Everything You Need to Know About ACH Payments

Wondering how best to carry out quick, paperless transactions at a reduced cost? Each day, billions of dollars move systematically through a complex but robust network payment system referred to as the Automated Clearing House (ACH). It may seem like jargon, but if you have received a paycheck directly deposited to your checking account or paid your bills electronically, then you are one of the millions of everyday users in the ACH network.

What Is an ACH?

ACH is a batch of processing systems used by banks and other financial institutions to move money across bank accounts within the United States electronically. The ACH network is operated by the National Automated Clearing House Association (Nacha). Since the 70s, the ACH network has been in existence, and industry estimates reveal that the network moved over $61.9 trillion worth of transactions in 2020.

What Is an ACH Payment?

ACH payments refer to the electronic bank-to-bank money transfers that are processed through the ACH network. Such payments are also referred to as an ACH transfer or ACH transaction. Ideally, ACH payments are not available anywhere else outside the US. They are also restricted to banking, which means you can't process ACH payments through your debit or credit card.

Types of ACH Payments

There are two main types of ACH payments:

ACH Direct Deposits: These ACH transfers cover all kinds of deposit payments from consumers, businesses, to government payments. Specific deposit payments covered under this category include:

• Payroll

• Government benefits

• Tax and other refunds

• Annuity payments

• Interest payments

• Employee expense reimbursement

ACH Direct Payments: ACH Direct Payments can be utilized by businesses, individuals, and other organizations to send money to various recipients. For example, you are basically making an ACH direct payment whenever you pay a bill online with your bank account. In an ACH direct payment transaction, you will see an ACH debit appearing on your bank account whenever you send money in an ACH direct payment transaction. The debit typically reveals the amount of money paid and to whom. The recipient of the money registers it in their bank account as an ACH credit.

Types of ACH Transfers

There are also two main types of ACH transfers; ACH credits and ACH debits. Typically, the difference between the two transfers lies in how the funds are transferred. While ACH credits "push" the funds into an account, ACH debits "pull" the funds out of an account. In a nutshell, a bank debit ACH process is the withdrawal of funds from a bank account, for example, when you set up an automatic monthly insurance payment. On the other hand, ACH credit is the money that comes to you. Employers typically use ACH credit to deposit payroll directly into a bank account.

How Do ACH Payments Work?

The ACH transaction is entered into the ACH payment system by an originator in both credit and debit transactions. The originator must obtain all the required authorization for each of the transactions. The originator then sends the ACH transaction to their chosen ACH operator, either an Electronic Payments Network or a Federal Reserve.

If the transaction is a "push," the Originating Depository Financial Institution (ODFI) automatically debits its customer's account. ODFI will then forward the transaction to the ACH operator. In a "Pull" transaction, the Receiving Depository Financial Institution (RDFI) debits its customer's account upon receipt.  

Ideally, the ODFI and RDFI utilize different operators. The first operator switches the transaction to the second. The ACH operators typically make calculations of their new settlement totals for their banks each day. The details of these calculations are sent to the Federal Reserve charged with managing the actual settlement process.

Benefits of ACH Payments

Using ACH payments infrastructure to process transactions comes with significant benefits for individual consumers and organizations that need to take payments daily or hourly. Some of the crucial benefits of ACH payments include:

• Speed and ease: ACH transfers are typically easier and faster than the conventional methods of payments like a check. They cannot also be lost and don't need to be entered manually.

• Lower costs: ACH payments are typically not routed through the more expensive traditional card networks. This makes the payment method a cheaper option for electronically transferring funds.

• High accessibility: ACH payments are open to anyone with a US bank account. Whether you are a big corporation, a small business, or a consumer, you can make payments via the ACH scheme. See what you need to open a bank account.

• High retention: Whenever credit and debit cards expire, financial institutions lose a substantial number of their consumers. However, with ACH transactions, the bank account is typically the source of the funds, and the risk of involuntary churn is reduced substantially.

• They can be automatic: If you are involved with recurring purchases, paying through ACH enables consumers to have funds debited from their bank accounts automatically every time the payment is due.

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