Your Guide to ACH Payments and Transfers

One of your chief goals as a business owner is strong business growth, and that requires healthy sales and profits. Both help you improve your products and services and boost your marketing efforts so you stay ahead of your competition. You also gain the welcome benefit of more money to your personal bank account at the end of the day.  

One key way for boosting sales and profits is evaluating the ways you receive payments. On the whole, the more forms of payment you allow customers, the more you increase your sales potential, but there are also other elements worth considering. Customers value an easy purchasing process, so the easier you make it, the more they buy. Recurring payments are an example of a proven driver for ongoing purchasing that results in more sales. Additionally, payment options with a low cost-per-transaction boost your overall profits significantly.  

Welcome to the world of ACH payments. This powerful payment option offers a wealth of benefits that lead to more sales and higher profits. This article acts as your definitive guide to ACH payments. We review what they are, how they work, and why they are worth adding to your list of payment processing options.

What Are ACH Payments and ACH Transfers?

DFN: An ACH (Automated Clearing House) is an electronic network for processing payments between banks. It may support both credit transfers and direct debits. It is a direct payment option that customers and businesses can use for electronic payments (called EFTs – Electronic Fund Transfers) and offers automatic payments capability at a frequency they determine. 

ACH is managed by an organization called Nacha (based on its original acronym NACHA – National Automated Clearing House Association). It is a nonpartisan government entity that oversees and regulates the ACH network, laying out guidelines for participation to ensure a strong and effective framework and guard against issues like data protection and fraudulent activity. 

Automated Clearing House services are restricted to banks within the United States. It is not part of the Canadian payment industry and cannot fulfill international transfers.

The payment method has been around since the 1970s, but it has experienced profound growth in recent years. It has a strong reputation for receiving and providing funds reliably, safely, and at a low cost compared to other types of payment. It has improved its internal processes and widened its participation, making it a more accessible payment option. Today it is a popular alternative to paper checks and credit card payments.

ACH has moved transactions worth $61 trillion in funds in 2020 alone, an 11% increase over the year before. This translates to two billion individual online transfers, a 15% rise over the previous year.

Company-Trusted

The wide range of benefits has made ACH extremely popular; in fact, you are likely enrolled in it in your personal life. Most major recurring services offer ACH for continued payment. You may use it for paying bills from your local utility company, phone company, or electric company, or to make mortgage payments, car payments, monthly subscription payments. You may use it to receive money, too.  Direct deposit payments are a form of ACH transaction.

Government-Trusted

ACH is trusted by local and state governments – even the federal government. It is often used to provide government benefits, social security checks, and tax refunds.   

The Terms “ACH Payments” and “ACH Transfers”

You will often come across the terms ACH Payment and ACH Transfers when researching ACH. The terms are interchangeable, each describing the process of moving funds through ACH.

An ACH payment/transfer comes in two categories:

  • Direct Deposits are transactions from businesses or government departments to customers.
  • Direct Payments are transactions from customers to businesses or government departments.

To better understand how you use ACH with customers, this article will focus on direct payments – the movement of payments from your customers to your business.

How do ACH Payments Work? Understanding ACH Transactions.

The ACH network connects banks electronically for direct bank-to-bank transactions. They can be person-to-person transactions, business-to-business transactions, or any combination of the two. 

It works differently than a credit card transaction and services like PayPal and Venmo in that are no third parties involved in handling the money. This not only makes the transaction safer but also lowers the fee per transaction.

Through ACH, money is either “pushed” by your customer to your bank account from his or her bank, or it is “pulled” by your bank account from the customer’s bank account.

H3: How the Transfers Happen: Steps of Automatic Withdrawal from Accounts

Since you will most often “pull” money from customer bank accounts, let’s take a closer look at how the electronic withdrawal from customer accounts works. You will notice that bank money transfers work similar to wire transfers. For the following example, the customer transfers will happen on a monthly basis.  

