ACH Payments: What They Are and How They Work

If you run a business, you most likely encounter the ACH network in your daily operations. This payment infrastructure is the primary way that financial institutions oversee and manage the movement of money between accounts across the US. With this article, we want you to gain a strong understanding of how ACH payments work and how they pertain to your business. 

ACH—an electronic network for transferring funds between banks—has simplified the way businesses are run since the 1970s. 

To put it in perspective, in 2023 the ACH network processed 31.5 billion payments valued at more than $80 trillion. That’s huge–and the value of the network is only growing, as it has been for the past 11 years.

We’ll dive deeper into the world of ACH payments by answering the following questions: 

• What are ACH payments?
• What types of ACH payments are there?
• How does an ACH transfer work?
• What are same-day ACH payments?
• What are some examples of ACH payments?
• How long do ACH payments and transfers take to process?
• How much are the processing fees?
• What are the benefits and drawbacks of ACH transfers?

What are ACH payments?

Your first question is likely: what does ACH stand for? ACH stands for Automated Clearing House. It’s a US financial network that enables payments to be transferred between bank accounts. The ACH network is governed by Nacha, formerly known as the National Automated Clearing House Association. Nacha regulates payments as they are processed in daily batches through the ACH network.

For businesses like yours, ACH transfers can streamline your operations and make payment processing, bookkeeping, and accounting much more efficient because everything is digitized. 

ACH payments eliminate the need for paper checks, wire transfers or cash, so they can contribute greatly to the growth and efficiency of your business.

Let’s define some important ACH-related terms:

• Originator: The business, financial institution, or individual who initiates the ACH request.
• Account number: A unique, 8-12 digit code that identifies the bank account you use to carry out ACH transactions. 
• Routing number: A unique, nine-digit number that is assigned to financial institutions in the US. Banks use this code to establish where payments should be moved.
• ODFI: The originator’s approved payment processor or bank is referred to as the Originating Depository Financial Institution (ODFI). The ODFI is an interface that submits the request to the ACH network for the originator. 
• RDFI: The Receiving Financial Depository Institution (RDFI) is the bank that receives payment.
  

Types of ACH payments

The ACH network supports both debit and credit transactions. Unlike the names suggest, this isn’t related to card types. 

It’s important to note that these transactions differ based on what the originator is asking. Let’s look at them individually:

ACH debit transaction 

Otherwise known as a pull request, ACH debit is a transaction in which funds are pulled from one bank account and moved to another. 

Let’s give the example of a customer purchasing merchandise from your store. In this scenario, you as the merchant are the originator of the request. You’re asking the network to pull money for the purchase from their account to yours. The money is in turn debited from the customer’s account, making it an ACH debit transaction.

ACH credit transaction

Otherwise known as a push request, ACH credit is a transaction in which the originator asks the ACH network to push funds from their bank account to another. With this type of transaction, the receiver’s account is credited.

An example of an ACH credit transaction is when you, as an employer, pay your employees through payroll—the funds are pushed to their accounts.

How ACH transactions work

Although the process of ACH transactions may appear complicated, it’s quite simple for you as a merchant if you’re set up with the ACH network. These transactions occur without any work on your part, because the network processes all ACH requests automatically on the back-end.

Let’s go over the ACH process for both debit and credit transactions:

1. The originator initiates the transaction. 
2. The ODFI submits the request through the ACH network on behalf of the originator. 
3. The ODFI passes on these ACH entries in batches to the network.
4. ACH network operators sort through and organize the batches by transaction type (debit vs. credit).
5. The network sends the transactions to the RDFI. 
6. After the RDFI establishes sufficient funds, the RDFI sends the money to each recipient’s account.

Same-day ACH payments

As the payment landscape evolves, same-day ACH transactions are becoming more and more common. As the name suggests, same-day ACH transactions are faster than their standard counterpart, allowing funds to be transferred on the same day. 

Same-day ACH payments have cut-off times and submission deadlines. The request can be submitted multiple times in a day, typically in the morning and the afternoon. 

Settlement for these transactions typically happens three times a day. However, some types of transactions aren’t available for same-day ACH. These may include international or high-value payments. 

Same-day ACH is becoming more available and commonly used. In fact, earlier this year Nacha executive vice president Michael Herd said “We’re going to do more than a billion same day payments this year.” 

Expect that number to grow in the following years, too.

Examples of ACH payments

Now that we’ve established the two types of ACH transactions and learned how ACH works, we can look further at examples of these transactions. Here are just a few:

Direct deposit

An employer paying their employee via direct deposit is an example of an ACH payment. The funds are pushed to the employee’s account from the originating bank. Typically, these payments are automatically scheduled to occur once every two weeks or once per month on a specific date, accounting for holidays. 

Paying bills

As a merchant, there are several bills you have to pay, including rent, utility costs and ongoing services. These bills can be paid through the ACH network, and can be set up to be pulled from your bank account on a specified date each month.

Fund transfers

If you use a payment service like PayPal or Venmo and have to transfer money to your bank account, the ACH network handles this. 

