What is ACH credit?

The Automated Clearing House (ACH) is an electronic money network that processes financial transactions, such as direct deposits and direct payments. Ideal for businesses, ACH payments are quick, convenient, and often have lower rates than credit card transfers.

But how do ACH credits work, exactly? And how can they benefit your business? This article will explain everything you need to know about this popular type of ACH payment.

What is ACH credit?

ACH credits are “push” transactions. This is when someone sends money from their bank to another account. For example, when employers pay employees, or when government agencies pay benefits to citizens – these are ACH credits.

ACH credits also include everyday transactions, such as buying products online or moving money via an app like Venmo. In 2021 alone, ACH handled a total of 29.1 billion payments worth over $72 trillion.

ACH credits are an easy and inexpensive way to move money from one bank account to another, with funds reaching the destination account within a few hours, or up to a few business days. To make these payments, all you need is a name, routing number, bank account number, and basic transaction details.

How does ACH credit work?

ACH credits are part of a digital money network, and are processed by the U.S. Federal Reserve or the Clearing House Payments Company, a private organization owned by major U.S. banks. The ACH network is overseen by the National Automated Clearing House Association (NACHA), and therefore all payments must follow NACHA’s guidelines.

ACH credits work like a digital check, pushing money from one bank account to another. Whether a person or business, both parties must authorize the transaction – you can’t push money to or from someone else’s bank account without formal permission.

Once both parties have signed off, the party initiating the ACH credit has their bank push funds to the destination account, which can be a one-off transaction, or created as a recurring payment.

For added security, many ACH authorization forms allow you to retrieve the money in case of accidental overpayment.

Here’s how ACH credits work from a mechanical perspective:

1. The payer provides essential information, including the amount, categorization code, target settlement date, and payee’s account information, to an Originating Depository Financial Institution (ODFI), which holds the originator’s account.
2. The ACH credit is submitted by the originator’s bank to the ACH network in batches, which happens multiple times each business day.
3. The batches are then delivered to each Receiving Depository Financial Institution (RDFI), which holds the payee accounts.
4. Each RDFI imports those batches into their system, sending back any error codes and confirming whether the originator’s account has enough money to fund the transaction.
5. The funds are then released by the RDFI to the payee.

On average, it takes two business days for ACH credits to reach payees, depending on when the ACH transaction was submitted, or whether the sender pays extra for same-day processing.

What’s the difference between ACH credit and ACH debit?

When it comes to ACH credit vs debit, the main difference is that ACH credits are initiated by the sender, usually a bank, who “pushes” funds into another account, while ACH debits are initiated by the receiver of funds. In contrast to ACH credits, ACH debits happen when the payer allows the recipient to withdraw from the payer’s account, which is known as a “pull” transaction.

ACH debits are typically used for recurring payments, such as bills or mortgage repayments, while ACH credits are used for electronic deposits, including salaries or government benefits.

How can businesses use ACH credits?

ACH credit transactions are quicker and safer than paper checks, especially for high-value payments. This is why businesses use them. Below, we’ll explain common scenarios in which businesses use ACH credits.

Send ACH credit payments

Businesses normally use ACH credit transactions to deposit paychecks. In these cases, the employer has set up an automatic recurring ACH credit transfer that pushes money from the company’s account to the employee’s account. Issuing refunds is another way that businesses use ACH credits.

Even the government uses ACH credits. Whether it’s disability benefits or the COVID-19 stimulus payment, the government agency will push funds from its account to multiple recipients.

When it comes to paying bills, many utility companies require ACH payments. This means that many businesses pay bills using ACH credits, setting up a recurring transfer that pushes funds to the utility company.

Receive ACH credit payments from customers

When customers are looking to buy something online, entering credit card details won’t be enough, depending on whether the merchant is too small or operating abroad. In these circumstances, the customer may have to use an ACH credit to push money to the business, rather than a credit card payment.

How does this work? First, the customer is given the company’s bank account details and then makes a transfer using the ACH system. The recipient bank or payment processor then creates a charge request and completes the payment.

As with any ACH credit, both parties must authorize the transfer, so the customer must take extra steps to send the funds. This means the transfer can take a few days to arrive.

Read more: What is an ACH return?

Accept ACH with Checkout.com

There are many benefits to accepting ACH payments – for businesses and customers alike. The ACH network is ideal for high-value payments thanks to their low fees, but also for recurring payments, which is convenient for customers who are already familiar with direct debit payments, and for businesses because they don’t need to chase late or missed payments.

Here are the benefits of using ACH payments in more detail:

Lower fees

On average, ACH payments cost much less than credit and debit card payments, making them ideal for high-value transactions. Card payments cost more because they’re calculated through third-party credit card companies, rather than between just the two banks.

Added security

According to the 2022 AFP Payments Fraud and Control Report, most businesses still use checks as their primary payment method, even though two-thirds of businesses were victims of check fraud that year.

ACH payments are generally safer than other payment methods. This is because they must adhere to strict regulations enforced by clearing houses, with money transferred directly between accounts, and account numbers kept confidential. These security measures significantly reduce the risk of fraud.

Ideal for recurring payments

ACH payments are ideal for recurring payments, offering convenience for customers and lower costs for businesses. First off, customers are already familiar with direct debit payments, so they should find ACH payments straightforward.

Meanwhile, subscription-based businesses, or companies that regularly bill customers, can cut costs by switching from credit card payments to ACH payments as the fees are typically lower - especially when a business is handling regular, monthly transactions.