  1. Each month, your internal ACH software instructs your bank to communicate to each customer’s bank requesting funds from his or her account. At this stage, your bank assumes the role of the Originating Depository Financial Institution (ODFI).
  2. The customer’s bank receives the request, verifies the account details, and checks to see if there are enough funds in the customer’s account to pay the funds. The customer’s bank is the Receiving Depository Financial Institution (RDFI).
  3. When funds are verified, the customer’s bank initiates the electronic transfer of funds between accounts.
  4. Your bank and the customer’s bank communicate together, verifying the authenticity of the funds transfer and ensuring that the transaction doesn’t exceed each bank’s individual or monthly transfer limit. If all is good, funds are received into your account.
  5. In some cases, your bank may hold the funds for further verification. The entire bank-to-bank transfer process averages from 3-5 days, though it can be faster in certain circumstances – even the same day. We discuss this in greater detail below in our Timing for ACH Transactions section.

There is no restriction on the types of accounts that ACH can access as long as the bank is a member of Nacha. They can be cash accounts, savings accounts, money market accounts, cash management accounts, or investment accounts.

Benefits of ACH Payments

There are benefits of ACH payments for you and your customer. Here are some of the biggest:

Lower processing fees: Sending money between accounts is free, which is a strong advantage for customers doing frequent transfers. Receiving the funds at your business may require a nominal charge, or it can be free. It depends on the bank. If there is a charge, it costs you less than credit cards, debit cards, checks, and wire transfers (especially wire transfers from credit unions. )

You typically pay between $0.29 and $0.75 per transaction, even for dollar amounts reaching as high as $25,000. In some cases, banks will charge a transaction fee of $3 to cover processing and operational costs for using ACH. Even with this cost, it is still cheaper than a check, bank wire transfer, and credit card while also allowing for a much higher limit than a credit card and faster money than a check. This makes it a particularly good choice for large-sum and time-sensitive transfers. 

  • Note: Some banks restrict the number of transactions, such as six per month. There may also be a payment volume threshold per day (often $25,000 per day.) Also note that customers can be charged a fee for requesting same-day transactions and can be charged a penalty for insufficient funds.

The benefit of regular payments: The more consistently you receive payments, the better you can budget and plan your business growth initiatives. The ups and downs become more stable, making it easy to track profits and growth and plan your next steps. 

Added security through direct payment: Since ACH transfers money electronically bank-to-bank via an encrypted network, the payments are safer than credit cards, checks, cash, and wire transfers.

High retention: Customers find the process of paying so easy and minimally intrusive that they frequently prolong payments or subscriptions. 

Fewer payment issues: Since payments are pre-verified and move directly from bank to bank, you won’t have to contend with the lower balances on credit cards or risk bounced checks.

Less back-end work for your staff: ACH automatically creates invoices, receives payment, creates receipts, and provides records for your accounting. This frees up valuable time for improved service and more focus on growth initiatives.

Fewer late payments: Customers benefit from avoiding expensive late fees. At the same time, you get payments on time when you need them without having to spend time chasing customers. 

Increased payment options: You can set up payment plans that work weekly, monthly or at any frequency that works best for you and your customer. Paying partial payments can also be a strong incentive for customers, resulting in more sales for you.

Improved customer relationships: Customers are automatically informed when payments don’t go through, and they can correct issues on their own without your customer or your staff need to discuss the issue. This saves everyone from having an awkward exchange that can negatively affect future business.

What Is an ACH Credit Transaction?

When learning about ACH, you will undoubtedly come across the terms ACH debit and ACH credit.

ACH credit transactions are financial transactions from the payer to the payee (from the customer to you). In this movement of money, funds are “pushed” from the customer’s bank to yours with approval from the customer initially set up during the ACH enrollment process.

Businesses often use this for direct deposit payroll. From a customer’s perspective, an ACH Credit is used for a one-time payment (a single purchase) or for the initial setup of ACH with a company to connect the two banks.

For the timing of credits, Nacha states that financial institutions have the option of processing and delivering ACH credits within one business day or after one or two days.

What Is an ACH Debit Transaction?

ACH Debit transactions are financial transactions where the payer (the customer) allows the payee (you) to move the payments. In this case, the money is “pulled” from the customer’s bank account to your bank account per your request.

This form of payment authorization is approved by your customer and done at a frequency outlined in the enrollment form. It can be a one-time debit transfer or recurring. With the initial approval in place, you can initiate ongoing payments without the customer doing the work of pushing payments to you.

