Glossary

What is an ACH Check and How Do Payments Work?

ACH (Automated Clearing House) checks are essentially electronic checks (sometimes called e-checks), or paperless checks. Although the term may be unfamiliar to many consumers, most have likely dealt with ACH checks before. If you’ve ever received a direct deposit payment from an employer or agency, you have received an ACH check.

This article will discuss what an ACH check is and how ACH check payments work. Additionally, it will review ACH processing and clearing times, different types of ACH payments, and some of the benefits of ACH payment processing. Lastly, this article will explore the potential benefits of Bill.com, as an ACH processing option for you.

What is an ACH check?

An ACH check is an electronic transfer of funds without a paper check, a credit card, a wire transfer, or an exchange of cash. From the user-end, an ACH payment is made from one individual or organization to another. On the financial institution end, transactions are ultimately processed in large batches of payments, several times a day. Trillions of dollars are transferred, and billions of payments are made each year via the ACH network. Whether you’re sending or receiving funds, payment processing with ACH checks is straightforward and simple.

What is ACH Processing?

ACH processing refers to the action of sending or receiving money electronically. ACH payments and ACH withdrawals are processed through the ACH network, and subject to rules and regulations established by National Automated Clearing House Association (NACHA). NACHA, a not-for-profit trade association established in 1974, is funded by the 440+ financial institutions that it governs. And while ACH payment processing is not new technology, it continues to grow year-over-year, according to statistics published by NACHA.

Same-day ACH payments - for individuals, businesses, and governments - have grown rapidly in the last five years. ACH payments are increasingly less limited by payment time restrictions as funds sent via ACH are now available faster than ever.

How ACH Processing Works

A few decades ago, the night skies were filled with hundreds of cargo pilots flying paper checks. Aircraft were filled to capacity with clear plastic bags stuffed with checks needing to quickly go from and to banks all over the country. These so-called “freight dog” pilots moved billions of checks for banks each year - paychecks, mortgage payments, benefit payments, and much, much, more.  With the passage of a federal law known as Check 21 in 2004, this costly and inefficient process of physically transporting checks changed. Banks were allowed to process checks electronically via ACH. This saved financial institutions significant amounts of money and increased the speed of which checks cleared.

ACH Processing now is done quickly, efficiently, and electronically multiple times a day. ACH checks involve an Originating Depository Financial Institution (ODFI) and a Receiving Depository Financial Institution (RDFI). A credit transaction involves “pushing” funds to an account, and an ACH debit transaction involves “pulling” money from an account. Financial institutions can specify whether they need ACH credits to be processed and delivered in a same day period, or in one to two business days.

Types of ACH Payments

One of the most common examples of setting up an ACH payment is direct deposit. In years past, it was customary to set up direct deposit with a voided check - a paper personal check with the word “VOID” written in big, bold letters across the front of the check. Nowadays, most employers will allow you to set up direct deposit with simply your bank routing number and account number. However, a paper check may be helpful to determine complete accuracy of your banking information. Other types of payments which you may send or receive an ACH check payment for include:

  • Social security payments

  • Utility payments

  • Mortgage payments

  • Tax refund payments

  • Estimated tax payments to the IRS

  • Government benefit payments

  • Economic impact payments

  • Healthcare claim payments.

If you handwrite a check, it may be converted to an ACH check in front of you. A cashier may scan your handwritten check, void it, and hand it back to you. The payment information will be electronically sent to the merchant’s financial institution, and the payment processed via ACH.

ACH Payment Processing Time

Processing times vary based on when they are sent and the processing timeframe requested, ranging from less than a day to up to five days.  For a fee, funds can be sent “same day” - allowing money to be in an account longer. To meet growing consumer needs, NACHA expanded the same-day ACH processing window by two hours in March 2021, allowing even more time for originating banks to send funds. All receiving banks are required to receive same-day ACH payments. Regardless of processing time, check payments processed through the ACH Network are extremely reliable.

Benefits of ACH payment processing

For businesses, receiving ACH payments is cost-effective, as it typically costs less to process an ACH transfer than a payment by credit card. Recurring payments, such as monthly payments for utilities or rent, are extremely reliable as long as funds are available in the consumer’s account.  ACH payments are not subject to credit card expiration dates - banking information may be good for decades. For consumers wishing to send money to others, ACH transfers or electronic funds transfers are significantly less expensive than wire transfers.

One notable downside of ACH payments is that they can take longer to process. In situations when money needs to be moved in real time, such as for a real estate purchase or escrow closing, a wire payment sent individually may be necessary. Banks also typically have daily limits and monthly ACH transfer amounts. For example, one financial institution may allow ACH transfers of up to $2,000 per day or $10,000 per month. Some banks may restrict ACH transfer limits based on your account history.

ACH Check Processing with Bill.com

Ready to simplify your payment processing? ACH checks processed through Bill.com are cost-effective and seamlessly integrate with accounting software and payment platforms.  With Bill.com, payment processing (receiving payments or paying bills) is easy.  Businesses, banks, and accounting professionals are connected, and payables and receivables are efficiently managed.

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