ACH Payment Processing 101

Sending electronic money is a fast and easy way to pay bills, pay for a product or service, or save money. You can send money electronically with a wire transfer, an automated EFT payment, and a credit card. It can also be done through ACH payments.
An ACH payment is a payment method where electronic payment is made through a direct debit from one bank account and deposited into another. ACH payments are fast, simple, and highly secure since they are almost entirely automated.
So what is an ACH payment?
To get you started with ACH payment processing, this overview article will

  • Describe what ACH payment processing is,
  • Provide an overview of the government regulations in place protecting ACH payment processing,
  • Suggest secure solutions for ACH payment processing,
  • And give you what you need to know to implement ACH payment processing.

What is ACH Payment Processing?

ACH payment processing is the process of approving, debiting, and crediting the money from one bank account to another. All ACH transactions move through what is known as the ACH Network, otherwise referred to as the Automated Clearing House Network. Therefore, once sent by the issuing bank, an ACH transaction will be checked against several government and financial regulations to minimize financial risk and financial crimes.
An ACH transaction can be made as an ACH debit request and as an ACH credit request. In either case, the ACH transfer needs to be approved through a variety of governmental regulations in order to ensure that the transfer of funds is safe and legitimate.

If you’d like to send money straight from your bank account, there are only a few ways that this can be done. This might be through an EFT payment, which is a recurring payment set up as an ACH debit to be pulled out of a bank account, or as a single ACH payment entry. Any ACH payment must be made with an approved entity. Typically, you cannot send money directly from one friend’s bank account to another. Instead, the account must be approved through a service.
ACH payments are typically made in the form of direct deposit, which can be a payment from a government agency, employer, or contracted person. A payment gateway can also facilitate ACH payment processing, which allows for more people to send cash money to common folk and small businesses.
In order to process an ACH payment, several steps need to be completed:

  • The financial institution or third-party payment processor (TPPP) must be an approved ODFI or RDFI
  • The banking information must be submitted complete
  • The process must be given a certain amount of time so that the RDFI can verify the information or send it back if the information is incorrect

To be able to process an ACH payment, the financial institution must be approved by NACHA, the National Automated Clearing House Association, as well as being compliant under several governmental regulations.

Government Regulations Around ACH Payment Processing

Any account that handles ACH processing must be approved by U.S. and NACHA organizational rules. These regulations protect the payment data as well as the integrity of the financial network in the United States.
Any bank or financial institution that processes payments via the ACH Network are considered an ACH Operator, and in turn, they must ensure the following:

  • To comply with customer privacy laws and data protection laws, all banking information must be kept encrypted and sent over a secure network
  • Banking information must be secured in protective on-site and cloud storage, including on Payment Card Industry Data Security Standard (PCI DSS) approved hardware and software
  • All ACH transfers must be checked against the Office of Foreign Assets Control (OFAC) regulations to protect against financial crimes from foreign entities
  • All customers must be approved through Know Your Customer (KYC) or Customer Due Diligence (CDD) rules
  • Privileged accounts required multifactor authentication
  • And all third-party service providers must go through an extensive vetting

ACH payment processors are guided by Regulation E of the Electronic Funds Transfer (EFT) Act, OFAC, the CCPA and GDPR, and the National Automated Clearing House Association (NACHA) Operating Rules.

Secure Solutions for ACH Payment Processing

The hardest part of ACH payment processing is ensuring governmental and financial regulatory compliance. Compliance is often reinforced through randomized checks and hefty fines. And it is ultimately up to the financial institution to ensure that each transaction is compliant. The financial institutions referred to as Originating Depository Financial Institutions (ODFIs) and Receiving Depository Financial Institutions (RDFIs) are the number one line of defense for secure ACH payment processing.
An ODFI or RDFI does not have to be a bank. Credit unions, payment gateways, digital wallets, and other third-party payment processors can perform ACH payment processing. An ACH payment API, such as Sila’s API which can allow developers to create a payment API that facilitates ACH transfers using cryptocurrency, is also a secure solution for ACH processing.
ACH payment processing is more secure than paying by debit card as it operates away from the card network and instead through the Automated Clearing House network. As long as you are able to store payment data securely, accepting ACH debit transactions will offer more security and reliability in the long run.

What You Need to Implement ACH Payment Processing

ACH processing provides users with a cheap and effective way to send money transfers between bank accounts. In order to facilitate ACH processing through the ACH Network, a financial institution needs to consider the following items:

  • Sending ACH transfers requires that customers submit sensitive banking data. This ensures that the financial institution “Knows Their Customer” and that the money transfer is not likely to be fraudulent. Therefore, the financial institution must ensure that payment data is stored securely, encrypted when sent, sent over secure networks, and protected through several cybersecurity measures.
  • Approval through the ACH network is required; the process to become an ACH Operator takes time and the approval process, as outlined by NACHA, is lengthy. Once approved, ODFIs and RDFIs must maintain compliance through systemized checks and regular self-assessment. NACHA will randomly reach out to customers to check compliance.
  • Make sure that you are prepared to integrate an ACH API or equivalent in order to accept the ACH payment.
  • Educating your clients is a large portion of the ACH payment processing guidelines. Clients need to be aware of the KYC rules, the Regulations guided by the EFT Act, how their private data is being stored and secured, and regulations for breach of liability.

The implementation of ACH payment processing can be simple with the right tools. If you are a third party payment processor (TPPP; and not a major financial institution such as a bank or credit union) then typically ACH payment processing can be facilitated by a Software as a Service (SaaS) model for your data to be considered secure and for regulations to be validated.

Benefits of ACH Payment Processing

Being able to process ACH payments gives your customers more flexibility in terms of how they spend their money. ACH payments are considered to be more secure than a credit card or debit card, faster than a wire transfer, and the most affordable way to send money electronically within the United States.
By adopting ACH payment processing into your financial platform, you will be able to cut operating costs around financial fees and show your customers that you are making a concerted effort to make the financial process simpler and more reliable.
In adopting this process make sure that you are properly prepared to educate your clients on the limitations of ACH processing. For example, ACH processing might still include a small fee, but you can waive this fee to encourage the use of an ACH debit.
For long term customers, you can set up recurring ACH payments. For one-off customers, you can set up ACH payment processing through a third party app or payment gateway. This way you can still provide the benefits of ACH.
ACH payments can be submitted in two forms: as standard or as same day. While this timeline might be dependent on the payment processor you use, make sure to educate yourself and your customers on the benefits and downfalls of both. For higher-risk payments, the ACH debit might need to take the standard timeline of four business days. For clients that can be trusted and verified more easily, consider same day ACH as this completes the business transaction sooner.