- Gain insight into how ACH payments work, their processing times, and their cost-effectiveness.
- Explore the difference between ACH debit and ACH credit transactions and learn about the pros and cons of ACH payments
- Discover how to set up ACH payments and choose the right payment processor for your business needs.
This article aims to guide you through ACH payments, how they work, and their benefits for your business. By understanding ACH payments better, you can streamline your payment processes, save time, and offer a more convenient experience to your customers.
What are ACH Payments?
ACH payments are electronic transfers executed through the Automated Clearing House Network, a secure system governed by NACHA. It plays a pivotal role in transferring funds between banks, credit unions, and other financial institutions across the U.S. Notably, approximately 94% of American workers receive their salary through the ACH network.
The ACH network operates under two leading players:
- The Electronic Payment Network (EPN)
- The Clearing House, which includes 24 major banks
Types of ACH Payments
ACH transactions are either ‘debits’ or ‘credits.’ In an ACH debit, the payer authorizes someone else to ‘pull’ funds from their account. In an ACH credit transaction, you ‘push’ funds to someone else’s account. Here’s the difference:
The payer (e.g., a customer) authorizes the payee (e.g., a merchant) to take funds from their account. For instance, an auto-pay electricity bill falls under this category.
The payer allows the payee to take payment from their account whenever due. This is typically used for direct salary deposits.
This type of ACH payment is beneficial as it ensures that your bills are paid on time without any manual intervention.
ACH credit transactions are advantageous as they negate the need for paper checks.
How Do ACH Payments Work?
An ACH transaction involves:
The Originator: Initiates the transaction
Originating Depository Financial Institution (ODFI): Processes and transmits the payment
Receiving Depository Financial Institution (RDFI): Receives and credits the payment to the recipient’s account
The Receiver: The final recipient of the funds
The Originator initiates the transaction, which is processed by the ODFI and transmitted to the ACH network. The payment is then received and credited by the RDFI to the Receiver’s account.
How Long Does ACH Payment Processing Take?
ACH transaction timelines vary based on four factors:
- The time of day the transaction is initiated
- The day of the week the transaction is initiated
- Whether or not same-day ACH was used
- Whether or not the transaction returns an error code
Standard ACH transactions take about 2-3 business days.
Still, with same-day ACH payments, the process can be completed within the same day if the transaction is initiated early enough— Transactions and batches must be submitted before the 10:30 AM ET or 2:45 PM ET processing times window. However, same-day ACH incurs additional costs and requires a separate Originating ID.
How Much Does ACH Payment Processing Cost?
The internal cost for processing an ACH payment averages at $0.29 (ranging from $0.20 to $1.50) per transaction. Factors influencing the cost include the bank, the processor or ODFI, and the transaction volume. Notably, larger volumes often translate to lower costs per transaction.
Cost vs. Transaction Volume:
Small businesses typically pay $0.20 to $1.50 per ACH payment
Medium to large businesses can negotiate rates as low as $0.01 per transaction
Compared to checks and credit cards, ACH payments are more cost-effective due to lower transaction fees. For instance, a $5,000 ACH transaction might cost a maximum of $5, versus $100-$150 via card networks that charge the typical 2-3% fees.
Pros and Cons of ACH Payments
credit cards and wire transfers, ACH fees are significantly lower. For instance, for a $500 transaction processed through Stripe, you could save over $10 by choosing ACH over credit cards.
For businesses with high-volume transactions, such as those that process monthly billing cycles for their customers, using ACH instead of credit cards can provide significant cost savings.
High Transaction Success Rate:
ACH reduces payment churn as customers use their bank account rather than a credit card. On average, a bank account is held for 14 years compared to only 3 years for a credit card, making the bank account a more stable payment method.
Fewer Errors and Returns:
Bank account information must be entered only once to link an account for ACH payments, reducing the chances of errors.
Other payment methods like credit cards and wire transfers often need information to be repeatedly entered for payments, which increases the chances for errors and returns.
Safer from Fraudulent Activities:
ACH has the lowest fraud rate among major payment systems (averaging only $0.08 of fraud for every $10,000) representing only a fraction of 1 percent of the total value or number of all payments in the U.S.
Drawbacks of ACH Payments
ACH is among the safest payment rails available, but that doesn’t mean it comes without risk. The most common risks and liabilities associated with ACH are:
Insufficient Fund Returns:
ACH payments don’t settle immediately, so purchases made without sufficient funds can go unnoticed until rejected by the ACH network.
Businesses must fulfill Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements before starting with ACH, which can take time and effort.
Most customers are used to instant settlements, so understanding ACH payments’ time frame can take some getting used to.
What’s the Difference between an ACH Transfer and a Wire Transfer?
While both methods transfer funds electronically, they differ in cost, speed, and safety.
Cheaper ($0.20 – $1.50 per transaction)
More expensive ($15 – $35 per transaction)
Slower (offers same-day options)
Faster (almost instant)
Reversible in case of error or fraud
Irreversible once sent
How to Set Up ACH Payments
While it can feel overwhelming to get started with ACH, many organizations are already using it, and the ACH infrastructure is well set up for those who are just starting out. Here’s a step-by-step guide for businesses to set up ACH payments:
1. ACH enablement and verification:
To begin with ACH payments, businesses need to verify account details and routing numbers with banks or payment processors.
2. Update your software:
Many accounting or payment processing software support ACH payments. You may need to update or configure your software to enable this feature.
How to choose the right payment processor for ACH payments?
Many businesses choose a payment processor that integrates with their authorization methods. When deciding which ACH processor to use, it’s important to ask the right questions, such as:
- How quickly do I need to go live?
- How fast do I need to process payments?
- How much control do I need to have?
- What are this processor’s fees compared to others?
- What kind of fraud prevention capabilities do they have?
- How robust is their compliance process?
3. Add ACH to the payment flow:
How a business adds ACH to its payment flow will depend on the use case, which could be recurring subscription payments, new customer account funding, accepting one-time payments, or something else. Run a test transaction to ensure everything is set up correctly.
Frequently Asked Questions (FAQs)
Is ACH and direct deposit the same?
Yes, Direct deposit is a form of ACH transfer where funds, like a paycheck, are electronically deposited into a recipient’s bank account.
What is the difference between ACH debit and ACH credit?
An ACH debit is when funds are pulled from an account, like when you set up auto-pay. An ACH credit is when you push funds into an account, like your employer depositing your salary.
What is an example of an ACH debit transfer?
A classic example is setting up auto-pay for bills like your electricity bill. The funds get pulled from your account automatically, ensuring timely payments.
What are ACH Routing Numbers?
An ACH routing number is a 9-digit number used to identify an individual bank or financial institution, essential for facilitating ACH payments. You can find your ACH routing number by contacting your bank or credit union.
What is an example of an ACH credit transfer?
A perfect example is payroll direct deposit. Here, your employer pushes, or deposits, your salary directly into your bank account.
How much does it cost to set up ACH payments?
Costs vary based on your bank or payment processor but typically, small businesses pay around $0.20 to $1.50 per ACH transaction.
Do banks charge for ACH payments?
Yes, banks generally do charge for ACH transactions. The cost varies depending on your bank and the volume of transactions.
Understanding ACH payments and their benefits is crucial for any business. With lower costs, high transaction success rates, and enhanced security, they offer a significant edge over traditional payment methods. The key to leveraging this efficient payment method lies in choosing the right payment processor and integrating it seamlessly into your payment flow.