What Are ACH Payments and How Do They Work?

Every day, people are interacting with ACH transactions, even if they don’t realize it. ACH payments are commonly known as things like direct deposit and are considered to be the main reason why paper checks are falling out of style and online banking is becoming more popular.

With the development of ACH APIs, more technologies and apps are able to bypass bank controls and open up or expand the ways that Americans can control their money. Among online and app-based investing, ACH API development is allowing more and more Americans to freely exchange their money.

To better understand why this is important, this article will break down what an ACH payment is and how it works.

What are ACH payments?

ACH payments are electronic payments that move through the Automated Clearing House (or ACH network) of the nation in which the bank(s) resides. Essentially, ACH payments are documented and tracked electronic bank-to-bank money transactions.

Payments that move through the clearing house provide both merchants and consumers with a clear and documented record of the money transfer, making recordkeeping and accounting both easy and unified.

Most people use ACH transactions in their day-to-day banking. ACH transfers typically include things like direct deposit, online bill payment, loan or mortgage payments, recurring payments, or tax refunds.

ACH transfers also allow individuals to complete electronic payments or recurring payments to taxable brokerage accounts,  savings accounts, Individual Retirement Account (IRA), annuities and interest funds, funds for payroll, employee expense reimbursement, and other government benefits.

How ACH Payments Work

ACH transactions can move as an ACH debit or ACH credit transaction. So, for example, if you want to contribute a recurring payment to your IRA, then a regularly occurring ACH debit will be initiated to withdraw funds from your checking account. An ACH credit, on the other hand, is when the money is being deposited into your bank account, such as in a direct deposit.

In either case, many businesses prefer ACH payments over other types of transactions, such as moving money through paper checks, wire transfers, cash, or by credit card.

The most common example of an ACH credit is direct deposit. Through an employer, direct deposit is when a company is authorized to electronically deposit funds, such as a salary, bonus, or expense report reimbursement, directly into the bank account of an employee.

To authorize direct deposit, the employee will need to provide the following information to their employer:

  • The name of the financial institution receiving funds
  • The bank account type (such as a checking account)
  • The financial institution’s ABA routing number
  • The bank account number of the recipient

This information should only be provided to an employer or entity in which you trust as secure bank account information could otherwise end up in the wrong hands.

If you’ve ever been paid by an employer with direct deposit, then to you, the process may seem stress-free and straight forward. After all, you do not have to be physically in the office to receive a check and your money is automatically in your account.

But do you know what is happening on the back-end for you to seamlessly receive that direct deposit?

Here is how the transaction plays out:

  • Upon payday, the company’s payroll team will submit a payment file to their bank account to pay their employee (the Receiver) through an automatic direct deposit. In this scenario, the company is called the Originator and its bank is referred to as the Originating Depository Financial Institution (ODFI).
  • Once the company submits these files, the bank will make an electronic ACH entry form and send these forms to an ACH Operator (such as NACHA) in batches.
  • The ACH Operator will sort the entries and verify that the information is correct.
  • Then, the money is deposited in the appropriate bank and the transaction is completed.

How Long Do ACH Payments Take to Process

While ACH transfers are common (approximately 93% of Americans are paid through ACH direct deposit), the ACH network is typically only available for bank transactions with a government, business, or corporate entity. The National Automated Clearing House Association (NACHA; the clearing house for the U.S.), only processes batch systems from banks and financial institutions and won’t process batches between people. Furthermore, ACH transactions are moderated by the national Operating Rules.

ACH debits are also sent in batch form. This means that even if your transactions are ready to go on Monday, the financial institution you are using may not send it off to the Automated Clearing House until Tuesday or Wednesday. Then, the ACH Operator must process the payment.

Since all ACH transactions are sent in batch forms, it usually takes about three business days for the ACH Operator to process the payment. Depending on the financial institution, an ACH payment could take as long as 5 business days to process.

Surprisingly, this process takes just as long as, if not longer than, credit card payment processing times. In general, credit card processing times are around 2-3 days. This is also comparable to wire transfers, which are preferred among many institutions because they only take 1-2 days to transfer over. Wire transfers can take as little as 1 day, depending on how early the transfer request is submitted.

Unfortunately, based on the batch processing system of the U.S.’s ACH network and NACHA, sending ACH payments take much longer than other forms of money transfers.

As a way to expedite payment processing, NACHA also opened up for “Same Day ACH” transactions to be completed starting in 2018. Same-Day ACH, which allows banks to send over three ACH batches per day as opposed to one, has increased the number of payments that the ACH network sees (23 billion in 2018) and contributed to moving $51 trillion in 2018. These increases show no signs of slowing down having increased by 9.5% in the third quarter of 2019.

How to Start Taking ACH Payments at Your Company

Bank-to-bank electronic transfers can expedite payments and relieve you from handling and manually tracking paper checks, wire transfers, or incurring fees when paying by credit card. It is easy to accept ACH payments since most banks do so already. All you need to do is to contact your business’ bank or visit your online banking profile to set it up.

Unfortunately, only transactions like payroll, tax refunds, interest payments, and annuities can be sent through ACH. Other methods, such as the ACH payments API, have created greater opportunities for people to electronically transfer in USD, one of the hardest methods of sending electronic money transfers.

APIs that are dedicated to ACH payments can expedite the ACH payment or transfer, and by-pass the regulations in place by converting dollars into a transferrable e-coin. ACH APIs are becoming the better way to quickly move money and they are also building a new financial world that offers greater financial control to everyday people. Check out what SilaMoney is doing today to improve our society’s financial accessibility.