Whether you're paying bills online or receiving a direct deposit of your paycheck, they're ACH transactions. In fact, most direct payments are ACH. It's everywhere in our lives. Businesses use it daily, and so do most people. But what is ACH, and how does it work?
What Does ACH Mean?
Automated Clearing House (ACH) is a network of banks. They electronically process payments. It is used to transfer transactions. For instance, these ACH transactions include direct deposit of a paycheck and a monthly debit for a transaction.
According to Nacha, ACH payments include salaries and credit card payments to Social Security benefits and mortgages. ACH is great for money transfers and recurring payments.
How Does ACH Work?
Think of ACH as a super highway. The originating depository financial institution (ODFI) interfaces between the Federal Reserve or ACH and the originator of the transaction. The depository financial institution that's an ACH member is a bank or credit union that is processing payment on behalf of a client.
When the payer makes an electronic funds transfer, the ACH payments are made to the recipient's checking account or savings account. So it's a credit to the payer and a debit to the payee.
In order for the depository financial institution to make ACH payments to the correct payee, it must have the payee's account number and routing number.
ACH is not the same thing as wire transfers. ACH transfer is made through a clearing house via the Federal Reserve, whereas wire transfers move money from one financial institution to another.
How Quickly Are Funds Transferred via ACH?
Regarding the electronic funds transfer of ACH, speed is the goal. The payment processing speeds up when an ODFI submits transfer requests in batches.
ACH allows for two kinds of transactions. They are debit transactions and credit transactions. Nacha requires different processing speeds for each one.
- Credit transactions: Credit transactions from an ODFI to an account at a receiving depository financial institution must be processed within two business days. A payroll direct deposit is an example of a credit.
- Debit transactions: Debit ACH transactions that send money from a receiving depository financial institution (RDFI) to an ODFI bank account must be processed within one business day. There is also same-day ACH. An ACH debit transaction example is a bill payment.
Some financial institutions offer next-day payments for an additional fee.
Is ACH the Same Thing as Direct Deposit?
Direct deposit is not the same as ACH. Direct deposit is an electronic payment that uses the ACH network to move money between an ODFI and an RDFI.
But is an electronic check the same as ACH? An electronic check is just a digital form of paper checks. The electronic check is the payment, and ACH is the process that delivers it from one bank or credit union to another.
Direct pay is sometimes confused with ACH. But they are not the same. Direct pay is a secure service that lets you pay taxes to the IRS directly from your savings account or checking account. It doesn't use ACH because it's not an RDFI or an ODFI.
How Much Does ACH Cost?
Several factors affect the cost of ACH transactions. Often, they're less expensive than credit card or debit card payments.
There are times its part of standard banking fees. But some examples of transfer fees include flat rates of 26 cents to 30 cents per transaction. Percentages are sometimes charged, equaling 0.5 percent to 1.5 percent per transaction. Other times a per batch fee of $1 is charged.
Pro | Con | |
|---|---|---|
Cost | ACH transactions are usually less expensive. They don't have to go through a credit card or debit card network. The ACH transactions are going through the cleaning house. | Business must pay a set-up cost and a fee per transaction. |
Security/Speed | ACH is great for payroll transfers. They are also effective for business-to-business payment processing. The clearing house makes ACH more secure and quicker than wire transfers. | The settlement is slower than a credit card or debit card, although same-day ACH is becoming more frequent. |
How Do I Convert to ACH?
To create an ACH payment, you'll need to have the customer's or vendor's bank account information. You will also need a bank or credit union routing number. You'll need these two items for both the payee and the payer.
You'll then enter the payment into the platform. There might be a fee. All ACH transactions are processed during bank business hours.