ACH Payment: What It Is, How It Works, & Who It Benefits

What is an ACH payment?

An ACH payment is a bank-to-bank transfer between two financial institutions in the United States or territories. These transactions — also described as direct debit, electronic funds transfer (EFT), or eCheck — can support up to a $1 million deposit and are typically completed within a business day.

The underlying guidelines and infrastructure used to support these exchanges are managed by Nacha (previously the National Automated Clearing House Association), a non-profit organization. 

Altogether, there are two types of ACH payments:

ACH credit

An ACH credit, or a direct deposit, results when the transaction originator “pushes” or sends funds from their account to someone else. Commonly, these payments are made by a public agency or business (in the role of an employer) directly to a private individual. This might look like a:

• Paycheck deposit
• Income tax refund
• Unemployment benefit
• Insurance payment

ACH debit

An ACH debit, commonly called a direct payment, includes most other transaction types where the originator “pulls” or requests funds from an external account, which are then deposited into an account controlled by the originator. As such, these exchanges might be business-to-business (B2B) payments, consumer-to-consumer (C2C) payments, or any combination of the two. Examples include:

• Equipment purchases
• Cleaning service payments
• Utility bills
• Charitable donations
• Gifts sent to family

How does an ACH payment work?

ACH transactions are processed four times during each business day in batches. Each exchange is handled either by The Clearing House Payments Company LLC or the Federal Reserve. Your average transaction will look something like this:

1. The originator initiates the payment or deposit by handing off instructions to their financial institution, which is known as the originating depository financial institution (ODFI).
2. The ODFI, in turn, sends an ACH operator (e.g., The Clearing House, the Federal Reserve) a payment file containing details about the transaction.
3. The ACH operator then hands the relevant payment files to the receiving depository financial institution (RDFI).
4. The RDFI confirms with the ODFI that sufficient funds are in the source account to cover the transaction.
5. Lastly, the receiver has the associated funds credited to (for a deposit) or withdrawn from (for a payment) their ACH account.

Benefits of ACH payments

Now that you understand more about the process and different types of ACH payments, here’s how they can benefit your business: 

1. Saves you money

According to data compiled by Forbes Media LLC, the average credit card processing fee presently hovers between 1.5% and 3.5% of the total transaction. Meanwhile, the Association for Financial Professionals (AFP) noted in its 2022 AFP Payments Cost Benchmarking Survey that respondents paid $2.01 – $4 to issue checks and $1.01 – $2 to receive them, with the higher price due to increased labor costs. By contrast, in that same study, respondents reported average costs between $.26 and $.50 to support their ACH transactions — at least, for organizations with revenue less than $4.9 billion.

2. Offers greater control

Whether you’re pushing or pulling funds, you get to decide when the transaction will occur. That control over money entering and leaving your business makes it much easier for your accounting staff to manage cash flow, forecast financials, and budget for future business plans.  

3. Gets you paid sooner

Admittedly, ACH transactions don’t happen in real-time, but they are much faster than more traditional methods, like mailed checks. These payments are typically closed out in less than one working day, often in just a few hours. Of course, you can further accelerate this process — and surrounding billing and payment efforts — with an automated accounts receivable (A/R) process.

4. Helps keep your transactions safe

Fortunately, the ACH network has several anti-fraud measures built in that help limit any transaction’s risk. For instance, all payments are channeled through an ACH processor that keeps account numbers confidential. Since the exchange happens entirely electronically, your payments and deposits are safe from mail or check fraud. Further, the Electronic Fund Transfer Act of 1978 extends protections to customers who perform an ACH transaction, such as establishing liability limits, requiring prior consent from the receiver, and providing buyers and sellers with a 60-day grace period to recover funds lost to fraud or error.

5. Allows customers to pay bills on autopilot

Perhaps one of the most convenient features of ACH transactions is that it makes it possible for sellers to offer automatic payment options — a capability that is particularly useful for subscription-based pricing models. Buyers can spend less time worrying about missed payments while remaining confident that their outstanding invoices will be settled per established timelines and transaction values. And with fewer forgotten or missed payments, the labor and money required for your dunning efforts can be reduced.

6. Streamlines payment processes

Altogether, ACH transactions help simplify payment efforts for you and your customers, yielding a more consistent, hassle-free process. For instance, by shifting your customers away from more traditional, paper-based payments, you can reduce the likelihood that human error will creep into your A/R processes and disrupt operations. Plus, an ACH transaction will never get lost in the mail. ACH payments also lower the risk that a given transaction will fail due to outdated account information, as bank account numbers tend to change less frequently than credit card numbers. 

7. Reins in disputes

Billing mistakes happen, so you always want to offer some way for your customers to dispute any given transaction. But sometimes, this necessary function can be exploited by shoppers to take advantage of your business or even commit fraud. Fortunately, the ACH network helps to minimize the overall number of disputes you might experience by limiting the scope of these challenges to just three potential reasons:

• The transaction was never authorized (or the authorization was revoked)
• The transaction value is different from the total that was authorized
• The transaction was debited before the authorization date

ACH payment vs. wire transfer 

A wire transfer is another bank-to-bank transaction type that occurs without incorporating any intermediaries, like an ACH processor. Instead, the two banks directly communicate the relevant payment information — account numbers, routing details, transaction total, and payee’s contact information — to each other. Typically, these exchanges reflect a one-time, large-value transaction (e.g., the down payment for a piece of real estate).

If you’d like to explore wire transfers in more detail, as well as how they relate to ACH transactions, check out our blog: ACH vs. Wire Transfers.

How long does it take to process ACH payments?

According to Nacha, 80% of ACH payments are settled within one business day. Of course, actual timelines will vary depending on the responsiveness of the relevant financial institutions as well as when the transaction originated — during or after regular business hours — and if the following day is also a business day. Further, an ACH transaction can be scheduled to be processed up to two business days after it is initiated if a delay is required.

How much does it cost to process ACH payments?

According to the 2022 AFP Payments Cost Benchmarking Survey, the average cost to initiate and receive an ACH transaction was between $.26 and $.50 for organizations with revenues less than $4.9 billion. However, this amount doesn’t factor in any of the monthly, percentage, or reversal fees you’ll also need to pay, so the actual out-of-pocket transaction cost will likely be higher, depending on how you’re facilitating your ACH payments. In addition, these charges can vary widely depending on if you are accessing the ACH network directly — and incurring associated labor and access costs — or if you are working with an outside payments processor using automated A/R or A/P software.

As part of Invoiced’s automated A/R and A/P software, our new Vendor Pay feature helps reduce payment processing fees for businesses making ACH payments. Vendor Pay requires a flat fee of only $1 per invoice rather than a fee based on the percentage of the overall payment, which can quickly add up. This new feature ultimately allows US-based sellers to reduce spending on fees and improve their bottom line. 

Get fast, reliable, cost-effective payment processing with Invoiced

As a business, it’s wise to offer as many payment choices as possible to your suppliers and customers, including ACH. This ensures that all preferences are catered to, as some buyers may prefer credit cards for their transactions, while others may opt for the simplicity and security of ACH transfers.  

So rather than limiting your options, you should utilize a payments platform that provides broad flexibility like our Accounts Receivable Automation platform. Our software supports ACH, direct debit, credit card, virtual card, wire transfer, and cash app transactions. Its Vendor Pay function empowers you to manage your ACH payments effectively and reduce associated processing costs, all at a flat rate of $1 per transaction.

So if you’d like to maximize the value of your ACH payments, set up AutoPay capabilities, or just reduce the hassle of your A/R efforts, schedule a demo today.