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. ACH payment processing is a cost-effective and reliable alternative to traditional payment methods.
What Is the Automated Clearing House?
The Automated Clearing House (ACH) is an electronic payment network in the US that facilitates the secure and efficient transfer of funds between financial institutions.
The ACH network performs key functions, including payment processing, clearing, and settlement, all under the governance of the National Automated Clearing House Association (Nacha).
Nacha connects all US financial institutions to enable the secure movement of money from one bank to another. It supports various transaction types, from direct deposits to recurring bill payments, and has evolved to offer faster processing options, including same-day transfers.
How ACH Payments Work
In simple terms, ACH payment processing is an alternative “payment railway” to credit card payments because the authentication and approval process is completely different.
Setting up ACH payments is easy. 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) or merchant’s bank. 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. This delay in processing is a significant pain point for merchants using ACH payments.
Top ACH Payment Processors
| ACH Processing Fee | Approval Times | Invoicing/Recurring Payments | Virtual Terminal | ||
|---|---|---|---|---|---|
 | ACH Debit: 0.8%($5 max)ACH Credit: $1 per payment | 2–4 days | ✓ | ✕ | Visit Stripe |
 | 1%($1 min) | 3–5 days | ✓ | ✕ | Visit Square |
 | 0.5% + 25 cents($6 max) | 3–4 days | ✓ | ✓ | Visit Helcim |
 | 0.5%–1.5% | Within 24 hours | ✓ | ✓ | Visit PaymentCloud |
 | 1% + $0.25 ($2.50 max)+ 0.3% for amounts above $1,000 | 2–3 days | ✓ | ✕ | Visit GoCardless |
 | 1%($10 max) | 3-4 days | ✓ | ✓ | Visit QuickBooks Online |
Learn more in our list of the best ACH payment processors for small businesses.
Types of ACH Payments & Examples
There are various types of electronic transactions processed by ACH, each serving different purposes and flexibility.
Direct Deposit
Direct deposit is a commonly used ACH payment method, particularly for businesses, government entities, and organizations making payments to individuals. This type of transaction allows funds to be electronically deposited directly into a recipient’s bank account.
Examples of direct deposits include:
- Paychecks
- IRS tax returns
- Pension payments
- Dividend payouts
- Interest payments
Direct Payment
Direct payment in the ACH network involves transactions between individuals or businesses and consumers. There are two subcategories of direct payments: credits (push payments) and debits (pull payments).
Examples of direct payments include:
- ACH credit (push): Receiving money from a friend on Zelle or Venmo
- ACH debit (pull): Recurring bills, subscriptions, mortgage payments, donations, and membership fees
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.
Same Day ACH
An extension of the standard ACH system, Same Day ACH is designed to expedite the processing of ACH transactions. Historically, the ACH payment process took three to five business days. This longer processing time was one of the key drawbacks to ACH payments.
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. Same Day ACH aims to complete transactions within the same business day. This acceleration allows for faster fund transfers, making it particularly valuable for time-sensitive payments. While not always as fast as accepting credit card payments, ACH payments are much faster than they used to be.
Real-Time Payments (RTP)
Although technically not a type of ACH payment, RTP by The Clearing House allows real-time payments from one bank account to another. It uses the RTP network instead of the ACH network. While Same Day ACH still process transactions in batches several times a day, RTP transactions happen in real time (instantly) with immediate finality.
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, Same Day ACH volume in 2022 increased by 86.3%, which drove the increase of overall ACH payments volume in 2022 by 5.6% valued at $76.7 trillion.
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. Using ACH payments for recurring billing will also likewise reduce the number of outstanding invoices.
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.
Drawbacks of ACH Payments
Cutoff 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. Eastern time for ACH transactions designated for same-day processing (settlement occurs at 6 p.m.)
- 2:15 a.m. ET for next-day ACH transactions (settlement occurs at 8:30 a.m. ET, 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 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 Key Statistics
The use of ACH payments is gaining popularity. Understanding the key statistics associated with ACH payments provides valuable insights into its impact and growth.
- 30 billion payments: In 2022, the ACH network processed a staggering 30 billion payments. This high volume underscores the prevalence and widespread adoption of ACH as a preferred payment method for both businesses and individuals.
- $76.7 trillion: The total volume of ACH payments in 2022 reached a substantial $76.7 trillion, representing the significance of ACH payments in financial transactions.
- 12.7%: ACH payments have experienced an impressive average annual growth rate of 12.7% from 2018 to 2021. This sustained growth highlights the increasing reliance on ACH for secure and efficient fund transfers.
- 72%: ACH payments made up 72% of the total core noncash payments value in 2021.
- 39%: Around 39% of organizations utilize ACH credits for their financial transactions, showing the widespread adoption of ACH credits as a preferred method for businesses to handle various payment processes efficiently.
- 26%: An estimated 26% of B2B payments are conducted through ACH credits, highlighting the importance of ACH payments for B2B transactions.
Learn more key payment statistics and trends.
Frequently Asked Questions (FAQs)
Click through the sections below to learn more about the most common questions we get about ACH payments.
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.
