ACH Payment Guide
You might not know it, but ACH payments have almost certainly served you somewhere, sometime in your everyday life. When your hard-earned salary has been automatically deposited to your bank account on payday, that’s the work of an ACH.
Conceptualized in the late 1960s in the United States, ACH, or Automated Clearing House, has been around since the early 1970s. Today, it is widely used by consumers and businesses alike, and is one of the world’s safest and most reliable payment systems. In fact, in 2018, over 23 billion ACH payments were made according to the National Automated Clearinghouse Association (NACHA), the association behind the ACH system.
What is ACH?
In banking, ACH transfers are electronic payments made by directly moving funds from one checking account to another bank account with the help of the ACH network.
The ACH network utilizes two central clearing houses, in which payment requests go through either the Federal Reserve, or the Automated Clearing House itself. Computers work together to process payments using a batch processing system, enabling efficient matching among the financial institutions involved in the transactions.
ACH transactions work at a domestic level. They can be one-time payments, or set up on a recurring billing schedule. ACH transfers are generally inexpensive, and the automated, electronic nature of the ACH system makes recordkeeping more convenient.
ACH Transactions: Direct Deposit vs. Direct Payment
Two types of ACH transactions exist, based on purpose: ACH Direct Payment and ACH Direct Deposit.
Direct Deposit refers to depositing funds via the ACH network for taxes, government benefits, annuities, interest payments, payroll, and expense reimbursements. Examples of Direct Deposit include:
- Taxpayers paying the IRS online
- An employer depositing wages to an employee’s checking account
- Consumers transferring funds from a brick-and-mortar bank to an online bank
Direct Payment refers to making payments via the ACH network to pay for products or services. For example:
- Customers sending automatic, recurring payments to service providers
- Businesses paying vendors and suppliers
ACH Payments: Debit and Credit
Payments are divided into two processing classifications: ACH debit and ACH credit.
ACH debit is an ACH transfer that deducts or pulls funds from your customer’s account when a payment is due, typically automated on recurring schedules.
ACH credit, on the other hand, pushes funds from your customer’s checking account to yours. The payer should trigger the funds to be sent to the merchant.
Making and Completing ACH Transactions
To send or receive funds using ACH, the individual or organization requesting the payment needs to acquire bank account information from the other party in the transaction. The details required include:
- The name of the bank where the funds will be received
- The type of bank account (savings or checking)
- The bank’s routing number
- The recipient's account number
Whether you’re an employer making a direct deposit to your employees, or a biller making a pre-authorized withdrawal from a customer’s account, providing the required information allows payments to be directed to the correct account.
Finding Your ACH Routing Number
An ACH Routing Number is the unique, 9-digit ID assigned to a banking institution. The routing number, along with the recipient's account number, is used to determine where the payment should be taken from or sent to.
There are a number of ways to find your ACH routing number, such as:
- In your checkbook: look for the 9-digit number to the left of your account number
- Online: search by using the keywords “ACH routing number” and the name of your bank
- Online banking: log into your banking platform and look for numeric ID
How is ACH Different from Other Payments?
To better define ACH payments, here are the key differences between ACH transactions and other types:
ACH vs. eCheck
In vernacular, the terms ACH and eChecks are often used interchangeably. In the high-risk industry, however, ACH and eChecks are clearly distinguished. As high-risk merchants aren’t always qualified for traditional ACH processing, they may be eligible for a specialized check processor that offers risk protection and mitigation. In this case, the eCheck processor is referred to as a high-risk ACH payment processing services provider.
ACH vs. Wire Transfers
ACH and wire transfers are both electronic fund transfers, but that’s where the similarity ends.
Unlike ACH, wire transfers are processed individually, in real-time. Thus, for urgent, time-critical transactions, wire transfers are preferred over ACH. Wire transfers are also not limited to domestic transactions.
However, wire transfers can be more expensive. As such, they are mostly used for high-value payments in small volumes.
As for ACH payments, they are processed in groups, making them ideal for businesses with high transaction volume. They are also generally free of charge for customers and are less costly for businesses, saving companies money in the long run.
ACH vs. Debit Cards
Both ACH and debit card payments withdraw money from the payee’s bank account, but the processing networks are different. Debit card transactions go through card networks that charge the same kinds of fees as credit card transactions. Meanwhile, ACH bypasses these card networks, making it far less costly than debit and credit card payments. The cost depends on the average ticket size of your business, but the average for sending or receiving ACH payments is around $0.29 per transaction.
A Note on Chargeback Rules
Reversal policies for ACH transactions are stricter than credit card transactions. For debit or credit card transactions, customers can easily initiate a chargeback just because they claim that they’re not satisfied with your product or service. For ACH transactions, there are only three reasons for a customer to make a payment reversal:
- When the transaction was revoked or was unauthorized
- When the transaction was processed on a date prior to authorization
- When the transaction amount is different than the authorized amount
ACH transaction reversals have a time limit of only 60-90 days. If you’re a high-risk merchant, the chargeback rules are particularly beneficial in reducing the risk of excessive chargebacks.
It takes two to three business days for traditional ACH payments to go through. Fortunately, developments have been made to catch up with today’s on-demand world. Same day ACH payments are now possible, and with expanding functionality, you can expect faster transactions in the future.
Benefits of ACH Payments
There are plenty of reasons why businesses and consumers use ACH for their payments. To sum up all the good points, here are the advantages of ACH payments in a nutshell:
- Less exposure to fraud
- Recurring billing automation
- Lower processing costs, especially in recurring billing
- Protection against excessive chargebacks (shorter time period, more difficult to initiate)
- Additional payment option for buyers who don’t, can’t, or won’t use debit and credit cards
- Save time on check payments
- Electronic record that can be auto-synced with other systems
- Easy monitoring of transaction status
Paper check payments are time-consuming. With ACH transactions, businesses don’t need to wait for the check to arrive in the mail before they can deposit and convert them to funds. Instead, the amount will be directly deducted from the customer’s bank account and transferred to yours.
Accepting ACH Payments from Your Customers
ACH provides an alternative to transferring money between banks without using wire transfers, paper checks, cash, or credit card networks.
To accept payments via ACH, you need to find a payment processor with ACH payment services.
For regular merchants, you can start with the bank of your business account. You may also ask your account software provider if they have apps or programs that enable ACH transactions.
For high risk merchants, you can shop around for a high risk payment processing partner that offers ACH payment services.
At Allied Payments, we offer online gambling payment solutions, Forex merchant account services, global wire transfers, and crypto solutions, among others. Talk to us to learn more about how we can help you make payment processing easy.