What Is an ACH Payment? A Small Business Guide
Meaghan has provided content and guidance for indie retailers as the editor for a number of retail publications and a speaker at trade shows. She is Fit Small Business’s authority on retail and ecommerce.
This article is part of a larger series on Payments.
Automated clearing house (ACH) payments are simply direct bank transfers of payments between people and businesses. If you process sales online or through invoices, then ACH transfers can save you time and money. The ACH network is overseen by Nacha, which connects all US financial institutions to enable the secure movement of money from one bank to another.
ACH Payment Process for Businesses
Setting up ACH payments is easy, and most payment processors allow for ACH payments. As a merchant, you provide the transaction total or subscription amount to the customer. The customer in turn shares their banking information, routing number, and account number, and authorizes the charge.
The customer’s bank, the Originating Depository Financial Institution, or ODFI, sends the transaction to the ACH clearing facility. The ACH clearing facility then processes the transaction and sends the funds to the Receiving Depository Financial Institution (RDFI). At this point, the funds from the transaction are deposited into the merchant’s bank account.
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.
Learn more about how your business can accept ACH payments, including our recommended processors.
Types of ACH Payments & Examples
- Direct Deposit: An ACH payment from a company or government to an individual.
- Examples: A paycheck that is automatically deposited into your bank account, IRS tax returns, payouts from the COVID Economic Impact Payments.
- Direct Payment: An ACH payment between individuals or businesses and consumers. There are two types of ACH payments: credits (or deposits), also known as push payments, and debits or pull payments.
- Example of ACH credit (push): Receiving money from a friend on Zelle or Venmo.
- Example of ACH debit (pull): A recurring bill that’s pulled from your checking account each month, like an internet or cable bill.
As a business, if you are paying employees via direct deposit, you’re using ACH direct deposit. If you bill customers on an ongoing or subscription basis, you’ll likely want to use ACH direct payments, as it’s more affordable than paying credit card processing fees.
Pros & Cons of ACH Payments
| PROS | CONS |
|---|---|
| Lower processing rates | Customers may be limited by their banks |
| Great for recurring billing and subscriptions | There can be delays in transfers |
| Reliable | Some banks charge fees |
| Preferred by B2B | Some banks don’t allow international transfers |
| Perfect for payroll | |
ACH payments are an efficient form of payment that is increasing in popularity. According to Nacha, ACH payments increased by 8.2% in 2020, with the value ($61.9 trillion) representing an increase of 10.8%. Nacha says the pandemic and the rise of online businesses are responsible for a lot of the growth. In 2020, over 2 billion new payments were added.
Historically, the ACH payment process took three to five business days. This longer processing time was one of the key drawbacks to ACH payments.
However, in 2016, Nacha introduced same-day ACH credits and began processing transactions three times per day instead of just once. Since then, Nacha has implemented same-day debits, faster fund availability, and increased operating hours. While not always as fast as accepting credit card payments, ACH payments are much faster than they used to be.
Benefits of ACH Payments
Lower Payment Processing Rates
There’s no way to accept credit payments online for free, so the best you can do is minimize the cost of payment processing fees. ACH payments usually have lower fees than credit and debit card transactions. For example, Square charges 1% per ACH transfer, but 3.5% + 15 cents per transaction.
Reduced Failed Payments & Involuntary Churn
ACH payments work better than credit card payments for recurring billing like subscriptions, rent or leases, and monthly retainers for services. Bank account information is less likely to change than credit cards, which expire, get lost, or are canceled, and can lead to missed or failed payments. Many small businesses that bill on a recurring basis prefer ACH payments because of the stability, in addition to lower fees.
Contactless & Online Solutions
As the COVID pandemic has accelerated our adoption of digital-first ways of doing business, accepting credit cards online has become critical. However, not every consumer uses credit cards or prefers this method. While there are some payment alternatives like PayPal, ACH transfers are a great option for those who are more comfortable paying outright, as if by handwritten check.
Ideal for Processing Payroll
ACH payments are not just for accepting money. You can use them for making payments yourself, whether for rent on your building, supplies for your store, or payroll for your employees. 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.
Did you know?
ACH payments are one of the most common types of B2B payments. Learn more about B2B processing solutions and how B2B payments work for credit card processing.
Drawbacks of ACH Payments
Cut-off Windows for Processing
While ACH payments are faster than they used to be, they still typically take longer to process than card payments. And, transactions need to be submitted before specific cutoff times, including:
- 4:45 p.m. Easterm time for ACH transactions designated for same-day processing (settlement occurs at 6 p.m.)
- 2:15 a.m. Eastern time for next-day ACH transactions (settlement occurs at 8:30 a.m. Eastern time six hours after the cutoff)
Limited Operating Hours
The ACH Network does not settle payments on weekends (or holidays) when the Federal Reserve system is closed. So, payments initiated on Friday or Saturday may not be settled until the following week.
Not Ideal for Point-of-Sale (POS) Transactions
ACH payments typically require more data entry on the part of the customer—they need to enter their bank account information and, sometimes, additional information like their address.
In general, setting up ACH payments is a slower process than paying by credit card and simply not designed for a fast-paced retail or B2C environment.
ACH Payment Frequently Asked Questions (FAQ)
ACH payments are processed through the Automated Clearing House Network. Wire transfers move money directly from one bank account to another. Wire transfers are typically much more expensive than an ACH payment, though they are also typically much faster.
It is a myth that ACH payments still take three to five business days. Over the past few years, the ACH network has modernized, and there are options for two-day, next-day, and same-day transfers.
Just like ACH payments are now faster, Nacha also has expanded its international network. According to Nacha, “As electronic payments have grown, so has their use across national borders. To ensure that cross-border payments are both efficient and secure, Nacha worked with the Office of Foreign Assets Control (OFAC) to develop an ACH format that includes information on all parties to the transactions.”
International ACH Transactions (IATs) have certain guidelines they need to follow in order to comply with both Nacha and Office of Foreign Assets Control (OFAC) regulations.
Bottom Line
While you should still accept credit cards and other payment forms, ACH payment processing can help lower payment processing fees, improve the customer experience, and reduce your risk of credit card fraud. Learn how to accept ACH payments as a small business.
You May Also Like…
- Many of the best merchant services for small businesses have built-in solutions for accepting ACH payments from customers. Learn more about merchant accounts with our guide.
- If you want to use ACH payments for employee direct deposit, see our top picks for payroll processing apps.
- Accepting ACH payments can be significantly cheaper than accepting credit cards. Learn about how credit card processing works.
- Many of our top picks for B2B payment processing include options for accepting ACH payments.