Vendor payments

You can pay your vendors and suppliers through ACH, which can streamline your accounts payable process.

Customer payments

When you ring up a sale, funds are pulled from the customer’s bank account to your business bank account through the ACH network. 

Payments to the government

Making tax payments to the IRS, for instance, can be done through the ACH network. Funds are pushed from your bank account to the IRS. 

Note: Since ACH payments are growing in use and popularity, you can personalize your payment schedule to receive settlements with more frequency—more on that below.

Processing times for ACH transactions

ACH transactions are processed in batches by the network. This means payments aren’t instantaneous—it can typically take anywhere from one to three business days for the funds to become available to the receiver. This depends on how your ACH schedule is set up: you can ask for two-day, same-day, or next-day ACH processing. 

Here’s a summary of average processing times: 

• Standard ACH: 1-2 business days
• Same-day ACH: Same business day (typically within hours)
• Next-Day ACH: Next business day

Note: Same-day and next-day ACH processing may come with higher fees.

Processing fees for ACH transactions

Like any other payment service, ACH transactions come with fees, typically one per each individual ACH transaction. 

According to a recent survey, the average cost of an ACH transaction across industries is between 26 and 50 cents. Every ODFI has a unique pricing structure—from flat-rate to tiered pricing—so take that into consideration as you research ACH transaction fees. 

Fees are affected by several factors, including:

• Monthly transaction volume (the higher the volume, the lower your fees will likely be)
• Requests for same-day or next-day transaction processing (fees will increase in this case)
• Transaction type (debit or credit)
• ACH reversal and chargeback fees (these would be charged on a per-occurrence basis)

The benefits and drawbacks of ACH 

Like any other payment processing system, ACH comes with pros and cons. To determine what’s best for your business, weigh each of the following points carefully.

Benefits 

Cost savings

As they often cost less than 30 cents per transaction, ACH payments are much more affordable than the prices associated with paper checks and wire transfers. Transaction costs are also typically lower than other types of payment processing networks, such as PayPal.

Heightened security

The ACH network is highly regulated, meaning there are fraud protections and security infrastructure in place to protect you and your business from any vulnerabilities. Security is heightened further by the fact that ACH payments and transfers only occur between approved US-based bank accounts, which mitigates the risk of illegal activity or fraud.  

Reduced human error and increased efficiency

Your business operations are streamlined with automated payments and transfers. You don’t have to worry about writing and mailing checks or recording important transaction data yourself, because the ACH network handles all those transactions for you. Plus, ACH makes it much simpler for you to manage crucial aspects of your business that involve large transactions, like payroll, and the margin for error will decrease.  

Reliability and timeliness 

You can rely on the ACH network to deliver payments in a timely manner, for a total of four settlement windows per day. Another upside to this is that predictable settlements will help you better manage your cash flow and plan out your monthly expenses. 

Streamlines some of your processes

The convenience and efficacy of ACH payments is a big plus. Since ACH allows for automated payments like payroll and utility bills, it can simplify financial management for your business. The batch processing aspect of ACH payments also reduces administrative workload. 

Potential environmental benefits

This may seem small in the grand scheme of things, but eliminating the need for paper checks and other related materials contributes to environmental sustainability. It also reduces waste across your business.

Drawbacks

Domestic limitations

Because the ACH network only operates among US-based bank accounts and financial institutions, you’ll have to find another system to transfer and receive money internationally. Depending on the nature of these transactions (for instance, transferring money to pay an international supplier), processing fees for international payments will likely be higher. This may not be an issue if you have a small business that only operates domestically, but if your business is global you’ll have to use another payment system to send money to overseas accounts. 

Capped transaction volume

Depending on the financial institution you use, limits to your transaction volume and amount vary. Some banks may implement monthly or daily caps on the amount of money you can move via the ACH network. However, the regulating body Nacha has flexible rules: for instance, in March of this year they increased the same-day ACH dollar limit to $1 million per payment—a hefty sum.

Risk of returns and reversals

ACH transactions may be returned or reversed for several reasons. That includes insufficient funds, incorrect account details or if the transaction is unauthorized. This can create uncertainty for both the payer and the payee.

Lack of immediate confirmation

Finally, businesses that need receipts or proof of funds quickly may find a drawback in the lack of immediate confirmation. Unlike credit card transactions, the ACH network doesn’t provide an instant confirmation of payment.

Understand how ACH impacts your business

We hope that you now have a greater understanding of the ACH network and how it operates. The ACH network is integral to the way merchants across the US run their businesses. 

This payment infrastructure makes it simple and convenient to pay business expenses, receive payments from customers, send payments to government agencies, and more. 

If you’re searching for a better way to accept payments and check out customers, talk to a Lightspeed Payments expert today.

Editor’s note: Nothing in this blog post should be construed as advice of any kind. Any legal, financial or tax-related content is provided for informational purposes only and is not a substitute for obtaining advice from a qualified legal or accounting professional. Where available, we’ve included primary sources. While we work hard to publish accurate content, we cannot be held responsible for any actions or omissions based on that content. Lightspeed does not undertake to complete further verifications or keep this blog post updated over time.