What Is an ACH Payment & How Does it Work?

The payments industry has arguably seen some of its most rapid transformations this past year. As the COVID-19 pandemic changed the way we do business everywhere, merchants have faced their fair share of challenges. But with those challenges also come new opportunities and technologies, new ways of anticipating and accommodating customer preferences. And as the way customers want to pay changes, small businesses also need to find ways to accommodate those payment preferences. One method to consider is ACH payments.

ACH Payments Defined

ACH is the abbreviation for Automated Clearing House, which is how people and businesses electronically transfer funds via bank transfer. For small businesses, accepting ACH payments is essentially processing digital checks or taking direct deposit payments.

Basically, electronic funds transfers (EFTs) can happen via credit card, debit card, ACH, mobile wallet, wire transfers, and more. So, ACH payments are simply one form of online payment.

Online payments continue to trend upward, both for ecommerce and in-person transactions. The total transaction value of digital payments is forecast to hit more than $6.68 billion in 2021, yet bank transfers only make up 9% of total online payments globally.

Unfortunately, many merchants are leaving money on the table if they don’t accept ACH payments. They’re often less expensive than other payment methods and more convenient than requiring a paper check. Not to mention, the funds typically hit your merchant account faster via ACH—three to five days is standard, though there’s also the option for same-day ACH transfers.

Awareness around ACH payment processing could be increasing. Q3 2020 saw 6.8 billion ACH payments, a 9% increase from Q3 2019. B2B payments, in particular, have seen a rise in ACH payments. This is good news for businesses and consumers alike.

NACHA oversees the ACH network, responsible for “connecting all US financial institutions, enabling secure and efficient movement of money and information directly from one bank account to another. It essentially sets the operating standards for merchants, buyers, and all other entities involved.

How ACH Payment Processing Works

There are a few steps when it comes to processing an ACH payment. Essentially, the merchant provides the transaction total to the customer. The customer then shares their banking information, including a routing number and account number, and authorizes the charge, which alerts the customer’s bank to release the funds.

The customer’s financial institution is the Originating Depository Financial Institution (ODFI), and the merchant’s financial institution is the Receiving Depository Financial Institution (RDFI).

It’s important to note that when it comes to ACH payments, funds are not immediately released. Instead, ACH payments are based on a system of credits and debits, which is tracked by the ACH clearing facilities, the Federal Reserve System, and The Clearing House Association. At the end of each day, all credits and debits are cleared and processed, which is when the transfer of funds happens.

Many times, ACH payments are used for recurring charges—things like utilities, internet, and even taxes paid to the government. In these scenarios, the initial customer authorization also grants permission for recurring withdrawals from their account. Essentially, the merchant sends an ACH entry to the customer’s bank each month (or whenever payment is due), and it goes through the steps outlined above.

Is ACH Processing Right for Your Business?

ACH payments are ideal for subscription-based businesses or any merchant that uses recurring billing. They can also be a good fit for sellers looking to replace paper checks, and businesses that process large-sum orders such as B2B companies.

While ACH payments are beneficial for some merchants, they’re not right for everyone. Sometimes, it doesn’t make sense to take the extra steps to accommodate this payment method. There’s no instant pay-out and requires more details from customers—so it’s not well-suited for a traditional retail shopping experience.

ACH Payments Offer Lower Payment Processing Rates

While you might not be able to find a way to accept credit payments online for free, ACH payments can get you pretty close. It’s important to accept a variety of payment methods, but this can become costly. Credit and debit cards, in particular, come with high processing fees, not to mention the threat of chargebacks or even fraud.

Typically, ACH payments have lower fees than credit and debit card transactions. For example, if you’ve ever tried to send money via friends or family on PayPal, you’ll see zero fees for an ACH deposit, but you might have to pay a transaction fee if you were to use a credit card. The same is true for small businesses that have to pay for payment processing.

ACH Payments are Ideal for Recurring Charges

Small businesses that operate on a recurring billing basis may also benefit from ACH payments. You might have a subscription-based business, or you might offer services every month on a retainer business. Landlords, for example, often collect rent online via ACH deposits.

Whatever your business model, if you administer recurring payments, you’ll also need a way to accept recurring payments — and one great way to do that is with ACH payments. In fact, it’s the most popular payment method for recurring payments, according to data from Mastercard.

Bank account information is less likely to change than credit card information, so this is a more reliable method for recurring payments. Plus, it makes it easier for the customer as they don’t have to worry about updating payment information if they receive a new credit or debit card.

Many B2B Businesses Use ACH Payments

B2B payments occur when one business sells to another business. This might be when dealing with wholesale goods and purchasing equipment. Businesses use ACH payments more frequently than consumers. In fact, 70% of the Mastercard survey respondents said they’re “fine” with using ACH for B2B payments and 75% are satisfied with this payment option for both sending and receiving funds.

So, if you plan to sell to other businesses at any point, it’s a good idea to add ACH payments as an option.

ACH Payments Offer Contactless and Online Solutions

As the COVID-19 pandemic has accelerated our adoption of digital-first ways of doing business, small businesses everywhere have been forced to get innovative. Accepting credit cards online was just the start, but the payments industry has evolved. Online and contactless payment methods—think things like buy online/pick up in store, local delivery, etc.—are finally seeing their time to shine.

These trends have also impacted ACH payments. Buyers who have opted for paper checks in the past may no longer be able to use that payment method. ACH is the best alternative for those buyers, as it essentially acts as an electronic check. So if you have lots of customers who pay with a paper check, ACH is a no-brainer.

Use ACH Payments When Processing Payroll

One element to ACH payments that we didn’t discuss too much above is when merchants issue ACH payments to others. You often see this with payroll. Many employers issue wages to their employees via ACH direct deposit. This eliminates the paperwork and costs associated with paper paychecks. Plus, it puts funds in workers’ pockets a lot more efficiently.

Bottom Line: ACH Payments in 2021

ACH payment processing isn’t right for everyone, but it can help lower payment processing fees, improve the customer experience, and reduce your risk of credit card fraud. Many of the best merchant services for small businesses have built-in solutions for accepting ACH payments from customers.