The Basics of an ACH Payment

Sending money via electronic payment allows for fast and affordable payment processing. One of the most reliable forms of sending electronic payments is an ACH payment.

An ACH payment allows normal people and businesses to send money electronically through a secured network. So while ACH payments are incredibly convenient and reliable, it is important to understand how this process works so you know what is going on with your money.

If you’d like to learn the basics of an ACH payment then you are in the right place. This article will go over:

  • What an ACH payment is
  • How an ACH payment works
  • Benefits of ACH payment processing
  • And drawbacks of ACH payment processing

What is an ACH payment?

If ‘ACH payment’ sounds foreign to you, then you might be surprised to learn that you most likely interact with ACH transactions on a daily basis. ACH payments are how apps like CashApp and Venmo send money. It is also how you can set up a bank withdrawal to your PayPal account, and it is usually how you pay your bills and receive your income.

ACH payment is sending money electronically through a bank-to-bank transfer. Other common forms of ACH transactions are direct deposit, depositing money into an IRA, or withdrawing money from an external savings account. An ACH transaction is considered either an ACH debit or an ACH credit, and this simply describes the direction of the ACH processing.

ACH electronic payments stand for an Automated Clearing House payment. This means that the money moves through the Automated Clearing House (ACH) Network in order for the payment to be processed.

So what is the ACH Network and why does this matter? The ACH Network is the means by which an ACH transfer can be sent. It is also the reason why sending ACH money transfers is so reliable and affordable.

The ACH Network consists of numerous actors, such as ACH Operators, Receiving Depository Financial Institutions (RDFIs), Originating Depository Financial Institutions (ODFIs), the Financial Reserve, the National Automated Clearing House (NACHA), and the Clearing House.

All these actors are approved to operate within the NACHA Operating Rules and to maintain compliance in sending secure money transfers, setting up Know Your Customer (KYC) rules, and ensuring that the proper timelines are followed in order to prevent fraud.

Without these actors or the recommended guidelines for security, then sending ACH payments would not be as safe as it is.

How does an ACH payment work?

ACH transactions are typically facilitated by a bank, credit union, or third-party payment processor (TPPP). So to send this money, you must be known by the entity that is facilitating this process and they should be able to trust you to not submit a falsified ACH entry request.

In order to send an ACH transaction, the following information is provided to the bank:

  • The name of the bank account of the recipient (or the other party)
  • Their bank account number
  • Their ABA or routing number
  • Sometimes their transit number
  • And the amount, date, and frequency of the ACH transfer

If you are sending money through another ACH provider such as a TPPP or as bill pay, then it is likely that financial institutions will have all that information known but secure. So, all you will need to do is inform the entity as to who is receiving the money, the amount in question, and the date and frequency of the sending.

ACH payments can be set up as automatic payments (such as an EFT with a business), a recurring payment (for a recurring ACH deposit to occur), or a one-time ACH payment.

To give you a better sense of the ACH payment process, here’s an overview of what it might look like

  • The ACH Originator, also known as the person who started the ACH transaction request, inputs all the relevant information (listed above).
  • Once the submit button is hit, the payment entry form is received by the ACH Operator.
  • If all the information is correct, the bank (Originating bank or ODFI) will be able to process the request, and then either that day or the following day the payment request is sent to the Clearing House.
  • The payment entry request will be submitted in a batch form along with other relevant ACH payment entry requests submitted by other members of that bank typically that same day.
  • The Clearing House confirms that the recipient information provided is accurate and then it completes the request by sending it through the Federal Reserve and then finally to the Receiving bank, or the RDFI.
  • It is recommended that the RDFI wait at least 48 hours to send the payment to the recipient so that it is confirmed that the money has been “cleared” by the Clearing House. If a return code shows up, then the money cannot be sent and the RDFI needs to send that information back to the ODFI.
  • Once the pending period has passed, the money is then available in the recipient’s account.

It must be noted that this is a general overview of how the ACH process works. The details of this process will vary from bank to bank, and between other financial institutions. Be sure to inquire about the financial institution’s payment processing timelines and fees before sending an ACH transfer.

Benefits of ACH payment processing

ACH payment processing is typically known to be fast, reliable, and secure. But these differences will depend on the type of service that you are using, among other factors.

One of the biggest benefits is that ACH payments are nearly processed automatically through the Clearing House. Except for when the Originator/Receiver is interacting with the financial institution, the process is almost entirely automated. This means that there is less opportunity for human error in ACH processing and less opportunity for ACH fraud to occur.

Other benefits include a more affordable cost compared to wire transfers or credit card transactions. If you are trying to debit money from your checking account into an IRA account, it would make no sense to send the money by wire transfer as that might cost anywhere from USD $15-$45.

Additionally, sending that money with paper checks would be a lot slower as the recipient must wait for the check payment to arrive by mail courier. It is then vulnerable to mail tampering or check fraud. ACH payment processing is ideal for businesses that regularly need to debit money into employees’ accounts, in the form of direct deposit.

ACH payment processing will, at most, take four business days. But usually, with trusted users, the process takes one to two business days because the financial institution can take advantage of the same day ACH benefits. Additionally, if you are able to use the service through a financial institution like a bank or credit union, then ACH payment processing is very affordable.

TPPPs usually allow ACH payment processing in their app. This means that in addition to using a credit card, you can use the TPPP to make a purchase online. They come in the form of payment gateways and digital wallets. Each TPPP will have its own set of processes for security and KYC regulations, but they do open up for individuals to send money to others rather than relying on bill payment options alone.

Another benefit of ACH payment processing is that you have a number of processing options. For example, ACH payment processing can be facilitated by the Sila API, which converts your money (in any currency) into cryptocurrency.

This means that you can send your money in one currency and deposit in another, and even though the ACH network. This makes money transfers extremely secure, given the security of the cryptocurrency. It also opens up for international payments to more simply be converted into the U.S. dollar.

Drawbacks of ACH payment processing

While the ACH payment process is fast and secure, there are some drawbacks.

For example, right now ACH payments can only happen online, rather than at the Point of Sale (POS). They might also be rejected in the case that the bank account has insufficient funds. Credit cards might provide a much bigger benefit in this regard.

Payments also take anywhere from one to four business days in order to be processed. If you need the money to be deposited instantaneously, then an ACH transfer will not be useful. Additionally, other than using a TPPP it may be difficult to send money using your bank or credit union when it is not for bill pay.

TPPPs might also charge a higher transfer fee as well as additional transaction costs. If you are sending a lot of money, then this can add up and take away from the balance.

Sending ACH payments with Sila

ACH payments are a generally reliable and sure-fire way of sending cash electronically. If you are seeking an ACH payment processing app that can be integrated into an eCommerce system, financial solution, or web page, then you should consider the Sila app.

Sila transfers any currency into the Sila token, a form of Ethereum cryptocurrency, to another Sila user. With the ability to transfer any currency into the U.S. dollar at an affordable price and reasonable rate, Sila helps moves business faster and keeps them connected to U.S. markets.