Learn How ACH Payments Work

Electronic Payments Replace Check and Card Payments, Save Money

Checkbook and computer
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ACH payments are electronic payments that go through the Automated Clearing House (ACH) Network. Funds move from one bank account to another with the help of a centralized system that directs funds to their final destination. These computerized payments can provide benefits to both merchants and consumers: Payments are inexpensive, they can be automated, and recordkeeping is often easier with electronic payments.

Most people already use ACH payments, although you 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 often responsible for those payments. Consumers and businesses made over 23 billion ACH payments in 2018, according to Nacha, the Electronic Payments Association behind the ACH network.

Basics of ACH

 © The Balance, 2018

ACH payments are electronic transfers from one bank account to another. Several examples 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, an employer needs the following details from employees to set up direct deposit:

With that information, payments can be created and routed to the correct account. Billers need those same details to make pre-authorized withdrawals from customer accounts.

ACH payments are often electronic from start to finish. But sometimes merchants convert paper checks 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 can benefit from cost savings and improved operations when using electronic payments.

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 arrive 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 payments by credit card, it often costs less to process an ACH transfer than it costs to take a credit card payment. Especially when collecting numerous 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 provide 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

Businesses aren’t the only ones to benefit from ACH payments.

Easy payments: There’s no need for consumers to write checks, reorder checks when they run out, and get checks in the mail on time. No charges go onto 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 take action when payments are due. 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 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 can help you accept 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 enable ACH payments for you, including:

  • The bank where you keep your business accounts
  • The vendor 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 with a $25 monthly fee that includes ten free transfers. Large businesses might pay less per item for ACH, but that might be competitive 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. The average cost for sending and receiving ACH payments are around $0.29 per transaction. For small businesses, service providers might charge more (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 charges for 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 paper 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. When you automate payments, you have more capacity for other activities.

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 hard to establish, 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 as well. 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 take 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.

Article Sources

  1. Nacha. "What is ACH?" Accessed Oct. 28, 2019.

  2. FFEIC. "Consumer Compliance FAQ for Check Clearing for the 21st Century Act (Check 21) and the Implementing Regulation (12 CFR 229)," Accessed Oct. 28, 2019.

  3. Plooto. "Pricing," Accessed Oct. 28, 2019.

  4. Bottomline Technologies. "2015 AFP Payments Cost Benchmarking Survey," Page 4. Accessed Oct. 28, 2019.

  5. Nacha. "Payments Mythbusting," Accessed Oct. 28, 2019.