What is an ACH payment?

The Automated Clearing House (ACH) is a network that processes electronic funds transfers between US financial institutions. An ACH transaction is any type of payment that takes place on this network – for example, bill payments, direct deposits, or payments for goods or services.

The ACH network is massive; it processed 8.2 billion payments in the first quarter of 2024 alone. The network’s volume continues to grow year-on-year, driven by the adoption of Same Day ACH and steady growth in B2B payments.

In this article, we'll explore how ACH payments work, plus their benefits and use cases.

What is ACH?

The Automated Clearing House (ACH) is a US payments network that facilitates electronic funds transfers between banks and credit unions. It was originally established by banks and the Federal Reserve in the 1970s to digitize the process of clearing checks.

The governing body of ACH is the National Automated Clearing House Association, also known as “Nacha”. Payments made through the ACH network must, therefore, adhere to Nacha’s operating rules, which include messaging standards, account validation, return monitoring, and many more protocols.

What is an ACH payment?

An ACH payment is a fund transfer via the ACH network. ACH payments are commonly used to disburse payroll, pay mortgages and bills, or make loan repayments. ACH payments are also referred to as ACH transactions or ACH transfers.

How do ACH payments work?

ACH payments require several different participants to complete a transaction. These include the Originator, The Originating Depository Financial Institution (ODFI), an ACH Operator, the Receiving Depository Financial Institution (RDFI), and a Receiver. Moreover, in certain cases, additional participants may sit in the transaction flow such as a Third-Party Sender or a Third-Party Service provider. There are two ACH operators that each handle roughly 50% of ACH payment volume: the Federal Reserve and the Electronic Payments Network (EPN). The latter is a service of The Clearing House Payments Company (also known as “TCH”), which is privately owned by major US financial institutions.

The following steps outline how an ACH payment works:

The Originator, which may be an individual, a business, or a bank, initiates an ACH transaction by sending a payment instruction to the ODFI.
- In some cases, the Originator may send the ACH payment instruction to a Third-Party Service Provider or Third-Party Sender, who subsequently passes the payment instruction to the ODFI. Checkout.com serves as a Third-Party Sender in the ACH transaction flow.
The ODFI batches the payment instructions into an ACH entry and sends the entry to the ACH operator.
The ACH operator sorts the ACH entry and sends it to the RDFI
In the event of an ACH debit, the RDFI verifies that the Receiver’s account has a sufficient balance to fund the transaction, and debits the account. In the event of an ACH credit, the RDFI credits the Receiver’s account.

Types of ACH payments

There are two main types of ACH payments:

ACH Debit: Pulling funds from an account. For example, a merchant pulls funds from their customer’s account to charge them for a monthly utility bill.
ACH Credit: Pushing funds into an account. For example, an employer pushes funds to their employee’s account to process payroll.

ACH Debit

ACH debit payments correspond to originators “pulling” funds from the customer’s bank account. Most commonly, the payer (a customer) gives the payee (a merchant) permission to debit a payment out of their account when it's due.

For instance, if a borrower sets up a recurring monthly payment for a personal loan, the lender would process an ACH debit to automatically pull the payment from the borrower's bank account.

Businesses that collect recurring payments value ACH debits because the process is automated, substantially reducing late and unsuccessful payments.

It is important to understand that before a merchant can process an ACH debit, it must request the customer’s account details and authorization for the payment. The organization can request authorization from the consumer through the completion of a hardcopy paper form, verbally over the phone, or online.

Learn more: Recurring payments explained

ACH Credit

On the other hand, ACH credits correspond to originators “pushing” funds into the recipient’s account. In this case, the originator initiates the process for the money to be sent to the payee.

A common use case for ACH credits is payroll. Others include government benefits, tax refunds, or interest payments.

To make an ACH credit transfer online or through a mobile banking app, the individual making the payment must have the recipient's banking details—account name, bank routing number, and account number. If the individual is making an ACH credit payment via a payment link or web page, they will only need to enter their own banking details and likely a customer reference number.

International ACH Transactions

While the ACH network is predominantly US domestic, the network does support payments to non-US bank accounts. Commonly known as IAT, International ACH Transactions are ACH payments that involve a financial institution outside of the United States. Payments of this kind must adhere to stringent Nacha rules as well as OFAC (Office of Foreign Assets Control) regulations.

How long does an ACH payment take to process?

ACH payments can take anywhere from 1 to 3 business days to process. Processing times vary for a few different reasons. Firstly, an ACH transaction may be processed as Same Day, which may incur an additional fee, or Standard (aka Next Day).

Secondly, the processing time depends on when within the day the ACH payment is initiated – if the payment is initiated after the ODFI’s latest cutoff time, the payment may not be sent to the ACH operator until the next business day, adding an additional day of processing.

What’s the difference between ACH transfers and wire transfers?

