How ACH payments work

The ACH network is a powerhouse in financial processing, handling billions of transactions each month – translating to trillions of dollars annually. By the close of 2023, it handled 31.5 billion payments valued at $80.1 trillion. As reliance on the ACH system grows, it continues to facilitate seamless money transfers for countless individuals.

Chances are, you've used ACH payments – perhaps without even realising it. This article serves as a complete guide to ACH payments, providing a comprehensive overview of what ACH is, how it functions, and its benefits and risks.

ACH payment definition

ACH payments are processed in batches through the network, sorted by destination, and scheduled for transmission within specified periods. The Federal Reserve is one of the main ACH operators, ensuring the reliability and safety of electronic payments. The ACH network stands for automated clearing and acts as a central hub for facilitating electronic payments, managing the clearing and settlement of various types of electronic transactions such as direct deposits, electronic checks, and peer-to-peer payments. This batch processing means ACH transactions, while not real-time, offer a cost-effective and reliable method for money transfers.

How does ACH transfer work?

To make an ACH transfer, the party requesting the payment (whether it wishes to send or receive funds) must obtain the account number and routing number from the other interested party. For example, the employer must obtain information about their employees’ checking accounts and routing numbers to send salaries. This sensitive information must be protected to ensure transaction security. ACH payments work by having the originating depository financial institution (ODFI)—typically the payer’s bank or credit union—initiate the transfer request, while the receiving depository financial institution (RDFI) processes and credits the funds to the payee’s account. Depository financial institutions, including banks, credit unions, and other financial institutions, collaborate within the ACH network to facilitate these electronic transfers. If there are enough funds in the payer’s bank account to process the transaction, the money is transferred to the payee’s account using the centralised ACH network. Paying via ACH reduces manual effort and improves efficiency for both individuals and businesses.

ACH payment processing is managed directly between banks or credit unions and other financial institutions, without intermediaries, eliminating all the dependencies and inconveniences that may arise with other payment methods. The ACH operator acts as a central entity that processes batches of ACH transfer requests, facilitating the clearing and settlement of transactions between participating institutions. That’s why more and more businesses are looking for ways to accept ACH payments.

Types of ACH transactions

ACH transactions fall into two primary categories: ACH debits and ACH credits. Understanding the distinction between these types is crucial for businesses and individuals looking to optimise their payment processes and cash flow.

• ACH debits occur when funds are pulled from a consumer’s bank account and transferred to a business or organisation. This method is commonly used for recurring payments such as utility bills, loan repayments, or subscription services. With ACH debits, the business initiates the transaction—once authorised by the customer—ensuring timely collection of payments without the need for paper checks or manual intervention.
• ACH credits, on the other hand, involve pushing funds from a business or organization’s bank account into a consumer’s account. This is the standard approach for direct deposits, including payroll, government benefits, and interest payments. ACH credits streamline the process of distributing funds to employees or beneficiaries, reducing administrative overhead and improving payment reliability.

Both ACH debits and credits are processed through the automated clearing house (ACH) network, which acts as a secure intermediary between financial institutions. The ACH network enables efficient, low-cost transfers between different banks or credit unions, making it a preferred choice for businesses managing large volumes of transactions.

ACH transactions can also be classified as direct deposits (payments made into a consumer’s account, such as payroll) or direct payments (payments made out of a consumer’s account, such as bill payments). By leveraging the flexibility of the automated clearing house ACH system, businesses can automate recurring payments, reduce errors, and enhance their overall financial operations.

Understanding these types of ACH transactions empowers organisations to select the right payment method for each scenario, whether it’s collecting monthly bills or distributing salaries, and to take full advantage of the benefits offered by the ACH network.

What are same-day ACH payments?

Same-day ACH payments process and settle transactions within the same day, unlike standard ACH transfers, which can take 2-3 business days. To qualify for same-day processing, transactions must meet specific cutoff times set by financial institutions, typically in the morning, mid-day, and early afternoon.

This service is particularly valuable for urgent payments, including emergency payroll, time-sensitive business transactions, and last-minute bill payments where delays could result in penalties or other consequences. By enabling the timely receipt of funds, same-day ACH payments can improve cash flow for businesses, helping them better manage their finances and avoid disruptions caused by payment delays.

Popular uses of ACH payments

The ACH network facilitates various types of transactions:

• Taxes
• Bank transfers
• Investments
• Wages & Salary
• Person-to-person transfers
• E-commerce payments
• B2B payments
• Donations

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ACH vs wire transfers

When it comes to moving money between bank accounts, businesses and individuals often choose between ACH payments and wire transfers. While both are electronic funds transfer methods, they differ significantly in terms of speed, cost, and use cases.

ACH payments are processed in batches through the Automated Clearing House network, typically taking 1-3 business days to complete. This makes them ideal for recurring payments such as payroll, bill payments, and subscription services, where immediate settlement isn’t critical. ACH payments are favoured for their low fees, making them a cost-effective solution for businesses handling high transaction volumes or regular payments.

Wire transfers, in contrast, are processed individually and can often be completed on the same day, depending on the financial institutions involved. This speed comes at a higher cost, with wire transfers generally incurring more substantial fees than ACH payments. Wire transfers are commonly used for urgent or high-value transactions, such as real estate closings, large supplier payments, or international wires, where timing and certainty are paramount.

Another key distinction is international reach. While the ACH network primarily serves U.S.-based banks and credit unions, wire transfers are widely accepted for cross-border payments and can handle larger sums, making them suitable for global business needs.

Security is also a consideration. Both ACH and wire transfers are secure, but wire transfers offer an added layer of finality—once sent, they cannot be reversed, which is important for high-stakes transactions. ACH payments, on the other hand, offer some recourse for errors or fraud, providing additional peace of mind for recurring or lower-value payments.

Ultimately, the choice between ACH payments and wire transfers depends on your specific requirements: use ACH for cost-effective, recurring, or non-urgent payments, and wire transfers for same-day, high-value, or international transactions. By understanding the strengths and limitations of each payment method, businesses and individuals can optimise their payment processes, manage fees, and ensure timely fund delivery.

Pros and cons of accepting ACH payments

Determined to accept ACH payments? Then we recommend that you know in advance what benefits and pitfalls they have.

ACH transfers are becoming increasingly attractive for businesses for three reasons:

Along with the apparent advantages, some drawbacks may stop you from adding ACH transfers as a payment method for your business. Here they are:

Key takeaways:

• ACH payments are cost-effective, especially when compared to card payments, due to lower fees and higher success rates.
• They offer strong security and are environmentally friendly.
• ACH is best suited for US-based transactions and may have speed or amount limitations, but remains a reliable and efficient payment method for many businesses.

How to accept ACH payments?

There are several ways to accept ACH payments. For example, if you have a business bank account, all you need to do is provide your customers with its details. Electronic funds transfer (EFT) is an umbrella term that includes ACH transactions, wire transfers, and other digital payment methods. After that, you will be able to receive transfers without any confirmation actions on your part.

However, if you plan to accept many ACH transactions or want to set up recurring billing, you will need the services of a third-party processor. Pick a provider that supports ACH transfers, charges reasonable fees, and provides other valuable tools like the payment dashboard to manage and track your transactions. Treasury management is also an important aspect of handling ACH payments for businesses, ensuring efficient financial operations and regulatory compliance.

Looking for a payment partner that will set you up to accept ACH payments online? Corefy is a platform you can completely trust with your payments. Contact us to learn more about the opportunities we bring to businesses worldwide and how your company can benefit from them.