s understand the concept of how ACH payments work with the help of an example. 

When signing up for an autopay option for paying your utility bills, you enter your checking account information (routing number and account number) and sign a recurring payment authorisation.

When you reach your billing cycle, the bank that handles your utility bill (the ODFI) requests your bank (the RDFI) to transfer the specified money in the bill. 

The two banks then interact to confirm the availability of sufficient funds in your bank account to complete the transaction.

If there are sufficient funds in your account, the transfer is complete, and then RDFA transfers funds to your account.

Now, isn’t that a good faff?

Advantages of Using ACH Payments

It is a very convenient payment method

Using ACH transfers for bill payments or making person-to-person payments has various benefits; the most prominent is convenience. 

Using an automated ACH payment to pay your mortgage, utility bill or other recurring monthly obligation may be quicker and less time-consuming than writing and mailing a check. 

Not to mention that you will save money by not having to purchase stamps. Furthermore, ACH payments are more secure than other payment types since they pass through a clearinghouse, enforcing laws and regulations to safeguard account numbers.

It is a comparatively faster way to send money 

You can easily send and receive ACH payments quickly. A transaction’s settlement, or the transfer of payments from one bank to another via the ACH Network, usually occurs the next day after the transaction initiation. 

Nacha’s operating guidelines require credits to settle in one to two business days and debits to settle the next business day.

It is a more cost-effective way of transferring funds

ACH transactions are generally free of charge. For example, your bank may not charge you fees if you transfer funds from your checking account to another bank’s account.

Depending on the type of transaction, it may levy a minimal fee.

It is more convenient for your customers to process payments 

Offering a variety of payment alternatives improves the client experience. Customers don’t have to look for their chequebook every month when using ACH payments.

Upon signing up for recurring payments, they can automate payments and forget about them.

It has a lesser decline rate due to expiration 

Unlike credit and debit cards, checking accounts do not have an expiration date. As a result, you will see fewer payment failures when processing ACH payments.

Disadvantages of Using ACH Payments 

Transfer Transaction Limits are prevalent

There are daily, monthly, and other timely limits on transactions. In a day, you can only transfer 25,000 US dollars through ACH transfers.

Timing Issues

The time frame is important when sending an ACH transfer, and this is because not every bank submits them for processing at the same time. 

There may also be a cut-off time; beyond a specific time of the day, the bank will not process a transfer until the following day.

Transferring Money Too Frequently From Savings Accounts May Result in a Penalty

Federal Reserve Regulation D mandates that an account categorised as a “savings deposit” allow no more than six convenient transfers or withdrawals every month. If you exceed that limit, you may be subject to an excess withdrawal penalty by making several ACH transfers from savings to another bank. 

If you make regular transfers from your savings account, the bank may convert your savings account to a checking account.

Speed of transaction

ACH payments might take a few days to process – usually three to five business days.

ACH is only accessible in the US

The Automated Clearing House (ACH) is the American counterpart to the UK’s BACS. The ACH network only operates within the US, so you cannot send payments to UK clients through it. 

Note: BACS and ACH payments are not the same.

How to accept ACH payments for your business?

Accepting ACH payments through a bank is the most straightforward method. You only need to open a business bank account (if you don’t already have one) and offer your banking information to the customer. Customers initiate the payment, and you are not obliged to take any additional action.

Note: NACHA does not allow small firms to operate as the ODFI or RDFI in an ACH transaction. Nevertheless, small businesses can use a bank or payment processor to accept ACH payments.

Reasons some ACH payments are rejected 

There are some instances when ACH payments get rejected. You can fix such failures by ensuring the availability of sufficient funds in your customer’s bank account, updating bank details in case of change, double-checking bank details and information provided, etcetera.

Here are the four main reasons contributing to the failure of ACH payments.

There are insufficient funds in the account

It indicates that the consumer did not have sufficient funds in their account to cover the amount of the debit entry.

The bank account was closed

It occurs when a consumer closes a previously active account.

There is no bank account associated with the details, or the account cannot be found

This error code gets generated when some combination of the data provided (the account number and name on the account) does not match the bank’s records or when a customer provides a nonexistent account number.

R29 reject

The Receiver (non-consumer) alerts the RDFI that the Originator of a certain transaction has not been authorised to debit the Receiver’s account.

To allow future transactions, the payer must contact their bank and provide them with your ACH Originator ID, and then you must resubmit the denied transaction.

Key Takeaways

• ACH transfers are electronic and bank-to-bank funds transactions supervised by the Automated Clearing House Network.
• ACH transfers are easy to administer, fast-paced, and frequently free.
• Two Types of ACH Transfers — Direct Deposits and Direct Payments.
• ACH payments usually take three to five business days to process.
• The Automated Clearing House (ACH) is only accessible in America.
• You may be limited in the number of ACH transactions you initiate, pay additional costs and experience delays in sending/receiving cash.

FAQs

What is the difference between ACH payments and Wire transfers?

While ACH payments and wire transfers are both methods of moving money between bank accounts, they still differ in several ways. 

In contrast to ACH payments, which are handled in batches three times per day, bank processors wire transfers in real-time. 

Wire transfers are assured to arrive the same day, but ACH transfers might take several days to process. In addition, wire transfers are more costly than ACH payments.

What is the difference between ACH payments and EFT payments?

You can interchangeably use electronic funds transfer (EFTs) and ACH payments as they both refer to the same payment system (Electronic Payments).

How much time do ACH payments take to process?

ACH payments often take 3-5 business days (days when banks are open) to process. 

Payments processed are handled in batches through the ACH network (instead of wire transfers that the bank can process in real-time).

According to NACHA requirements, financial institutions can have ACH credits processed and distributed within a working day or between one to two days. 

What’s the cost of ACH processing payments? 

ACH payments are often less expensive to process for businesses than credit cards. Your merchant account provider (or whichever organisation you use to handle ACH payments) establishes the cost.

Checking up on their policies is the best way to gather information about it.