Are ACH payments as secure, quick, and convenient as some people think? Here’s what to know about direct payments.
The volume of ACH payments continues to grow steadily, with the ACH network processing more than 28.6 billion payments in 2020 alone. This shows fantastic growth from the round 25 billion figure of just four years prior. If you’re considering ACH payment processing for your business or are just interested in learning more about how it works, you’re in the right place.
What Are ACH Payments?
In the United States, ACH payments are very common. The term stands for “Automated Clearing House,” and it’s a financial network used to facilitate electronic payments and money transfers, often called “direct payments” by ACH users.
With ACH, payments can be made directly from one bank account into another without the need for cash, wire transfers, paper checks, or credit card networks. NACHA (The Electronic Payments Association) is the governing body over ACH payments and the one to turn to if you have questions regarding ACH limitations and relevant regulations.
Common Questions About ACH Payments
Before we dive into the details about ACH payments, it’s important to get the facts out of the way.
What’s the Difference Between ACH and EFT?
EFT stands for “electronic funds transfer”. Even though ACH and EFT transfers are very similar, ACH is under the EFT umbrella of a variety of electronic transactions. Automatic Clearing House transactions are very simply moving funds from one bank account to another.
Where Is ACH Available?
ACH payments are only available in the United States and Puerto Rico, meaning you cannot use ACH if you wish to transfer money to a bank account outside of these areas, nor can you use ACH to receive money from a bank outside of these areas.
When Can I Use ACH Payments?
ACH payments only work for transfers between checking and savings accounts, or any combination thereof. For instance, you can use ACH to move money from one checking account into another checking account, or from one saving account into another savings account, or one checking account into a savings account (or vice versa). However, you cannot, for instance, use an ACH payment to take money from a credit card and put it into a checking account.
How Long Do ACH Payments Take?
Perhaps the biggest downfall of ACH payments in the modern world is that they are not instant. Generally, once an ACH payment is initiated, the money will arrive in the recipient’s account within 3 to 5 business days. The money will leave the sender’s account sometime before then.
Examples of ACH Payments
Not only do ACH payments typically come with minimal to no fees for the users involved, but they’re also considered convenient and secure. They’re often used for handling routine bill payments, like monthly rent and loan payments, since they can be set up to draft on a schedule, but ACH payments also have other use cases.
Consumers are highly familiar with ACH payments—even if they don’t know it. For instance, anyone who gets paid directly into their bank account by their employer is happily benefiting from the ACH payment process, routinely getting their paycheck in their account rather than having to pick up and cash a check each week.
Businesses should also get to know ACH payments a bit better because they’re a fantastic alternative to paper checks, and even to credit card payments. Being electronic, ACH payments are more reliable (and faster) than a paper check, which can streamline accounting and increase automation. Next to credit card payments and wire transfers, ACH payments tend to cost less to process, as well.
If your company isn’t already offering ACH as a payment option, it’s worth considering—particularly for companies that deal with routine payments, like subscription-based services.
ACH Payments vs. Wire Transfers
Wire transfers and ACH payments both allow you to move money between two accounts, but they’re far from the same. The first difference is in how these two payment types are processed, with wire transfers being processed in real-time and ACH payments being processed in three separate batches each day. Thanks to a wire transfer’s speedy processing, it’s guaranteed to arrive the same day it is sent.
Another difference between wire transfers and ACH payments is the cost. Wire transfers are expensive, and while the fees vary among banks, some cost as much as $60 for a customer to send a wire transfer. Meanwhile, ACH payments can be made for free or for a small fee, typically amounting to a flat fee of $1.50 or less and/or a percentage fee of 1% to 2% of the amount being sent.
How ACH Payment Processing Works
ACH payments are processed in a very straightforward manner, but it takes more than one party to pull it off. You may be familiar with the Automated Clearing House network, which facilitates connections between all banks in the United States, but there are also three other organizations that come into play to process an ACH payment.
- ODFI: The Originating Depository Financial Institution, which is the bank that initiates the request.
- RDFI: The Receiving Depository Financial Institution, which is the bank that receives the request.
- NACHA: The National Automated Clearing House Association, which is a nonpartisan government entity that oversees and regulates the ACH network.
ACH payment processing begins when an individual authorizes the ACH payment, which is typically set up as a recurring payment. They can do this by signing the authorization form and providing their routing and checking account numbers to a company/recipient or by setting up the ACH payment within their banking portal using the recipient’s routing and checking account numbers.
When it comes time for the payment to be processed (i.e., on the day specified in the authorization form), the ODFI and RDFI communicate with each other. If the RDFI confirms that you have sufficient funds in your bank account, the transaction will process using the ACH network (overseen by NACHA), and the funds will be moved from the RDFI to the ODFI account.
Unlock New Ways to Pay for Your Customers
Are you interested in learning more about how the secure, convenient, low-fee ACH payment processing method could help you put more in your pocket as a business? At NMA, We Work For You™, and we go above and beyond to help businesses like yours better serve their customers by offering the latest in technology, software, and hardware solutions.Learn more about how NMA can help power your business and get more in your pocket. Explore our offerings today!