What are ACH Payments?

The ACH system is an electronic bank-to-bank payment in the US that allows you to transfer money from one bank to another. ACH makes it easier to send money and takes the guesswork out of making payments, including recurring payments, for business owners and consumers. This article will tell you everything, from the basics of ACH, to how ACH payments work alongside other payment methods.

Automated Clearing House (ACH) Meaning

The ACH system is an electronic bank-to-bank payment in the US that allows you to transfer money from one bank to another.

It's unique because, unlike other payment types, the ACH system goes through the ACH Clearing House rather than card networks. Also called an ACH transfer or ACH transaction, this payment method is extremely safe and more efficient than other payment types, making it a groundbreaking banking innovation in recent decades. There are many ways to use ACH, with the most common being for direct deposits to a checking account.

The Automated Clearing House (ACH) is a network that sends payment transactions across the banking system. The network handles around $29 trillion worth of transactions yearly. ACH transactions are a fast, cost-effective alternative for all types of businesses.

They're accepted nearly everywhere and can be completed quickly and easily. You may come across automated payments through ACH on a daily basis. When a salary goes into an account automatically, it is an ACH direct deposit. When you make an online bill payment, this is also an ACH transaction. Many American banks and credit unions use the Automated Clearing House Network.

It automatically handles government payments like Social Security and bank holdings, as well as mortgage and credit card payments. The receiving and sending banks must be approved to operate this system and are known as an originating depository financial institution (ODFI) and receiving depository financial institution (RDFI).

The National Automated Clearing House Association (Nacha) is the regulatory authority over the ACH network, and these automated payments are almost universally used in America today, especially by fintech operations.

ACH Transaction Types

ACH payments are a type of electronic bank transaction made through the ACH network. An ACH payment or bank transfer is an electronic funds payment between a sending bank and receiving bank for business purposes.

An ACH transfer allows you to send money in and out of your account and use it for anything from paying off a debt to being paid for a job.  American businesses frequently use ACH payments for things like paying wages and mortgages to loans and bill payments.

ACH also follows strict guidelines to offer more security.You can also use ACH payment processing to oversee other bank agreements and transactions. A prominent example is a direct deposit for payroll. Your paycheck funds are removed from your employer's account and channeled directly into your account on a scheduled basis.

What are the Different Types of ACH Transactions?

There are two types of ACH transactions: direct deposit and direct payment.

How does ACH direct deposit work? Direct deposit is a payment processing method where the sender directly deposits funds into the receiver's account. An example is when an employer deposits their employee's paycheck. In comparison, direct payments are initiated by the recipient to request funds to collect payment automatically.

An example of this would be recurring bills. The ACH Network supports different payment categories, which can be recognized by their 3-character Standard Entry Class (SEC) code. The SEC defines the rules for the payment and who can initiate it. 

The SEC codes fall under two categories: ACH Debit and ACH Credit.

However, the SEC code can differ. ACH payments are identified through their SEC codes. A few of the more common SEC codes include:

  • WEB (Internet-initiated Entry): WEB payments are bank account debits or credits for transactions initiated online.
  • PPD (Pre-arranged Payment & Deposit Entry): Directly debiting or crediting bank accounts for pre-authorized bill payments.
  • CCD (Cash Concentration or Disbursement): Credit or debit application where funds are distributed or consolidated between corporate entities.

A few principal ACH transactions run through the ACH network. Here are a few examples of everyday ACH transactions:

Examples of Everyday ACH Transactions


How Do ACH Payments Work?

If you're unfamiliar, the ACH network is a system of computers that communicates with each other to make and receive payments. For example, when someone makes a payment, their bank sends the request over the ACH network to your bank, which alerts them of the transaction and sends you an alert or email.

A typical ACH transaction is a file that contains information about the payment transfer, such as the account number and dollar amount. It's submitted to an ACH operator for approval.

When processing a transaction, the following takes place: it is first sent that file to the originator's bank. Next, it is sent to the clearing house. Finally, funds are transferred to the receivers' account at their bank.

Sending Money

An ACH transaction has many components that must work together to go through successfully. An ACH transaction may involve a direct payment or a debit.

To better understand how ACH transfers work, there are some terms that you should be aware of, as follows:

  • Originator: The company or individual processing the transaction
  • Originating depository financial institution (ODFI): The financial institution (bank or credit union) of the originator
  • ACH operator: The ACH operator is a central clearing facility that, on behalf of its member banks and financial institutions, receives transactions and moves them to the right place. It also performs some settlement responsibilities.
  • Receiver: All ACH transactions start with authorization from the person/company initiating the transaction. This person can be described as the 'Receiver.'
  • Receiving depository financial institution (RDFI): The Receiving Depository Financial Institution is the bank where the Receiver holds its accounts. The RDFI is responsible for passing the ACH transaction on to an account and following up if anything goes wrong. 


Example of the ACH Payment Process

Let's look at how you can set up an ACH Direct Payment—in this case, for a customer making a bill payment to a business.

Setting Up the Payment

Ensure you are in a position to withdraw the agreed-upon funds from your client's account when starting a transaction by getting the necessary authorization in advance.

