What is an ACH Debit? ACH Bank Transfers and Payments
As a business, you can select from a wealth of payment options. You can receive direct payments in the form of cash payments, paper check payments, credit card payments, debit card payments, and even electronic payments thru wire transfers. But there is another form of payment that has grown in recent years. It offers direct bank payments and automatic payments. In fact, you may already use it at home. It’s called ACH, and it’s worth adding to your list of payment options for customers.
When you read about ACH, you will often hear about ACH debit, but what is it exactly? In this article, we discuss what ACH is, clarify what ACH debit payments are, and discuss the advantages and disadvantages of this payment method.
What is an ACH Debit? ACH Bank Transfers
An ACH debit is a type of Automated Clearing House transfer where funds are pulled from your bank account. For example, when you set up recurring monthly payments for any bills or utilities, an ACH debit would be used and transferred automatically to the recipient’s account.
Understanding ACH Debit and Credit Payments
An ACH debit is money that is “pulled” by a company automatically from a customer’s account. It is often called “direct payment.” This contrasts with ACH credit transactions which are “pushed” payments, in which the payer initiates payment.
From your standpoint as a business owner, the “pushing” of funds by customers is most often done for one-time bill payments. “Pulling” happens in two ways: you can allow vendors or utility companies to pull from your account to pay any bills you owe, and you can pull from customer accounts to compensate you for your products and services.
ACH debits are the most common for recurring bill payments. Billers prefer this method because it costs less than other payment options, provides more efficient money transfers, and reduces late payments.
Understanding the Automated Clearing House Network
Both ACH debits and ACH credits are a form of Electronic Funds Transfer (EFT). Each EFT is run through the Automated Clearing House (ACH) – a financial network of 25,000 US banks, credit unions, and other financial institutions that follow set guidelines and practices to ensure safe and efficient transferring of funds.
The rules and regulations for the automated clearinghouse services are set and overseen by a board of governors at Nacha, previously known by its acronym NACHA (National Automated Clearing House Association).
Unlike credit card networks, this clearinghouse network provides direct bank-to-bank transactions without middlemen. To learn how it works, let’s look at it from the perspective of a business owner.
- You use ACH software to enroll your customer into the network. Your customer provides bank account information such as the bank account number, routing number, and other information for verification, such as their birthday and email address.
- Your customer approves an agreed-upon payment frequency, such as a one-time payment, annual payment, monthly payment, or any frequency you specify.
- At a reoccurring time, your bank sends a transmission to the customer’s bank via the ACH network requesting payment. This makes you the Receiving Financial Depository Institution (RDFI,) and the customer’s bank the Originating Financial Depository Institution (ODFI).
- With clearance provided by the customer during signup, the customer’s bank verifies funds are on hand and transmits the funds to your bank.
- Your bank verifies the funds and deposits them into your account.
Examples of ACH Payments
- You are likely familiar with ACH payments in your personal life. ACH is a common way of paying monthly bills from a utility company, such as:
- Electric company
- Cable company
- Phone company
- Insurance company
How Long Does It Take for an ACH Debit to Clear?
The banks send ACH payments at specific times during a business day, called batches. At most, three batches are sent a day. Since this happens during a bank business day and requests to a bank can fall after business hours, the total transmission time averages 3-5 days. Sending orders via “Same Day ACH” debits can speed things along, but it can still take longer than one day due to bank hours.
Advantages over Other Forms of Payment
ACH provides a wide range of benefits over other forms. One of the biggest is the ease of payment. You can receive continued payments monthly, or at any frequency you need. You get automatic bill payment from each customer for products and services without having to chase customers to demand payment or charge late fees.
It also benefits your accounts receivable department. It notifies customers payment will be taken, creates invoices, processes payments, provides receipts to customers, and logs it into your books – all automatically.
There are additional benefits over specific types of payment. Let’s look at each.
Benefits over Cash Payments
ACH is easier to deposit and much more secure. Cash can be stolen by thieves – including employees. And cash is an accounting nightmare. All payments need to be accounted for, logged in correctly, and deposited, all at the exact same total.
