How Does ACH Payment Processing Work

July 26, 2021

How Does ACH Payment Processing Work

How Do ACH Payments Work? ACH Processing and Transfers

As a business owner, you know that offering a range of payment methods increases your chances of a sale, but one payment method worth adding also saves you money and time. It's called ACH 

You may have heard business owners talk about ACH and you may wonder what it is and how it works. We are here to help. In this article, we review what ACH is, the timelines for payment, and how you benefit from this payment solution. 

How Do ACH Payments Work? ACH Processing and Transfers 

ACH transactions are processed in two ways, credits and debits. The ACH credit process deposits money into a bank account, and the debit process takes money out. 

Each credit and debit payment is completed as a bank-to-bank transfer, making it different than credit card and debit card payments. To do this work, it uses its very own electronic payment network called Automated Clearing House (ACH).  

What is the Automated Clearing House Network? 

Automated Clearing House is a financial network of participating US banks and institutions that supplies funds via electric file transfer (EFT). The clearinghouse network is run by a board of governors at Nacha, previously known for its acronym NACHA (National Automated Clearing House Association).  

The electronic banking network works bank-to-bank, cutting out the middleman, making it an appealing alternative to more expensive card networks out there, such as a debit card or credit card network.  

Transaction Payflow 

Here is how the transfer of funds works:  

  • A customer enrolls in the network by clicking a text or email link, filling out a paper form, or filling in an online bill payment section of your company's website.  
  • The customer supplies his or her bank account number, routing number, and identity information and then approves the payment frequency and amounts.  
  • When payment is due, your company's bank sends a request for payment to the customer's bank.  
  • The customer's bank verifies funds are available and transmits them to your company's bank.  
  • Your company's bank authenticates the funds and deposits them into your company bank account.  

Business Processing Times of Electronic Transfers: What are Batches? 

Transactions happen during bank hours. Each bank has its own hours and may not be open on weekends or holidays, which means orders can take 3-5 business days.  

A contributing factor to order timing is the time of day. Payments are sent in groups, called "batches," and batch processing is done three times a day. If a batch does not arrive before a batch cutoff time, then batch processing will not happen until the next business day, plus weekends and holidays.  

Requesting Same-Day ACH can speed things up, but due to the time when the order is requested plus weekends and holidays, it could still take 2-4 business days. 

Differences from Credit Card Payments 

Here are ways ACH differs from credit card payments: 

  • A lower processing fee: Credit card processing is a percentage of a transaction, while ACH is either free or a flat fee of cents on the dollar. (Some banks may charge a fee of a few dollars).  
  • Higher dollar thresholds: A credit card can have a credit limit (for example, $5,000) while ACH has a limit of $25,000 per day.  
  • Easier Checkout Process: ACH does not require a signature or secondary ID to process, and it allows for recurring funds automatically.  
  • More Safety: Credit cards can be stolen. ACH uses an encrypted network without cards.  

How is ACH Different from Checks?  

Paper checks are also bank-to-bank transfers but different in fundamental ways: 

  • ACH is safer than fraud-prone paper checks: Checks can be lost, stolen, or forged. 
  • ACH supplies automatic payments and approvals: Customer payments via check need to be cut and mailed on time, making payment more of a hassle. With ACH, automatic payment approval lets the bank does the monthly work for them.  
  • Faster processing times: Payments in the form of checks can take a week vs. 3-5 days for ACH.  
  • ACH verifies funds are on hand: ACH has a double-check process to ensure funds are available and secured. Checks, however, can bounce after a sale.  
  • ACH is cheaper: Your bank may charge for check deposits (typically $5.) There are also underlying costs like time away from work and fuel to transport checks. ACH is free or cents on the dollar. Your bank may charge $2 or $3 to cover certain bank transfers, but this is still cheaper than a check.  

Consumer Compliance FAQs for Check Clearing: Can ACH Process Checks?  

ACH is a powerful alternative to paper checks, but even when checks are still preferred by a customer, ACH can help. It can process checks electronically for faster, verified payment.  

How are ACH Transfers Different from Wire Transfers?  

Wire transfers are also electronic transfers (EFTs), but they have differences worth considering: 

  • ACH is safer: Wires cannot be refunded, which can be a problem if the company wanting payment turns out to be untrustworthy. ACH allows for a window for cancellations and refunds. 
  • ACH offers regular, ongoing processing: You can receive payments annually, monthly, and even weekly. 
  • ACH has lower transaction fees: A wire transfer can cost up to $30 while ACH is either free or at most a few dollars, making it perfect for frequent transfers. 
  • ACH is not instantaneous: Wire transfers provide immediate payment, but Same-Day ACH is available to achieve faster-than-normal ACH payments.  
  • Wire and ACH transfer amounts differ: ACH is limited to $25,000 per day and may have a monthly limit set by the bank. Wire transfer limits are higher (up to $100,000). 

ACH is limited to the US, whereas wires can be done as international transfers. 

Reasons Businesses Use ACH  

  • Accounts Receivable Get paid faster: Since ACH payments are electronic payments; they supply faster payments than receiving and depositing cash and paper checks. They can also be faster than a credit card transaction – especially with Same-Day ACH. 
  • Accounts Payable Sending ACH payments is automatic: Business clients prefer a set schedule and amount for payments. Once done, business payments processes are streamlined. Automatic payments come in at a time and frequency the payee specifies. ACH software aids with invoicing, processing receipts, and recording direct payments into your existing business accounts system. All these traits result in lower operational costs, reliable bill payments, and less work by your accounting department.  

The convenience of ACH payment processing has made it popular for B2B payments – especially for payments for SaaS businesses. 

What Type Company Uses ACH Payments 

Benefits are not limited to enterprise companies. ACH has grown so large, streamlined, and easy to use, small and mid-size companies include it in their payment options.  

ACH is often used for recurring payments for utility company payments (for example, electric company payments), as well as for car payments, home payments, and for subscriptions. The federal government also uses it to send tax refunds and a range of government benefits.  

ACH Failures: Why They Happen 

ACH payments can fail but overall are still more reliable than checks and credit cards safer than wire transfers, and checks. 

Three of the biggest reasons for failure are: 

  • Insufficient funds: ACH requires a minimum of funds in an account for payment. This helps ensure the customer is reliable. 
  • Incorrect bank information: This failure only happens during the initial setup. 
  • Disabled debits from bank accounts: Not all banks participate in the ACH system. 

How to Receive ACH Payment Services 

ACH can be installed with the help of a merchant services provider. BNG-Payments can provide Automated Clearinghouse services and software to help you take advantage of this powerful technology. You will enjoy faster, ongoing payments with added security and regular incoming profit for a more stable business. 

Contact us to find out how ACH can work for you.