Initiating the Payment

As the Originator, your responsibility begins by sending your bank the necessary data for your transaction. This should include essential details about what type of transaction this is—debit or credit—and where it should go, such as bank account and routing information.

Batching Payments

Next, in the batching process, your ODFI sends all transaction files to an ACH operator, which may be the EPN (Electronic Payments Network) or the FedACH (Federal Reserve Banks' Automated Clearing House).

Distribution of Payments

The ACH operator then sends the file to your customer's account maintained by the RDFI, which is the Receiving Depository Financial Institution.

Payment Completion

The RDFI withdraws the funds immediately from your customer's bank account; you will receive a payment, signifying that the transaction is complete.

ACH Compared to Other Types of Payment Methods

An ACH transfer is best for transactions that aren't time-sensitive. Standard ACH payment times are about two business days, but there are expedited times.

The longer processing times mean they're more suitable for those where money isn't needed urgently, but they don't usually come with any fees. The bottom line: ACH is secure and cost-effective.


Benefits of ACH Payments

Businesses want to avoid dealing with the hassle of negotiating paper checks. And they're only sometimes suitable for customers too. A wire transfer will work for payment transfers, but they are often expensive and inconvenient.

ACH payments are safe, efficient, and secure. Payments that use an ACH transfer can be made faster than checks or wire transfers, and the sender doesn't have to worry about checks getting lost in the mail.

ACH payments can offer many benefits to businesses, including cost savings and faster processing times, among other benefits:

ACH Payments Are Fast and Easy

Businesses have been traditionally expected to wait for paper checks to come through the mail. Once a check was received, the company would then need to process the check, which prompts a visit to the credit union or bank, and another wait for the financial institution to post the deposit. This is inconvenient, can cause late payments, and could be better for the current digital world and digital businesses.

However, an ACH payment can be processed much more quickly. And because these transactions are automated, there's no risk of them being lost and less chance of being posted out of sequence (before or after the agreed date).

Business owners are not required to perform detailed accounting, and once payment is scheduled and checked for errors, they can be confident that the cost will be processed as expected.

Customers are confident that their payments can be processed efficiently and with assurance, as they are automated. These features will allow you to access your funds faster for depositing checks.


ACH Payments Have a Low Cost

Many business owners who take credit and debit cards as payment are aware of the processing fees that come with them. However, they might not be aware that ACH payments typically cost less and offer additional benefits.

Credit card or debit card payments are typically more expensive than ACH transactions. This is because the fee is usually a percentage of the transaction amount. Paper checks may have the lowest transaction cost, but they can lead to higher prices for merchants due to the need for more labor and time from employees. The ACH payment process is the cheapest for merchants to accept. Add everything up, and you'll save a lot on processing fees.

ACH Payment Automation Saves Time and Money

One major inconvenience when paying bills is keeping track of when they are due. Setting up a monthly payment through the ACH system can help with this issue.

For businesses and consumers alike, ACH payments are automatic and can often be initiated as electronic payments. Since ACH electronic payments don't require physical transactions, you can schedule them and rest assured knowing the payments will be processed. 

This eliminates the need to make trips to banks or credit unions. 

It also means that you or your employees can spend time on other tasks. It will also reduce the time spent processing payments made by checks, which may save you money in the long run. ACH payments assume this tedious task, so you don't have to, helping businesses save time and effort without sacrificing convenience or quality.

ACH Payments Have a Low Failure Rate

Automated ACH payments are a time-saving solution for small businesses looking to become more efficient and increase the bottom line. These transactions help eliminate human error and reduce the amount of wasted time that can occur when errors must be corrected.

It's been proven that human errors are costly for businesses. If a check is coded incorrectly or lost, those funds are delayed from reaching your business account. You may also be faced with chasing down a replacement payment method. With ACH checks, you can almost entirely eliminate human mistakes, and any rare mistake can easily be rectified and reprocessed.

ACH Transfers Allow for More Control Over Payments

With ACH transfers, you can automatically collect payments via ACH debit on the specific day of your choice. This means that customers will always make the payments on time, which relieves you from the task of chasing payments. 

Businesses can opt-in to allow their bank account to automatically collect payments for any due invoices at the end of the month.

You can control how and when your funds are used, only monitoring them when needed. The recurring billing feature of ACH payments removes the hassle of remembering to make each monthly payment. 

Customers may have a better experience using ACH payments and be more likely to buy from you. This is because ACH payments are more secure than other forms, making customers feel like the risks are reduced. And customers find them more convenient because there is no need for them to visit your business in person or make arrangements regularly.

In short, businesses and consumers can make and stop payments through ACH transfers with complete transparency.

ACH Payments Are Easy to Set Up

The setup process for accepting ACH payments might sound intimidating, but the good news is that preparing for it will be similar to what you're already doing for your customers. There is a little effort involved; however, it's very manageable.

