Glossary

ACH Processing: Definition, Types, and Benefits

ACH is used for all kinds of payments, including payroll paychecks, insurance payments, disaster relief payments, social security payments, and tax refunds. If you have a bank account and receive direct deposit, chances are you regularly participate in ACH processing. Although the process is familiar, individuals outside of finance industries may be less familiar with the actual term that ACH stands for, which is Automated Clearing House. In the US, ACH generally refers to the ACH Network, which follows rules and regulations established by the National Automated Clearing House Association (NACHA).

In this article, we will discuss what ACH processing is and how it works. We will explore the types of ACH payments, processing time, and benefits of ACH processing over other payment methods. Finally, we will discuss how Bill.com can provide you a cost-effective ACH processing solution.

What is ACH Processing?

The ACH Network connects all the banks in the United States. Using the ACH Network, an individual or organization with an account at one bank or credit union can quickly send money to an individual or organization at another institution. On the user end, ACH transfers are sent or requested individually - using bank routing numbers and account numbers. However, when funds are sent, they are distributed in batches, through clearing houses.

Many third-party apps like PayPal, Venmo and CashApp also use the ACH Network. ACH can also be used for recurring payments. If you sign up for autopay with a utility company, for example, the utility company’s bank can send a request to your bank to transfer the money you owe. As long as there are enough funds in your bank to complete the transaction, the transfer is processed.

How Does ACH Processing Work?

ACH technology is actually 1960’s technology still in use today. Other terms for ACH payments are electronic checks, E-checks, electronic funds transfer (EFT), direct pay, or bank drafts. Instead of writing a check, a customer provides their account number and routing number to a business or vendor.

ACH transfers involve several institutions:

  • Originating depository financial institution (ODFI): This is the financial institution that originates the payment. They must abide by NACHA rules and regulations.

  • Receiving depository financial institution (RDFI): This is the financial institution that receives an ACH transaction. It is qualified by NACHA.

If you bank with an online bank that doesn’t have a branch, ACH processing is key. Without ACH processing, you would have to mail checks to the institution for deposit, and pay hefty wire transfer fees to send money. Banks also may have daily limits for ACH transfers. 

Types of ACH Payments

ACH transactions can be initiated by the party sending the money, or the party receiving the money. These transfers vary in delivery speed and cost to you:

  • ACH “Debits” or debit transactions occur when money is pulled from an account. When you arrange a monthly subscription or payment to be “pulled” from your account, the organization you are paying can initiate a debit to pull what it’s owed from your account.

  • ACH “Credits” or credit transactions involve you sending money to accounts at different banks, or individuals. If for instance you have an account at Wells Fargo, and want to send money to another account you have at Chase, this transfer could be done via an ACH credit.

According to the Federal Reserve, the ACH network was initially primarily used for recurring payments. Today, however, it is very often used to process one-time transfers, such as telephone payments, converted check payments, and payments to family members and friends. Costs for ACH transfers vary. There is usually no cost or fee to receive an ACH transfer. You may be charged to send money, either a small percentage or several dollars.

ACH Payment Processing Time

ACH payments eliminate or are an alternative to paper checks, credit cards, wire transfers, and cash. ACH payments are faster now than ever before, thanks to new rules established by NACHA. But even with same-day ACH available, not all payments are processed at the same speed. There are several factors that can determine how long it takes payments to process:

  • When the payment is submitted: ACH transfers are submitted in batches several times a day. If your transfer is submitted right after a batch is submitted, it will be delayed till the next batch, which could be the next day.

  • Whether the payment is expedited: Financial institutions may charge fees to process a same-day transfer.

  • Whether your financial institution holds received funds: Banks and credit unions are permitted to hold funds for a reasonable time period to ensure the funds are available. Processing timeframes are incorporated into account agreements.

Many financial institutions publish sample ACH processing times for ACH transfers on their website.

Benefits of ACH Payment Processing

There are numerous ways to move money between individuals, organizations, and financial institutions. While there are similarities between payment methods, there are differences as well. Unlike wire transfers where money is sent between financial institutions, ACH transfers use a third party clearing house, and offers a number of benefits:

  • Processing ACH payments is typically less for businesses than processing credit cards.

  • Paper checks, paper invoices, and paper records are eliminated. Customers don’t have to write a check every month, and merchants don’t have to wait for checks to arrive in the mail.

  • Bank accounts don’t “expire” like credit or debit cards, so there won’t be declines due to expired.

ACH transfers are not processed in real-time, and transactions are only processed on business days. On weekends and holidays when the Federal Reserve system is closed, the ACH Network does not settle payments.

ACH Processing with Bill.com

At Bill.com, we offer efficient solutions for ACH payments, following NACHA regulations. We offer data integrations that seamlessly sync with accounting software and accounts payable and accounts receivable platforms. For small and medium-sized businesses, Bill.com’s ACH processing is a safe, fast, and cost-effective way to pay and get paid.

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