Learn How ACH Payments Work

Electronic Payments Replace Check and Card Payments

Checkbook and computer
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ACH payments are electronic payments made through the Automated Clearing House (ACH) Network. Funds move from one bank account to another with the help of an intermediary that routes funds to the final destination. Computerized payments can provide benefits to both merchants and consumers. Payments are inexpensive, they can be automated, and record-keeping is easier with electronic payments.

Most consumers already use ACH payments, although they might not be familiar with the technical jargon. When employers pay wages through direct deposit or consumers pay bills electronically out of checking accounts, the ACH network is probably responsible for those payments. According to NACHA, the Electronic Payments Association behind the ACH network, over 25 billion ACH payments were made in 2016.

Basics of ACH

 © The Balance, 2018

ACH payments are simply electronic transfers from one bank account to another. Common uses include:

To complete payments, the organization requesting a payment (whether they want to send funds or receive funds) needs to get bank account information from the other party involved. For example, employers require employees using direct deposit to provide the following details:

  1. The name of the bank or credit union receiving funds
  2. The type of account at that bank (checking or savings)
  3. The bank’s ABA routing number
  4. The recipient’s account number

With that information, a payment can be created and routed to the correct account. The same details are required to make pre-authorized withdrawals from customer accounts.

ACH payments are typically electronic from start to finish. But sometimes paper checks get converted to electronic payments, and the funds move through the ACH system.

Benefits all around: Electronic payments are popular for several reasons.

  • Because they’re electronic, ACH payments use fewer resources than traditional paper checks. There’s no need for paper, ink, fuel to transport checks, time and labor to handle and deposit checks, and so on.
  • Electronic transactions make it easy to keep track of income and expenses. With every transaction, banks create an electronic record. Accounting and personal financial management tools can also access that transaction history.

Why Businesses Like ACH Payments

Businesses benefit from sending and receiving funds with ACH.

Easy to handle: When customers pay by check, businesses need to wait for the mail to arrive, and then they need to deposit the check with a bank. Payments sometimes get lost, and entering those payments into a recordkeeping system is labor-intensive. Electronic payments are received quickly and reliably, and there’s no need to forward checks to the bank and wait a few days to find out which checks bounced.

Less expensive than plastic: For businesses that accept payment by credit card, it costs less to process an ACH transfer than it costs to take a credit card payment. Especially when collecting recurring payments, those savings add up, and automating those payments only increases the benefits. However, ACH does not give you a real-time approve/deny response like a credit card terminal would.

Long-distance payments: Businesses can accept payments by ACH remotely, although the same is true for credit cards. If your customers don't have credit cards or they prefer not to send their card information regularly, ACH can provide a solution.

For a more detailed discussion of ACH for business use, see ACH Processing Basics

Why Consumers Like Paying with ACH

Consumers also benefit from ACH payments.

Easy payments: There’s no need to write checks, reorder checks when they run out, and get checks in the mail on time. No charges will be added to their credit cards—the funds come directly from their bank account.

Autopilot: If using automatic ACH payments, customers do not need to keep an eye out for bills—or do anything. For better or worse, everything runs on autopilot.

Learn more about how and why consumers use ACH. See ACH Debit for Consumers.

How to Accept ACH Payments from Customers

To accept payments by ACH, you'll need to partner with a payment processor. You might already have a relationship with one—you're just not using the ACH service yet.

Numerous payment processors will help you take ACH payments, so it pays to shop around for one that does exactly what you need.

Start by asking your existing service providers if they can handle ACH payments for you:

  • The bank where you keep your business accounts
  • The company that processes credit card (or other) payments for you already
  • Your accounting software provider—popular programs allow you to create invoices and accept payments by ACH

New payment processors continually enter the market, and they may be a good fit for small businesses that only need to make infrequent ACH payments. For example, Plooto allows you to send or receive payments starting at $1.00 each, and there is no monthly fee. Large businesses can pay less than that for ACH, but it may be affordable if you only have a handful of transactions each month.

How Much Does it Cost?

ACH is an option for businesses of any size. You'll naturally pay less if you have higher volumes, but the same is true for credit card payments. NACHA reports that average costs are around 11 cents per transaction. For small businesses, service providers might charge three to five times that much (some only charge per-transaction, while others include a monthly fee or take a percentage of each payment). Depending on your average ticket size, those costs might still be competitive with the costs of processing debit card payments.

Be sure to look at the big picture when evaluating alternatives: It might not cost anything to accept checks, but what's the tradeoff?

Dealing with those checks takes time, and funds probably don't get into your account as quickly.

For some businesses, like consultants who only receive one or two checks per month and for whom cash flow is not an issue, it might be more trouble than it's worth to set up ACH. But others might come out ahead just by creating more time in the day.

Personal ACH Payments

As an individual, you can send or receive payments via ACH if a business or other organization is on the other side of the transaction. Direct person-to-person ACH payments are typically not an option, but it’s easy to send funds with an intermediary involved.

Third-party apps: Several apps and payment services allow you to send funds to friends and family for free. Those apps provide a front-end to your bank account, and they often use ACH to make deposits and withdrawals for you.

Bank offerings: Your bank or credit union may have a P2P payment service that allows you to send money. Those services may be bank-branded, or they may be part of Zelle or Popmoney.

Unfortunately, it’s not easy for an individual to just punch in somebody else’s bank information and complete a transfer. Depending on the service you use, the person you’re sending to or receiving from may need to open an account with that service provider to complete a payment (or at least provide their bank routing and account numbers to the service provider).

Same Day Payments

Traditional ACH payments typically two to three business days, although weekends and holidays can slow down the process. In today’s on-demand world, that’s too slow—especially for an electronic system. Same day ACH payments began in 2016, and functionality is expanding, so you should expect to see faster payments soon.