What Is an ACH Payment: Everything You Need to Know

10 June, 2024
11.03 mins
Brett Johnson, AVP, Global Enablement

Table of Content

Key Takeaways
Introduction
What is an ACH Payment?
Types of ACH Transfers
How Do ACH Payments Work?
How Long Does ACH Payment Processing Take?
How Much Does ACH Payment Processing Cost?
Pros and Cons of ACH Payment Method
What’s the Difference between an ACH Transfer and a Wire Transfer?
How to Set Up ACH Payments
How Highradius Can Help Your Business with ACH Payments
FAQs

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Key Takeaways

  • An ACH payment is an electronic funds transfer between bank accounts within the United States, used for direct deposits, bill payments, and business-to-business transactions.
  • ACH payments offer significant cost savings compared to traditional methods, with an average internal cost of around $0.29 per transaction. 
  • ACH payments provide benefits such as high transaction success rates, reduced errors and returns, enhanced security, and convenience.
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Introduction

ACH payments have revolutionized how businesses and individuals handle financial transactions—offering a convenient and efficient alternative to traditional payment methods. They have become increasingly popular today. 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. Let’s get to it.

What is an ACH Payment?

ACH payments, regulated by NACHA, involve secure electronic transfers processed via the Automated Clearing House Network. They are crucial for transferring funds among U.S. banks, credit unions, and financial institutions. Studies state that about 94% of U.S. businesses pay their employees through this network.

The ACH network operates under two leading players:

  1. The Electronic Payment Network (EPN)
  2. The Clearing House, which includes 24 major banks

Types of ACH Transfers

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:

ACH Debit

ACH Credit

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.

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How Do ACH Payments Work?

An ACH transaction begins with a data file containing payment information. The process involves sending this file from the originator’s bank to the Automated Clearing House, which then forwards it to the recipient’s bank. This sequence facilitates the transfer of funds to the receiving account.

An ACH transaction involves:

  1. The Originator: Initiates the transaction
  2. Originating Depository Financial Institution (ODFI): Processes and transmits the payment
  3. Receiving Depository Financial Institution (RDFI): Receives and credits the payment to the recipient’s account
  4. The Receiver: The final recipient of the funds

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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?

Standard ACH transactions take about 2-3 business days, but ACH payment processing timelines vary based on four factors such as the time of day, the day of the week the transaction is initiated, whether or not same-day ACH was used, and whether or not the transaction returns an error code. 

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.

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ACH Batch Times and Settlement

Understanding ACH batch times is essential for predicting when transactions will be processed, and funds will be available. ACH operators typically have specific cutoff times for submitting batches of transactions, which can vary depending on the financial institution.

Once submitted, ACH transactions undergo a processing period before being settled. While the exact duration can vary, ACH payments generally take 1-2 business days . However, same-day ACH services are also available for faster transactions, albeit at an additional cost.

ACH Card Payments and Remittance

In addition to bank account transfers, ACH services also support card payments, allowing businesses to accept payments conveniently. ACH remittance refers to the electronic transmission of payment details accompanying a transaction, streamlining reconciliation processes for businesses.

How Much Does ACH Payment Processing Cost?

The internal cost for processing an ACH payment averages $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.

cost-analysis

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.

cost-analysis

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.

Pros and Cons of ACH Payment Method

Before deciding whether to implement ACH payments, it’s essential to weigh the advantages and disadvantages they offer.

Pros: 

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 only needs to be entered once to link an account for ACH payments, reducing the chances of errors. In contrast, other payment methods, like credit cards and wire transfers, often require information to be entered repeatedly for each payment, increasing the likelihood of 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.

Convenience:

One of the key benefits of using ACH services is the convenience they offer. Instead of relying on paper checks or manual bank transfers, individuals and businesses can automate their payments, saving time and reducing the risk of errors.

Cost-effective:

Additionally, ACH payments boast cost-effectiveness compared to traditional methods. With lower transaction fees and faster processing times, businesses can save money and improve their cash flow management.

Flexibility:

Another advantage of ACH payments is their flexibility. Whether it’s scheduling recurring payments, making one-time transfers, or processing bulk transactions, the ACH system can accommodate various needs and preferences.

