The automated clearing house (ACH) is a financial network that facilitates electronic payments and money transfers. ACH payments also referred to as “direct payments,” are a method of transferring funds from one bank account to another without the need for paper checks, credit card networks, and wire transfers.
ACH payments are a good alternative to paper checks and credit cards for businesses. They are faster and more trustworthy than checks since they are electronic, which also helps to automate and streamline accounting. Even if you are not acquainted with the term ‘automated clearing house,’ chances are you’re already familiar with ACH payments as a consumer. The ACH network is widely used while paying online bills (instead of writing a check or inputting a credit card number) and receiving direct deposits from your workplace.
In general, an ACH transfer is an affordable means of online transfer of funds. If your business accepts recurring payments, you can save a lot of money through ACH.
An ACH debit transaction “pulls” money from one account and moves it to another—for example, from a consumer’s personal account to a business or government agency’s account or vice-versa.
The ACH network regularly receives batches of push and pull requests from banks and their counterparts. The network then organizes them into bundles and delivers them five times every business day. When there is a request for a specific account to be debited for a specific amount of money— that bundle, is called an ACH debit request.
Every transfer requires the withdrawal of funds from some account, implying that debit will always occur on one side. Whether or not it is classified as an ACH debit is determined by the initiator of the transaction request.
To pay via ACH, you must give your client permission to withdraw funds from your account. This usually occurs when you supply your bank account and routing details of your checking account, and authorize your biller by signing a contract.
Let’s learn more about the ACH debit process.
The ACH system supports different types of debit. Each transaction is identified by its own Standard Entry Class (SEC) code representing a specific use case.
Some of the most common SEC codes for ACH debit are:
Before using ACH debit transactions for your B2B payments, you should evaluate its pros and cons and check whether ACH transactions are an appropriate fit for your business needs.
Some of the advantages and disadvantages of using ACH transactions are
NACHA reported that business-to-business (B2B) payments grew rapidly in 2021. The $50 trillion in B2B payments is a 20.4% increase from 2020, as the COVID-19 hastened firms’ use of ACH payments. ACH B2B payments have increased by 33.2% in the last two years.
Today, signing paper checks and preparing envelopes to pay a credit card bill or distribute bi-weekly salary is redundant.
ACH is a powerful instrument that can be used in various business scenarios. While it has been slow to catch on in some areas such as point-of-sale (POS) payments, it is the preferred mode of payment for others such as corporations paying their staff (according to NACHA, direct deposit via ACH is the way 93% of employees get paid). Other ACH use cases such as peer-to-peer (P2P) payments are also rising quickly with a 42.2% year-over-year volume increase from 2019 to 2020.
ACH transfer requires the transfer of funds from one account to another. This implies that debit will always occur on one side and consequently, a credit will occur on the other side.
ACH is a more secure method of payment than writing cheques. When you set up ACH payments, you only have to reveal your bank account information once. However, when you write a paper check, you have to reveal your information every time you write one.
Even though problems are unlikely, still you are covered by federal law if your account is subject to any ACH errors or fraud. The only catch is that you must act quickly and notify your bank within 60 days of discovering the error.
ACH payments generally take one to two business days to process (days when banks are open). Payments are processed in batches through the ACH network (as opposed to wire transfers, which are processed in real-time).
According to NACHA’s criteria, ACH debit transactions must be handled by the next business day.
In an ACH debit, the payer (e.g. customer) gives the payee (e.g. merchant) permission to take payment from their account whenever it becomes due.
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