December 30, 2021

ACH Guide

Carla McMorris

How ACH Can Help Your Business

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What is ACH?

ACH is a popular method of payment that inexpensively moves trillions of dollars from one account to another across the US. ACH is an electronic method of funds transfer that moves money between businesses, governments, and consumers quickly and securely. Encompassing multiple types of transfers, ACH often goes by other names like Direct Deposit, automatic withdrawal, e-checks, and other names. ACH is considered an efficient, cost-effective, and secure alternative to wire transfers and paper checks.

According to Nacha (the National Automated Clearing House Association) in 2020 over 26.8 billion payments were made via ACH, the total value exceeding $61.9 trillion.

What is the ACH Network?

The ACH Network (or the Automated Clearing House Network) is a network of ACH operators who process electronic financial transactions. The ACH Network manages transactions like Direct Deposit and Direct Payments, Social Security and other government benefits, online bill payments, recurring payments like mortgage payments, car loans, and tuition, person-to-person (P2P), business-to-business (B2B) payments, and more. 

Tens of millions of Americans use the ACH Network every day. Ninety-three percent of Americans use Direct Deposit to receive their payroll. By creating an efficient payment bridge between businesses and consumers, the ACH Network ensures that funds can be electronically moved between commercial or private parties quickly and securely.

A brief history of the ACH Network

In the early 1970s, the first ACH association launched in California was tasked with determining how to handle electronic payments as the volume of paper checks threatened to overtake the check processing technology and equipment of the day. By 1974, there were multiple ACH networks, and the National Automated Clearing House Association (NACHA which is now Nacha) was formed to administer them. Nacha establishes and enforces the rules for the ACH Network as the administrator, and the Federal Reserve along with The Clearing House process the transactions as ACH Operators.

After Nacha established the ACH Rules, Direct Deposit became the first standard ACH format and the U.S. Air Force was its first customer. Since it was first introduced, the ACH Network has grown and developed to accommodate a range of various payment types and a range of functionality to meet both commercial and private needs when it comes to transferring money. Today, ACH has revolutionized the way in which businesses and consumers accept and process payments.

How does ACH work?

ACH can uniquely push funds to accounts as well as pull funds from accounts, and transactions can be future dated or conducted the same day. Using a batch-oriented system that takes transactions and executes them as a set, and a store-and-forward system that uses an intermediate station to send value-dated settlement transactions to a final destination at a later time, the ACH Network can settle both credits (or disbursements), and debits (or collections). 

The flow of an ACH transaction begins with the bank that initiates the transfer as requested by the business or consumer. The ACH files are sent to an ACH operator who then processes the files in batches. The ACH operator sends the files to the receiving bank that processes the files and deposits the funds into the business’s or consumer’s account.

What types of ACH transactions are there?

An ACH transaction is made of two parts: a payment sent to an account and a payment received by that account. 

An ACH credit ‘pushes’ funds from one bank account to another. This occurs when a payer initiates the transfer process and the funds are to be sent to the payee. For example, an employer paying bi-weekly payroll is processed as an ACH credit transfer.

An ACH debit ‘pulls’ from one bank account to pay another. An example would be when a consumer sets up a recurring payment for their mobile phone bill, ensuring that the funds will be automatically sent to the mobile carrier on a designated day each month.

How long do ACH transfers take?

ACH transfers are processed in batches, not in real-time, seven times a day during the business week. ACH credits can be processed on the same day as they are initiated, or they can be delayed for one to two days based on the financial institution. All ACH debits are processed by the next business day.

What is Next Day ACH?

Next-day ACH is still based on the batch system, but it ensures that a payee receives any payments within the next business day. Next-day ACH payments are not limited in terms of transaction size, however, the cut-off time for next-day is 3:00 p.m PST.

What is Same Day ACH?

Back in 2016, the ACH Network launched Same Day ACH, an expanded option for same-day clearing and settlement. Now both ACH credit and ACH debit transactions are processed several times a day instead of only once resulting in same-day processing and settlement. The limit for same-day ACH is $100,000, which was raised in 2020 from $25,000 to offer greater flexibility with transactions.

How much do ACH transfers cost?

The median cost for processing ACH payments is 0.29 cents, though the total cost can vary based on factors like the number of transactions you process. The larger the volume of transactions, the lower the per-transaction cost. Costs will vary by provider and other fee types can also include a percentage fee per transaction, a monthly fee, a batch fee, an ACH return fee, and an ACH reversal or chargeback fee.

What's the difference between a Wire Transfer and an ACH Transfer?

The primary differences between a wire transfer and an ACH transfer are cost and timing. 

ACH transfers cost an average of 0.29 cents per transaction however wires can cost from $20-$30 per transaction. The ACH network processes transfers on a batch system, however, the wire network processes transactions in real-time so you can expect your funds to be sent or received in hours or even minutes with a wire. Costs will vary by provider.

What are the benefits of ACH?

There are many choices for businesses developing their payment acceptance strategy, but ACH payments stand out from other methods in one important way: cost. The cost of each ACH transaction is much lower than credit cards or wire transfers, and the lower cost applies for each transaction as well as to high volumes of transactions. For businesses with recurring payments, those lower ACH fees are repeated monthly, adding up to big savings and high customer value. And finally, for businesses seeking long-term relationships with their customers, ACH can help lower churn as well. Instead of tying payments to credit cards with a 3-year life span, ACH connects them to their bank account which is held for an average of 14 years. These cost savings are complemented by same-day and next-day transaction speeds.

ACH Guide

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Carla McMorris
December 30, 2021

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