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ACH transfers explained: How do they work?

ACH transfers explained: How do they work?

The term “Automated Clearing House” refers to a US network for banks and financial institutions to transfer funds electronically. It is used for all domestic electronic funds transfers (EFTs), so there’s some natural confusion about the difference between an EFT payment and an ACH transfer.

In this article, we’ll explain exactly what an ACH transfer is and how it differs from an EFT payment. We’ll also demonstrate how ACH works, what you need to set this method up, and go over the different types of ACH transfers. In the final section, we’ll cover how all of this can benefit your business.

History of the Automated Clearing House

The automated clearing house was originally established in 1974 and is administered by the National Automated Clearinghouse Association (NACHA). The NACHA is self-regulating and responsible for the management and administration of the ACH network. They also write the rulebook.

ACH was developed in response to an increasing number of paper checks being issued in the 1970s and the resulting overload on the banking system. It is a US-based electronic system that connects banks, credit unions, and other financial institutions.

There are currently more than 10,000 financial institutions connected through the ACH network, processing 25 billion electronic transactions a year with a dollar volume that is over $55 trillion. It is used for all electronic funds transfers, including credit cards, direct deposit, and pay-by-phone systems.

What is an ACH transfer?

An ACH transfer is a specific category of electronic funds transfer. There are two types: ACH debit and ACH credit. ACH debit is used for paychecks, expense reimbursement, government benefits, tax refunds, annuity payments, and interest payments. ACH credit is for point-to-point direct payments.

When sending a direct payment, the sender can be an individual, a company, or an organization. Online payment applications like Venmo and Zelle use this method for transferring money between parties. It’s essentially a money transfer from one bank account to another.

There were over two billion ACH transfers in the United States in 2020, a 15.2% increase from the previous year. Some of that may have been due to social distancing mandated by the pandemic, but there’s clear evidence that this mode of payment is increasing in popularity.

ACH transfers: How they work

An ACH transfer is initiated by the sender through their bank or a payment processing service. Payroll companies and bill paying software like BILL can also set up ACH transfers. This is how employees on direct deposit or workers seeking expense reimbursement get paid.

Technology has improved in recent years and significant progress has been made in reducing payment times. There are already a few ACH transfers that are eligible for “instant” availability, but network-wide capabilities through all institutions is still under development.

How to do an ACH transfer

Nearly all banks and financial institutions offer free ACH transfers as a part of their platform. Some may partner with third party organizations such as Zelle or Popmoney, or they may offer their own ACH functionality as a bank.

  1. Check your bank: Peruse your banking website for “automatic transfers,” “bill pay,” or other terms that indicate moving money between online accounts. Most will have these featured prominently on home pages and opening screens. 
  2. Determine details: Do you need the account numbers of where you’re sending the money? Name of the bank? Online ID of the user? Can you set up your ACH transfer to be recurring and automated, such as a monthly electric bill or savings account? Do you want a reminder via email each month when the credit or debit is completed? 
  3. Download apps: An ACH transfer can be even faster when its two swipes away on your phone. Banking apps or individual ACH money transfer platforms like Venmo, Paypal, Zelle, and others can stand ready on your home screen for transfers and money monitoring. 
  4. Read the fine print: ACH transfers are usually completed a few times a day – on business days. Be sure to read the fine print on the information needed for ACH transfer and how long you can expect it to take before your money is moved to the desired account.
  5. Click! It’s that simple: Type in the amount and where you want to send/receive funds and let the ACH transfer do the rest.

Successfully setting up an ACH transfer

ACH transfers have an origination point and a destination point. To send money successfully from one point to the next requires accurate information about the sender and the receiver. To ensure that the money arrives at its destination in a timely manner, you’ll need:

  • Recipient’s name
  • Routing/ABA number for the receiving bank
  • Account number for recipient
  • Type of bank account (business or personal)
  • Exact transaction amount

Some senders will assign a nickname to their account for identification purposes, but it’s not necessary. The sender’s bank may have further identification requirements, so be prepared with a photo identification such as a state driver’s license or a passport.

And make sure you execute the proper ACH transaction. The choice is between an ACH credit, which is used for sending direct deposits and other payments, and an ACH debit, which is for receiving money via direct payments. Both the sender and receiver will see one of these transactions on their bank statement.

There will be forms to complete before you can successfully send an ACH transfer. Businesses looking to set up direct deposit should use a payroll company or billing software that has all the necessary steps in place, along with the paperwork, to smoothly run the process.

How to cancel an ACH transfer?

What happens if you accidentally send the wrong amount – or to the wrong party? There is usually a window of time during which you can cancel or reverse an ACH transfer. ACH Transfers take between 1-3 business days to process, so often if you catch it before the transfer has processed completely you can click a button or link to “cancel transfer.” 

Call your bank or the financial institution immediately if you find an error in an ACH transfer and cannot cancel it online – many can find ways to stop the transfer or recover the funds depending on the circumstances.

According to The Balance, the National Automated Clearing House Association, there are three common conditions under which cancelling or reversing an ACH transfer can occur:

  1. Wrong total: if the wrong amount of money is transferred.
  2. Wrong account: if the funds were sent or received by the wrong party
  3. Duplicate transfers: sometimes a transaction goes through twice due to error, or both sides of the transaction initiating the same transfer

How long does an ACH transfer take?

Most ACH transfers take 1-3 days to process. There are a few factors at play to determine how fast your ACH transfer will go through – business days and frequency of processes. Generally, ACH transfers only take place during business hours on business days, so you may have to wait if your transfer was submitted after 5 pm or on a weekend. Many banks & financial companies push ACH transfers at a few set times during a business day, so for example they may process at 10 am, 1 pm, and 4 pm. Once pushed, the receiving end of the ACH transfer will also need to process according to their schedule before the funds are delivered to their end destination.

What does an ACH transfer cost?

Usually, an ACH transfer is free. Most banks and financial institutions offers free transfers between accounts. Some ACH transfers to external banks can have fees, but those fees are often less than $5 per transaction. You may also have the option to pay a fee for an expedited transfer for time-sensitive payments. 

You may also encounter fees if you have insufficient funds or go over a transaction limit. For example, most savings accounts have a limit of six withdrawals per month, so your ACH transfers could include a fee or be rejected due to these federal limits.

Why choose an ACH transfer

Nearly all modern consumers and businesses are already using ACH transfer. There are other options for transfer of funds (such as wire transfers) for different purposes, but it’s important to understand how ACH transfers work and the benefits they provide, even if you’re using ACH transfers already.

Pros of ACH transfers:

  • Convenience: accessible by phone & computers
  • Speed: faster than mail
  • Price: few or no fees, no postage or paying for checks
  • Recurring: for bills, savings, etc. 
  • Ease: often all you need is a single piece of information, such as a name or email
  • Vendor negotiation: small businesses prefer ACH transfers for more control

Cons of ACH transfers:

  • International: often ACH transfers are not available across borders
  • Limits: ACH transfers can be limited for savings accounts and excessive transactions, as well as transaction size limits
  • Timing: banks choose when transfers are processed, and usually only on business days
  • Scams: ACH transfer scams can be common, so don’t ever share your private information with unknown parties

How does this benefit your business?

Time is valuable. Business owners understand this better than most, because there never seems to be enough hours in the day to get everything done. Using ACH transfers for business payments and direct deposit for payroll can give some of that time back to you.

BILL customers can use ACH transfers for bill payments and expense reimbursements. There are even API integrations with accounting and expense software to help you keep track.

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