After the initial setup, accepting ACH payments is a very hands-free process; you'll be able to manage it easily just by checking in now and then. You will need the following:

  • Customer information: ACH payments require the payer's checking or saving account and bank routing numbers.
  • Business Account Information: ACH payments require your business bank account number and routing number to transfer the funds from your customer to you.
  • Payment Processor: Online ACH payments require an excellent payment gateway to transmit the data necessary for the ACH transaction.
  • Web Form or Virtual Terminal: You may receive online, mail, or telephone orders, and in that case, you will need to key in the payment information through a virtual terminal manually. For website payments, you'll need a web form to collect data on your online store's sales checkout page.
  • ACH Authorization Form: Your customer should sign an ACH authorization form to grant permission for ACH transactions. This form should include their name, phone number and address, the payment amount, the date of the scheduled payment, and an authorization statement and signature. You should also provide information regarding cancellations, and you may want to include a statement regarding dishonored fees. To make this agreement legal, have the customer date and sign it.


Should I Implement ACH as One Payment Type?

While some may think that customers only want to pay with a credit or debit card, this is not always true. There's been a rise in ACH payments due to the increase in internet-initiated transactions. Aside from costing substantially less than credit cards and wire transfers, ACH will also benefit businesses in the following ways:

Lower costs: There is no set cost for ACH, as various processors and banks charge different fees. Wire payments and credit card payments charge a percentage of the amount of the transaction, typically at a high rate, at almost 5% for credit cards and almost a $50 surcharge for a wire transfer.

User experience: Not only are credit card fees higher, and credit card transactions often take more time than other methods. For example, some credit cards require information like the credit card number, expiration date, verification code, and address before making a purchase. With modern tools like Sila's instant account authentication, ACH is easier than ever. Payments are easier to make online with banking credentials instead of account and routing numbers. This reduces friction and can lead to an improved customer experience. 

Many businesses chose to accept several different payment rails in the past to include any payment for each user at an expedited rate. However, using Instant ACH and same-day ACH payments is no longer necessary, and one payment type is often sufficient for businesses.


Choose Sila for Instant ACH Transfers

ACH payments offer both shoppers and merchants a time-saving, secure payment option. With ACH debit card payments, customers can get on with their day while their funds are transferred. ACH Payments are a huge step up in convenience for you and your customers, and accepting ACH transfers can improve your bottom line.

Despite the security of the ACH, it was built with old assumptions in mind. This can leave businesses hesitant to use ACH payments. However, there are ways to implement ACH payments that ensure security.

There are three challenges that businesses face with ACH payments:

  1. Fraudulent reversals
  2. Returned payment due to invalid account information
  3. Returned payment due to insufficient funds

These challenges can be alleviated with Sila.

Sila offers solutions that can help businesses ease these risks in real-time. Features like quick and easy account verification to check balances and ensure that the established account information is valid for online debits.

Transaction histories provide the opportunity to identify potential issues before they cause problems. These are all done with Sila's ACH API and Instant ACH to accept ACH payments instantly.

The ACH network is the most basic option for a US money transfer service and provides the foundations to build on, if desired, with other added security measures. Enhanced solutions have been developed to create a reliable ACH debit transaction process, making it the equivalent of real-time transactions while being considerably more affordable.


ACH Credits (Direct Deposits)

ACH Credits (Direct Deposits)

ACH Debit, or direct payment, is an alternative to paying a merchant or employer with cash. Payments are initiated by granting someone (such as a business) direct access to your bank account - for example, if you need them to withdraw money for recurring charges like a subscription or insurance payment.

Streamlined Actions through MX or Plaid

Sila’s Instant ACH

Instant ACH is a feature that allows instant deposit into your account before the funds are received from the bank. To make payments faster and easier, customers must complete registration, including enhanced anti-fraud verification.

Same Day Pre-Approval

Same Day ACH

With same-day ACH, depositing a check comes with the convenience of processing on non-traditional banking days, such as Saturdays, Sundays, and holidays. Previously, it might have taken 2-3 days before funds were deposited into your account—but that's no longer a problem because the time has been reduced to the same day.

ACH Debits (Direct Payments)

ACH Debits (Direct Payments)

ACH Debit, or direct payment, is an alternative to paying a merchant or employer with cash. Payments are initiated by granting someone (such as a business) direct access to your bank account - for example, if you need them to withdraw money for recurring charges like a subscription or insurance payment.

Sila Makes ACH API Money Transfers Simple… and Fast

No more dealing with archaic banking interfaces, rejections from payment processors who won’t support your use case, or stringing together multiple banking APIs just to add payment capabilities to your application. Sila was built from the ground up to get you up and running quickly.

Transfer balance
ACH vs. Wire Transfers

ACH vs. Wire Transfers

While there are some differences between ACH and wire transfers, the main difference is transaction speed and cost. For example, wire transfers are inexact but are still speedy compared to ACHs. Wire transfers are often used for cross-border payments; however, they can be quite costly. 

Digital Wallet Creation

ACH vs. Credit Cards

ACH transactions have the lowest costs compared to other payment systems. For example, credit cards average 2.5% with an extra processing fee if not paid off monthly-- which can add up quickly. Whereas ACH transactions have a fixed upfront fee, they range from 0.25%-0.75% depending on the amount of money processed that month.