What is an ACH Transfer?

July 08, 2019

From cash to cards, traditional checks to digital wallets, modern consumers enjoy an ever-evolving menu of options in how they pay for products and services. Yet, despite being a fixture in the payments industry for over 40 years, ACH transfer is a payment method that remains poorly understood.

Here, we’ll address some common questions about ACH transfer and explains the important role this payment type plays in transferring money between organizations and individuals.

What is ACH transfer?

ACH transfer is a payment made over the ACH (Automated Clearing House) network between bank accounts. ACH transfer is commonly used by consumers for things like direct deposit or auto bill pay, and by businesses for online, MOTO (mail order, telephone order), business-to-business (B2B), and direct debit transactions.

ACH transfer payments are growing in popularity. According to the National Automated Clearinghouse Association (Nacha), Q1 2019 ACH Network Volume grew 5.8% over Q1 2018. Of the 6% total volume in Q1 2019, 2.5B was credit, and 3.5B was debit.

There are two types of ACH transfer:

  • Direct Deposit via ACH (or ACH credit) pays funds into an account. For example, the deposit of funds into an employee or consumer’s account for payroll, government benefits, tax refunds, etc.
  • Direct Payment via ACH (or ACH debit) pulls funds from an account. For example, the withdrawal of funds from a consumer’s account to pay for a recurring subscription service, a utility bill, or another type of bill.

While Nacha sets limits on the amount of same day ACH transfer payments, each bank operates slightly differently when it comes to those rules and the exceptions they will make.

ACH transfer vs. wire transfer

ACH transfer and wire transfer is not the same thing. While both move money from one bank account to another, there are differences in how the exchange is made as well as the speed, cost, and security.

ACH transfers take place in batches, are almost entirely automated, are processed through a central clearinghouse, and can take one to several business days to complete.

Wire transfers move money from one account to another manually, guided by a bank employee, and happen immediately. Wire transfers use the bank as the direct middleman between account holders.

Due primarily to their one-off nature and requirement for manual intervention, wire transfers are often more expensive than ACH. However, wire transfers can carry a distinct advantage in that the money is transferred immediately. The flip side of that convenience is that wire transfers cannot be reversed and thus are usually considered less secure than ACH.

How does ACH transfer differ from debit and credit card transactions?

ACH transfer is similar to debit card transactions in that funds are drawn from a checking or savings account, but that’s where the similarities end.

Because ACH payments don’t use the card networks, they aren’t subject to the same fees that merchants pay when processing a credit or debit card transaction. These fees include a mandatory component (the interchange fee) as well as additional fees to the merchant acquirer that provides additional merchant services.

Still, debit and credit transactions are significantly more convenient than ACH for a whole range of transaction types. Perhaps the biggest difference is that debit and credit card transactions are “guaranteed funds” whereas ACH payments are not.

How much does it cost to process an ACH transfer?

The cost of processing an ACH transfer depends on the merchant’s payment processing provider and other factors specific to their business. But the short answer is “not much.” Businesses usually pay a flat fee per transaction, or depending on the payment processor, may pay a small percentage fee.

The standard fee for card transactions also depends on several factors including the number of transactions processed and the average ticket size. But in general, for many businesses, ACH payments can be less expensive to process than credit or debit card transactions.

How long does it take to get paid?

Historically, ACH payment deposits have taken longer to post than credit or debit card payments (within several days), but the gap has been closing in the last few years.

Nacha has moved to address the speed limitation of ACH and is currently in Phase 3 of adding new capabilities to Same Day ACH, part of the organization’s moving payments faster initiative. Beginning March 16, 2018, both ACH credits and debits are available for same-day processing.

Nacha has outlined the main use-cases for Same Day ACH including same-day payrolls, business-to-business payments, expedited bill payments, and account-to-account payments.

Main benefits of ACH

In addition to lower transaction fees, ACH benefits can include:

  • Convenience: ACH payments create less administrative hassle for a business. There are fewer paper checks to handle, paper invoices and trips to the bank.
  • Easier recurring billing: Unlike checks, ACH supports recurring billing.
  • Preferred funding compared to checks: While payment schedules vary, typically banks and credit unions process electronic payments before they process check payments.
  • Fewer disputes: Credit and debit card transactions can be disputed for a variety of reasons and they have a higher rate of non-payment compared to ACH payments.
  • More secure: Paper checks touch multiple hands during processing. They could be lost or left out in an unsecured area. With ACH payments, bank account information is encrypted within a secure system.
  • Environmentally friendly: No checks means less paper. Electronic checks issued through ACH therefore reduce the use of ink as well as fuel to transport checks. ACH can help those businesses looking for ways to reduce their environmental footprint.

What’s needed to accept ACH payments?

A business can accept ACH payments at the point of sale (POS), online, by phone, or mail. The first thing a business needs to do if they want to receive ACH payments from customers is work with a payment processor that offers the service. The business also needs to make sure that their financial institution that houses their business accounts can work with their processor to accept ACH transfer, and that their point of sale and accounting software are compatible with the process.

To initiate an ACH payment from a customer, a business usually must obtain the following information: the customer’s name, type of bank account (e.g. personal or business), bank routing number, account number, and payment amount. This can be done at the POS with a check scanner to scan the customer’s check. If you plan to accept ACH payments via telephone or mail, a business will need a virtual terminal to complete the transaction.

For online payments, you’ll simply have to ensure your current software accepts ACH payments. Unlike credit or debit card payments, with online ACH payments customers will have to enter their checking account and bank routing numbers on the checkout page.

Additionally, it’s important to have clearly stated customer terms and conditions for the ACH payments including frequency and cancellation notice.

Regardless where you sell your products and services—in a store, online, mail order or phone—ACH transfers can offer a variety of benefits to both merchants and customers. ACH transfers often have lower processing costs and are usually much more convenient than paper checks. Using ACH for certain classes of transactions makes sense for most businesses, so be sure to ask your payments provider how they can help your business.