ACH Transfers Explained: What Are They and 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.

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.

Advantages of ACH Transfers

Sending a direct payment via ACH transfer is more reliable and secure than sending a paper check. The transaction is entirely in the hands of the bank or payment processor, so there’s little risk of account and routing numbers getting stolen during the process.

The delay in fund availability may have some senders questioning whether a wire transfer might be a better option. It’s faster, but that can be a security risk on its own. Once the money has been received on the other end, there’s no way of reversing the transaction. An ACH can be stopped or reversed.

As for reliability, if the information for the recipient is accurate, the money will get there. That’s why businesses rely on ACH for direct deposit and expense reimbursement. Other modes of payment simply don’t have the same reputation for reliability that ACH transfers have.

Other advantages include convenience and eco-friendliness. Transferring money electronically is certainly more convenient than sending out checks and it eliminates paper. All functions and transaction records of ACH transfers are digital - even the forms are typically online.

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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