Understanding the ACH Network

If you have ever sent a payment using bank-to-bank, or if you have received your paycheck through direct deposit, then you have interacted with the ACH Network.

In the simplest form, the ACH Network is the system that processes a bank-to-bank transaction. However, understanding this process intuitively can be difficult.

Accepting ACH payments is far cheaper than a wire transfer and it can allow clients to avoid using a credit card for a transaction. These payments also process quickly so you can get cash in your account faster than other payment methods.

This article will give you a better understanding of how the ACH Network works, how an ACH transfer is processed, as well as some other useful information.

The ACH Network and What it Does

The ACH Network, which stands for the Automated Clearing House (ACH) Network, is the combination of various actors who work together to facilitate the bank-to-bank transfer of funds in the United States.

The ACH Network is run by NACHA, the National Automated Clearing House Association, who sets the guidelines and expectations for operating within this network. It is comprised of individuals, financial institutions, the Automated Clearing House, NACHA, and the Federal Reserve.

If you have ever sent a payment via bank transfer or received a direct deposit, then you have used the ACH Network. This network has been around since its establishment 1974 by a group of financial institutions and it continues to evolve to accommodate the increasing need for more people to accept a bank-to-bank transaction.

This network was established to help administer the ever-increasing influx of money transfers that exist in the U.S. In February 2020, NACHA reported that the ACH Network moved 24.7 billion payments in 2019, a 77% increase from 2018, and totaling $55.8 trillion.

How Does the ACH Network Facilitate ACH Transfers?

The ACH Network is comprised of designated ACH Operators who are approved to process an ACH debit and ACH credit. Facilitating each payment will really depend on who is making the initial request.

In order to complete an ACH transaction, an individual or business entity needs to make an ACH payment request (or ACH origination). You can think of an ACH transaction as an online or bank-direct version of paying with a debit card.

So, for example, if you want to deposit money into an employee’s bank account, then you will make an ACH credit request. To complete this transaction request, you need the following information:

  • The name of the financial institution that will be receiving the funds on behalf of the individual
  • The type of account that the funds will be deposited into (i.e., checking or savings account)
  • The bank’s ABA routing number
  • The recipient’s account number
  • The name on the receiving bank account

When an ACH entry request is first submitted, the person making the request (typically the employer) will submit the above information to their bank. This can be done through online banking or at a branch in person.

The person making this request is now known as the Originator because that is where the request originated from. The Originator’s financial institution is then referred to as the Originating Depository Financial Institution (ODFI), and this institution must be approved to be an ACH operator within the ACH Network.

Once the request is made, it is sent through the Clearing House to ensure that the request is in no way fraudulent or erroneous. If it is, then the Clearing House will send back a return code, which will be eventually issued to the Originator.

If the request is approved, the request is then sent over to the bank of the Receiver, also known as the Receiving Depository Financial Institution (RDFI). Again, the RDFI must be approved by NACHA in order to process this transfer.

Eventually, once the payment has been approved, processed, and transferred, the funds will land in the bank account of the Receiver. In our direct deposit scenario, this means that the employee got paid!

When making an ACH debit request, the same process will exist but the direction of the money might seem different. For example, if you need to deposit a payment into an IRA account, then you would set up an automated bank-to-bank transfer with your financial institution. This request will then be an ACH debit transaction that moves the payment out of your bank account and into your IRA account.

How Long Does an ACH Transfer Take?

As you can see, there are quite a few steps that need to be taken in order to complete an ACH transfer. Because of this, and the number of actors involved in facilitating this payment processing, ACH transfers aren’t automatic and sometimes cost a small fee.

There are two types of ACH entry requests that can be made: a same day payment and a standard payment.

Same day has been a more recent introduction to the ACH transfer system, and it expedites the processing of ACH entry requests so that the settlement occurs before 5 PM EST. Additionally, same day payments allow banks to send multiple batches of ACH request forms, when before only one request could be sent a day. By 2021, same day ACH transfers will be extended to account for later hours in Pacific Standard Time Zones.

If the financial institution does not submit the payment request form the same day as the transaction, then it will be processed as a standard transaction. A standard ACH payment is simply a bank-to-bank transaction that is not processed until the following day, so the settlement won’t occur on the same day that the request is made. A standard transaction will be processed on the following day, and show in the Receiving account three days from the requested date.

Alternatively, NACHA’s same day transaction will be processed on the same day as the payment was requested, but the funds may not be deposited into the receiving account until the following day.

What Are The Fees Associated With an ACH Payment?

Since a number of actors must support the transfer of these funds, nominal fees are associated with an ACH transfer. NACHA states that the average ACH transfer costs about $0.29 USD. However, the rate that your financial institution or ACH transfer mediator might charge will vary.

The following are estimates based on industry averages:

  • Flat fee, charged for each ACH transaction: $0.20 – $1.50
  • Percentage fee, charged for each ACH transaction: 0.5% – 1.5%
  • Monthly fee: $5 – $30
  • Batch fee, charged for each ACH payment batch sent: << $1
  • A return fee, charged for only when an ACH transaction is returned: $2 – $5
  • A reversal fee, charged for only when an ACH chargeback is required: $5 – $35

Fees for ACH transfers can be charged in a number of ways. For example, if you are a company that wants to encourage your clients to spend more, then you might offer a small flat rate for each transaction. If you charge a percentage, then that percentage would rise the more that your clients spend.

You could also consider sending in batches. Sending ACH transactions as batches is the best way to reduce the cost of an ACH transfer. Since the fee for a batch transfer can be less than a dollar, this amount can be easily subsumed into the price of your services or goods.

The fees associated with ACH processing are minimal, especially compared to the common fees of a wire transfer or credit card transaction. So it helps to offer benefits for those who prefer using an ACH payment over another type of transaction. Benefits might include offering a reduced fee for recurring payment or a reduced fee in general.

Implementing ACH Payment Processing

Many individuals and businesses can accept an ACH electronic payment as a valid payment method. This can be set up with a bank or by using a third-party payment processor (TPPP).

Many apps can facilitate ACH payment processing as well, and often they include payment verification and sender authorization into the process to ensure that it follows the NACHA guidelines. Apps and ACH APIs can be integrated to facilitate ACH payment processing so that you do not have to interrupt your current payment processing system in order to gain the benefits of an ACH payment.

Some ACH APIs can also accept international transfers by means of cryptocurrency. A fintech APIs can easily be integrated into an already functional payment processing system (such as software, website, or app) so that the integration to accepting an ACH transaction is seamless. Accepting ACH payments reduces costly fees (such as those associated with wire transfer and credit card payments) and can provide your clients with more ways to pay for services or products.

In general, an ACH API will provide clients with the security and peace of mind of sending a payment electronically. It can also decrease the associated fees and speed up the payment processing timeline.