ACH payment uses its proprietary network and is also known as “direct payment” because cash, checks, and card networks like Visa and Mastercard are not involved.
|In 2021, 29.1 billion payments worth more than $72.6 trillion were made using the ACH network. It is an increase of 8.7% from 2020 in volume and 17.4% in value.
Since ACH is a US-based payment system, it is not used outside the country except in some supported regions such as Guam, American Samoa, and the Northern Mariana Islands. This doesn’t mean the ACH network doesn’t support international transactions. However, wire transfers are a more effective way to make cross-border transactions due to their speed and convenience.
ACH payments are of two main categories. They are:
ACH credit or direct deposits are a payment type where funds are transferred from the payee’s account to the receiver after they give the instructions to the ACH network. Here the payment is initiated from the sender’s side. The transaction cost for an ACH credit transfer is around $3 per transaction.
An example of ACH credit would be when a company sends payroll to their employees at the end of every month. Since the funds move directly from the employer’s bank account to employees, it is categorized as ACH credit.
ACH debits happen when funds are pulled from the customer’s bank account with their approval. The business/receiver initiates the transaction in case of ACH debit. Unlike ACH credit which costs around $3 per transaction, ACH debit is generally free.
For example, when a bank collects the EMIs for your house loan after a user approves it from their end, it is categorized as ACH debit.
There are two primary types of ACH payments:
After your customer’s bank authorizes your business, it can request payments. Such payments need to be approved every time by the customer, giving them complete control over the transfer of funds.
As the name suggests, these payments need to be approved only once by the customer and are deducted automatically after that. For example, your bank could deduct monthly EMIs for house loans on the due date after you approve them once.
ACH payment processing involves a file with the details of the desired transaction. The file is first transferred to the user’s bank, which initiates the payment. After that, it goes to the clearing house and finally to the receiver’s bank account. Let’s look at the organizations involved in the process.
ACH payments are an easy and convenient way to make transactions in the United States. However, while there are benefits to using ACH as a payment method, there are also some disadvantages. Let’s take a look at the pros and cons of ACH payments.
Unlike checks that can take up to a week to process, ACH payments are processed much faster. Most ACH transactions are settled within 1-2 business days. According to the rules set by NACHA, ACH debits must be cleared on the same day of payment or by the next business day. On the other hand, ACH credits have a 1-2 business day time frame.
However, if your bank withholds payment for any reason, the total processing time of the ACH payment can take longer.
The National Automated Clearing House Association (NACHA) provides the rules and security requirements businesses must adhere to for using ACH payments. It ensures that sensitive ACH data is protected. So, if your business allows ACH payments or has plans to add the option in the future, here are the rules you must know about.
The NACHA states that any ‘non-public’ personal information (including financial data) and sensitive data like driver’s license number and social security number involved in an ACH transaction must be protected.
All the data that is transmitted during an ACH transaction must be encrypted with a ‘commercially reasonable’ encryption technology. So, sending or collecting sensitive data by regular email or a web form isn’t allowed. If your business uses a website or third party to collect sensitive information from customers, it must have a security certificate or strong encryption technology.
NACHA recommends that businesses take necessary steps to ensure that the routing number added to the ACH network is valid. And in case the authorization for a transaction happens verbally or over the web, businesses need to take the necessary steps to identify the customer’s identity.
Businesses should implement the necessary systems to identify irregularities and prevent fraud. This makes it essential to choose a payment processing system with a robust mechanism for detecting fraudulent transactions.
Here is an article by NACHA stating the security requirements for ACH payments.
Now that your business has an ACH account, you can accept payments from your customers by asking them to authorize ACH debits from their bank account. Some details that you will need to collect as a business to initiate an ACH debit transaction are:
HighRadius’s RadiusOne eInvoicing & Collections application can help you set up ACH payments for your business along with several other payment methods. It also allows you to offer a superior customer experience by giving clients a centralized place to manage their invoices, account statements and make payments.
ACH payments are different from bank transfers as they often take more time to be processed but are cheaper, more secure, and convenient. Additionally, ACH payments use its proprietary ACH network.
ACH payments are not processed on weekends and when the Federal Reserve system is closed. So, the transaction timings are limited to business working days.
ACH transfer limits vary from bank to bank and also depend on the type of account a user has. However, the top limit of ACH payments for same-day transactions is now $1 million.
ACH payments are safe, and since they are reversible within a fixed time period, it reduces the risk of any liability if a fraudulent transaction occurs.
Banks have different processing timings for ACH transactions, and since they are processed in batches, the time gap between them may also vary.
Unless there is a lack of sufficient funds in the sender’s account or they inform the bank of a fraudulent transaction, an ACH payment will go through.
ACH payments aren’t expensive and can cost anywhere from a few cents to $2-$3 per transaction. But, there can be penalty fees associated with ACH payments in case a sender exceeds the daily, weekly, or monthly limit of their bank account.
The transaction costs for ACH payments are extremely low and are often below $3. Some banks charge a flat fee while others charge a percentage fee which is often higher than the former.
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