An ACH debit payment is the most common type of payment. For personal accounts, you provide approvals for a company to pull money from your account each month, and you don’t have to lift a finger. As a business, you institute ACH debits to receive ongoing payments from your customers. 

Nacha requires that ACH debit transactions be processed by financial institutions the next business day.

What Information is Needed for an ACH Payment?

Your customer will need to authorize ACH payments by filling out an ACH form. As a merchant service provider, BNG Payments offers straightforward and easy-to-use forms and ACH software. Your customer can access these forms on your website, via email, or in printed form.

The form requires the correct bank information to link the accounts, such as the customer’s routing number, account number, and other personal details for verification, such as their home address, email, and phone number.

The customer will also verify in writing the frequency of transactions and, if applicable, the amounts being moved. The customer’s signature and acceptance of official terms and conditions provide final approval for bank payment. 

Processing Times for ACH Transactions

These electronic, digital transfers aid with faster payments, but contrary to what you may think, they are not always instant payments. The entire ACH transfer process typically takes between 2-4 days. This timing gives it a distinct advantage over other kinds of payment like credit card payments, check payments, and in some cases, even cash payments. Driving back and forth to a bank daily isn’t all that convenient.

The reason for the 2-4 day timeframe primarily has to do with bank hours. Here’s why. 

Batch Timing

Funds from the customer’s bank to your bank aren’t sent automatically. The order is sent at specific times of the day along with other electronic transfer orders. Each group of transfers is called a “batch”, and there are typically three batches done by a bank each bank business day.  

The batches are sent and received during bank hours. The batch the bank uses for your customer’s transaction is up to the bank, and as a result the time of day the batch is sent can delay the final transfer by one business day. For example, funds will arrive a day later if a batch is received by your bank after its business hours. 

Bank Hours for Both Banks

All funds transfer requests and fulfillments by your bank and the customer’s bank are initiated and completed during business hours of both banks. Since bank hours and locations vary and many banks don’t work on weekends or holidays, the total time of moving payments and completing fund transfers can average from 2 to 4 days.

In some cases, Same-Day ACH Payments can be made to speed things along. As the name states, it offers same-day transfer of funds, but not always. Bank hours are a significant factor here. For instance, if you send a request to your bank for a same-day transaction and it is already the end of the workday for your bank, the request won’t be received by your bank until the next business day. This means if you request on a Thursday night, the bank won’t know to fulfill it until Friday morning. And this process could take even longer if you request on a Friday night and the bank is closed on weekends, in which case it wouldn’t process it until Monday morning. If there is a bank holiday, it will take longer.

There is also the timing of the customer’s bank to consider. All the same working hour restrictions apply, which add to the timing. It could be that the customer’s bank is closed when it receives your bank’s request, or the last batch for the day has already been sent, delaying the transfer to the next day, in addition to added timing for weekends and holidays.

How to Get ACH Payment Capability

Nacha requires that all parties involved with ACH follow specific rules and procedures to protect customer data. One rule states that transmissions of bank information must be encrypted. This includes any bank account number or routing number. To do that, you will need to comply with specific internal procedures regarding data storage and use what they term as “commercially reasonable” technology.

The technology is regularly offered through merchant service providers. Due to the strict and numerous rules needed for compliance and potential for liability for data leaks, deferring to your merchant account provider for safe and proper setup is your best step forward.

How BNG Payments can Help

At BNG Payments, we regularly offer ACH capability and take the pain out of staying fully compliant. We provide all the needed systems and software to protect customer data and even install it on your current framework if desired. 

In our many years in the business, we have found that ACH payments provide extended flexibility in payments for customers. This payment method increases sales while providing more assurance for business owners through pre-verified payments and creating a stronger base for owners to plan their business goals.

Our back-end systems handle all phases or repeat business, reducing billing time for your staff, and our customizable enrollment forms make it quick and easy for customers to enroll on any device. Combined with this technology’s lower cost-per-transaction, your business stands to benefit significantly.

At BNG Payments, we work to be your ally in your business growth, and this is just one of the ways we do it. Contact us to learn more.