ACH and wire transfers have similarities, but there are important differences that you should be aware of, including:

Daily limits - both ACH and wire transfers have different daily transfer limits, which you can find out about by speaking to your PSP or bank
Processing speed - wire transfers are typically processed the same day, whereas ACH transfers may take up to three business days.
Posting times - when you make a wire transfer, the recipient should be able to access the money immediately. However, an ACH transfer will appear as pending for up to three business days until it clears the ACH system
Transaction reversal - it’s possible to reverse an ACH transaction if there has been fraud or a payment error. On the other hand, wire transfers are permanent and irrevocable
Security - both types of transactions have fairly robust security standards in place. However, as ACH transfers can be reversed, they are considered to be slightly safer than wire transfers
‍Fees - ACH transfers are much cheaper than wire transfers. Wire transfers typically cost between $10 and $35, whereas ACH transfers can cost far less

Learn more: ACH transfers vs wire transfers

Benefits of ACH payments for merchants

While there are a number of benefits for organizations to accept ACH payments, the following represent the most common:

Lower costs

Any merchant that accepts debit and credit card payments is aware of the processing fees that coexist with them. But merchants may not realize that ACH payments can cost much less than credit and debit cards, and even paper checks. One key reason is that card fees are usually calculated as a percentage of the transaction amount, whereas ACH transactions are typically subject to a flat, nominal fee. Each PSP or bank may charge for ACH transactions differently, however they can be a fraction of debit and credit card fees.

Security

ACH payments can be more secure and reliable than other payment methods, including paper checks, wire transfers, and debit and credit card payments, depending on the transaction use case. In the case of an ACH debit, customers must authorize the merchant to debit funds from their account. Moreover, ACH payments are required to pass through clearinghouses that impose stringent regulations. With ACH payments, money is transferred directly between bank accounts, and account numbers remain encrypted throughout the processing flow.

Convenience

ACH payments are convenient for businesses and their customers as ACH offers an efficient, user-friendly means to make and take payments.

For one, merchants can leverage ACH to set up one-time or recurring debit payments so they don't have to manually charge their customers every billing cycle. Businesses can save time and effort because money is transferred electronically, meaning they don't have to manually handle the payment.

Reduce human error

Because ACH payments are automated, they reduce the risk of human error by doing away with most of the manual tasks needed to process payments. ACH payments also cut down on the time it takes to fix employee errors. The fact is that businesses pay a high cost for human errors.

According to IBM Security’s 2022 Cost of a Data Breach Report intentional and unintentional human errors account for 21% of data loss. With ACH payments, businesses eliminate the chance of human error.

Additionally, accepting ACH payments means businesses don't have to deal with paper checks, saving time processing payments as well as eliminating frequent trips to the bank to make deposits. Consequently, employees can focus on more productive work.

Recurring billing

ACH payments are great options for organizations—and their customers—that operate on a subscription-based model.

Payment processing costs can be extremely high for subscription-based businesses as well as businesses that bill their customers on a regular basis because of the high number of recurring transactions they process monthly. Not only that, but customers may forget to pay their bills, which means invoices aren't paid, causing cash flow issues for businesses. ACH payments solve this issue.

Because ACH payments are a cost-effective payment method, they enable businesses to save on their processing fees. When added together, these individual savings can significantly affect a company's bottom line. And with recurring billing, businesses don't have to hassle their customers about their late payments.

Potential drawbacks of ACH payments for businesses

Despite the many benefits of ACH payments, there are still some potential drawbacks for merchants, including:

Processing Speed

ACH transactions typically take two-to-three business days to process. When you factor in weekends, federal holidays, and cutoff times, the days can add up. The ACH network has made strides to accelerate processing time, having launched the Same Day ACH functionality in 2016 and adding later cutoff times. Nonetheless, it’s important for businesses to understand the potential drawbacks of longer-than-expected settlements of ACH transactions.

Compliance with strict standards

‍The ACH network is strictly regulated, and ACH payments must conform to the Nacha Operating Rules. It can be difficult to process ACH payments compliantly and meet all the accompanying formatting requirements. That is why merchants tend to work with PSPs or licensed financial institutions to ensure their ACH payments meet Nacha requirements.

Transaction limits

Many banks impose limits that correspond to how much ACH volume Originators can send on a daily, weekly, or monthly basis. Additionally, the bank may impose per-transaction limits. Nacha itself has set a $1 million transaction limit for Same Day ACH transactions.

Read more: ACH returns explained

Why accept ACH payments for your business?

ACH payments are versatile alternatives to debit and credit card payments, and they enable merchants to debit funds easily from their customers' bank accounts.

Because of their lower processing costs as compared to other payment methods, ACH is ideal for merchants that process high-value payments or recurring payments, such as utilities, insurance premiums, car instalments, rent payments, gym memberships, and many more.