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An ACH transfer itself is a system of automated processes used by banking networks in the United States. These automated processes allow for money to be sent and received faster and more affordably than ever before.
There are many benefits to using ACH transfers.
An ACH transfer is the electronic transfer of funds in the U.S. ACH payment processing is facilitated by a bank, credit union, and financial institution that is qualified in accordance with NACHA, the National Automated Clearing House Association, and the Automated Clearing House (ACH) Network.
An ACH transaction is similar to a wire transfer in that it is a bank-to-bank transfer of funds. The main difference is that an ACH transaction has no intermediaries handling the money. The person submitting the request is the only person who “handles” the money. Everything else is automated.
You interact with the ACH payment system with bill payment through online banking and when you receive or send an electronic payment with a direct deposit.
There are two types of ACH payments: ACH debit and ACH Credit. The ACH payment type will depend on the ACH origination.
You can create an ACH request for bill payment in your bank account. With this request, you are requesting an ACH debit to be processed most likely from your checking account. When you are requesting for savings from an investment or retirement funds to be deposited back into your bank account, then you are requesting an ACH credit.
The ACH processing system works because of each ACH Operator within the ACH Network. This might seem like a lot of jargon, but the concept is simple: In order to process an automated electronic payment through this system, the financial institution must be approved by NACHA. That bank or financial institution will work towards becoming an ACH Operator and continuing to be approved year after year in order to process payments.
Payment processing for ACH transactions begins with an entry request. The person making the request (i.e., the Originator) will already have an account with the financial institution or bank where the ACH origination occurs. They then will plug in the bank account number, routing number, transit number, bank name, and client name for the recipient (i.e., the Receiver).
The transaction might be processed on that day (as a same day transaction) or it might be processed the following day. In either case, the payment must roll through the ACH Network. This process can range from 1 business day (if it is a same day transaction) to 4 business days (for standard processing). This is because the Clearing House needs to verify that the information is not erroneous or fraudulent.
If the information is erroneous or fraudulent, then the bank of the Receiver will issue a return code to the bank of the Originator. If there is no issue, then the transaction will be processed.
There are two main ways that ACH transactions occur: directly with a bank, or through a payment gateway (otherwise referred to as a third party payment processor).
The first is directly from bank-to-bank. The request is made with online banking and the bank must be able to locate the business in its directory.
The second is through a payment gateway. A payment gateway is a third party payment processor (TPPP) that validates and authorizes each payment and payment method, and the identity of those involved in the transaction. A payment TPPP can securely store sensitive banking information so that an ACH transaction can be used in recurring payments with external users but also one-off payments.
When a customer interacts with an ACH transfer, there are a few things that they need to consider.
First, the customer needs to trust the person or company on the other end. This is because the customer will be providing sensitive banking information for the ACH transaction to be processed.
If they do not fully trust the company then the customer might have to use a payment gateway or a digital wallet. This might also be the case if the company is not approved within the bank’s ACH network.
If a company accepts ACH transactions or ACH transactions through a payment gateway, then they are telling customers that they prefer cash to credit and that they want to make this transaction more affordable for everyone.
Customers benefit from ACH transfers because ACH transfers are more affordable (overall at least $1-$2 cheaper compared to a credit card transaction).
ACH payment processing is also more secure since the process to approve the payment is an automated system that checks for erroneous banking information and ACH fraud. Customers will also like the ability to send automatic payments.
If you’d like to accept ACH transfers for your business, then know that you will be able to get cash in hand faster than you would with the transfer system of credit cards.
Once the money is received, you will be receiving cash payments in your merchant account as opposed to other pending financial transactions. There is no way that the money will be pulled out or reversed like in a potential credit card dispute. Note that you still have the power to provide an ACH credit back (sometimes referred to as an ACH reversal or ACH settlement).
Accepting ACH transfers also forces a business to know your customer, a crucial form of verification in financial transactions. The process of receiving an ACH transfer might take around the same time as a credit card (and potentially a few days longer), but this time is dedicated to verifying the baning information and verifying that the client is not paying for a product/service when they have insufficient funds.
ACH transfer processing costs are notoriously cheaper compared to credit cards so you do not have to charge hefty payment processing fees for each transaction. You can also set up recurring billing with your customers so that they do not have to stress over recurring payments.
Additionally, not everyone has a credit card, while the majority of people are encouraged to acquire a bank account for electronic banking needs. Therefore, you are opening up your payment options to more customers.
If you are a merchant or you want to facilitate the transfer of money between a paying customer or client, then you might want to consider implementing ACH payment processing as a viable payment option.
This payment method is relatively easy to navigate, it guarantees faster payments, and it is far cheaper than accepting credit card payments or other types of payments.