Benefits over Paper Checks
ACH is a strong alternative to a paper check. In fact, in some ways, it is similar. You can imagine it as a paperless check. You share the benefit from bank-to-bank transfers, but you also receive faster payments than you do with checks – especially for orders with higher dollar amounts. Plus, like cash, checks can be lost or stolen. ACH is much more secure. And a hard-copy check is also susceptible to fraud. Stolen checks are a recurring problem, whereas ACH requires stronger compliance to initiate.
And then there is overall convenience. Let’s face it; paying bills by check each month is a hassle. Customers need to schedule a payment on time, write the check, put it in an envelope, address it correctly, add a stamp, and mail it. Sending a certified check for an important payment is even more laborious. With ACH, the whole process happens automatically on time, and more safely.
Advantages of ACH Payments Over Electronic Payments
ACH Payments vs. Wire Transfers
Both ACH and wire transfer move pre-verified money electronically, but there are key differences between the two, each with its own benefits.
While wires can be done as instant payments, the ACH timing – even same-day ACH – takes longer. And wires let you receive cross-border payments (domestic wire transfers as well as international wire transfers, whereas ACH is limited to transfers within the US.
Still, there are big advantages of ACH payments vs. wire transfers which have made ACH a more popular alternative. Here are a few of the benefits:
Lower Processing Costs Thanks to Lower Operating Costs
The processing fees for moving payments via wire transfer can cost as much as $30, but payments cost for ACH is only cents on the dollar, leading to considerable cost savings. In some isolated cases, the cost to process for ACH can run up to $2 or $3 to cover validation of funds, but overall, ACH services come at a nominal cost.
If bank information is obtained by a scrupulous party and a wire transfer is sent to their account, a wire transfer can’t be refunded. The money is gone for good. ACH payment typically allows for fund returns shortly after any deposits. And since ACH works only with US banks, there is a reduced risk of fraud via international wire transfers.
ACH Payment vs. a Debit Card Transaction
ACH payments and debit card transactions both work like a paper check. They also differ from this transaction type – and from each other.
- Debit cards require PINN or signature for authorization, whereas ACH debit transactions require an account and routing numbers and online credentials, making it a powerful fraudulent transaction detection system.
- Another way a debit card payment is similar to a credit card transaction is that it requires card networks and payment processors to communicate with the banks, and this means you pay similar credit card transaction fees. These fees increase the cost per transaction. ACH debit transactions are often cheaper or free.
- You also get the advantage of higher withdrawals, making ACH more useful for high-dollar business transactions.
ACH Payments vs. eChecks
An eCheck is a form of ACH debit. The term ACH debit is an overarching term for all debit types through the network, and eChecks are a subset of it. EChecks allow you to convert paper checks into an electronic debit, providing payment benefits over standard check payments by ensuring fast, verified funds.
Why Are Some ACH Payments Rejected by Banks?
The fact that bank account transfers are rejected by bank employees is a good sign. It means ACH is working. A bank ACH transfer requires verified funds from a customer bank. Bank transfers are canceled when bank accounts show insufficient funds because bank money transfers require a minimum credit reserve balance on a bank statement.
Is ACH Payment Safe? The Security Risks of ACH
Logging sensitive bank information can lead to trouble if the information ends up in the wrong hands, but once the initial setup is done, the information is no longer required. In many cases, protected software on your website or through an email link provides superior protection. As a merchant service provider, we regularly install this software onto business systems. Keep in mind the other advantages ACH has over other forms of payment like cash, checks, and other electronic transfers listed above. In many ways, ACH is safer.
How a Business Can Start Accepting ACH Payments
BNG Payments provides full merchant services, including ACH payment capability. We know first-hand the benefits of this service. We find businesses make more money and are more financially secure via regular payments, which leads to more time for stronger service and more money for future business growth.
In addition to ACH, we offer the needed hardware to make the transaction process easier, improving all your performance from top to bottom. Click here to find out more.