Cons 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.

KYC/AML requirements: 

Businesses must fulfill Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements before starting with ACH, which can take time and effort.

Customer expectations: 

Most customers are accustomed to instant settlements, so adjusting to the time frame of ACH payments may take some.

What’s the Difference between an ACH Transfer and a Wire Transfer?

Sometimes, people get confused between an ACH and a wire transfer, so before initiating an ACH transfer, it’s important to understand how it differs from a wire transfer. Though both methods transfer funds electronically, they differ in cost, speed, and safety. 

ACH Payments

Wire Transfers

Cost

Cheaper ($0.20 – $1.50 per transaction)

More expensive ($15 – $35 per transaction)

Speed

Slower (offers same-day options)

Faster (almost instant)

Safety

Reversible in case of error or fraud

Irreversible once sent

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How to Set Up ACH Payments

While getting started with ACH payments can feel overwhelming, many organizations are already using this system, and the ACH infrastructure is well-established for newcomers.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:

  1. How quickly do I need to go live?
  2. How fast do I need to process payments?
  3. How much control do I need to have? 
  4. What are this processor’s fees compared to others?
  5. What kind of fraud prevention capabilities do they have?
  6. 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.

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. ACH payments offer a reliable, cost-effective, and efficient way to handle financial transactions. By leveraging the ACH system, individuals and businesses can streamline their payment processes, improve cash flow management, and experience greater convenience. The key to leveraging this efficient payment method lies in choosing the right payment processor and integrating it seamlessly into your payment flow. 

How Highradius Can Help Your Business with ACH Payments

Payment gateways serve as essential infrastructure for modern electronic transactions, enabling businesses to securely and efficiently process payments. Serving as intermediaries between merchants and banks, these gateways ensure the seamless transmission of transaction data while safeguarding sensitive financial information. They play a crucial role in supporting various payment methods, including credit card transactions and ACH payments, providing businesses with a versatile solution for their payment processing needs.

HighRadius offers a leading payment gateway software designed to optimize electronic payment processing for businesses of all sizes. The payment gateway empowers businesses to streamline their payment processing operations and elevate the overall customer experience by prioritizing security, efficiency, and cost-effectiveness.

One of the standout features of HighRadius’ payment gateway software is its robust support for ACH payments, presenting businesses with a cost-effective alternative to traditional payment methods.. HighRadius helps businesses reduce processing costs by up to 90% by validating bank accounts and securely processing ACH payments. This substantial cost-saving capability enables businesses to optimize their payment processing expenses and allocate resources more effectively, thereby driving bottom-line growth and profitability. Embracing HighRadius’ solution equips businesses to remain competitive and foster sustainable growth in today’s digital economy.

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FAQs

1. Is ACH and direct deposit the same? 

ACH and direct deposit are not the same but are closely related. ACH (Automated Clearing House) is the network facilitating electronic transfers, while direct deposit is a specific type of transaction within the ACH system, typically used for payroll deposits directly into a recipient’s bank account.

2. What is the difference between ACH debit and ACH credit? 

ACH debit withdraws funds from an account, initiated by the receiver like when you set up auto-pay. ACH credit deposits funds into an account, initiated by the sender. An ACH credit is when you push funds into an account, like your employer depositing your salary. The key distinction lies in the direction of the transaction: debit pulls funds, while credit pushes funds.

3. 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.

4. What are ACH Routing Numbers?

ACH Routing Numbers, also known as ABA Routing Numbers is a 9-digit number, used to identify the financial institution involved in an ACH transaction and facilitate the routing of funds between accounts. You can find your ACH routing number by contacting your bank or credit union.

5. 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.

6. How much does it cost to set up ACH payments? 

 The cost of setting up ACH payments varies. Many banks and financial institutions offer ACH services for free or at minimal cost. Small businesses pay around $0.20 to $1.50 per ACH transaction. However, third-party service providers may charge fees based on transaction volume or service features. 

7. Do banks charge for ACH payments? 

Yes, banks generally do charge for ACH transactions. The charge for ACH payments depends on their fee structure and the type of account held by the customer. Common charges include transaction fees or monthly service fees for businesses executing transactions through ACH services.

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