How do ACH transactions work

Routes to finance

ACH payments are electronic payments made through the Automated Clearing House (ACH) network. They are a popular alternative to paper checks and credit card payments because of the benefits for merchants and consumers: everyone involved can save some money and automate payments (which means fewer errors and less hassle).

If you are thinking of collecting electronic payments from customers or making payments through ACH, it is worth knowing how the system works from everyone's perspective.

Most consumers are already familiar with these payments, although they may not describe them in technical jargon: If employers pay through direct deposits or pay bills electronically on checking accounts, the ACH network is likely responsible for these payments. According to NACHA, the Electronic Payments Association behind the ACH network, over 23 billion ACH payments were made in 2014

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

A customer pays a service provider

  • An employer pays money into an employee's account
  • A consumer moves money from one bank to another
  • A company pays a supplier for products
  • Because they're electronic, ACH payments use fewer resources (paper, ink, fuel to transport checks, time and labor to process checks, and so on). In addition, electronic transactions make it easy to keep track of your finances.
Instead of general verification information on a bank statement ("Exam # 3509 for $ 45.82" -

what was that for? ), you'll see the payee's name without the need for further research. This makes it easy to sort or categorize transactions with your financial software. ACH transactions can be electronic from start to finish, or they can occur when a paper check is converted and processed electronically.

To see how paper checks become electronic, see Electronic Checks Overview

  • Why companies like ACH Payments

Businesses benefit from sending and receiving funds with ACH. When customers pay by check, companies have to wait for the mail to arrive. Then they have to transfer the check to the bank. Payments are sometimes lost and entering these payments into a record keeping system is labor intensive. Electronic payments are taken faster and more reliably, and there is no need to route checks to the bank and wait a few days to find out which checks were returned (however, the ACH doesn't give you a real-time approval / denial response like a loan. Card terminal does).

For businesses that accept credit card payment, an ACH transfer costs less than accepting a credit card payment. Especially when collecting recurring payments, those savings add up, and automating these payments only increases the benefits.

Finally, businesses can accept payments from ACH remotely (although the same is true for credit cards). If your customers don't have credit cards or don't want to use them, ACH can add flexibility.

A more detailed description of the above points can be found under ACH processing principles

  • Why Consumers Pay Like ACH Payments

Consumers also benefit from ACH payments. There is no need to write checks and get them in the mail on time. When you use ACH automatic payments, you don't have to look out for bills - everything is on autopilot - for better or for worse.

For more information on consumer use of ACH: ACH consumer direct debit

  • Accepting ACH payments from customers

To accept payments from ACH, you must work with a payment processor. It's possible you already have a relationship with one - you don't use the ACH service yet (there are

a lot of payment service providers out there so it pays to buy one that does just that). what you need). Start by asking your existing service providers if they can process ACH payments for you:

The bank where you keep your business accounts

  • The company that already processes credit card (or other) payments for you
  • Your accounting software service provider
  • Compare your offers with providers that you can find through online research - new competitors regularly enter the company.

How much does it cost?

ACH is an option for businesses of all sizes. You will obviously pay less if you have larger amounts, but the same goes for credit card payments. NACHA reports that the average cost is around 11 cents per transaction. For small businesses, service providers might charge three to five times as much (some only charge per transaction, while others include a monthly fee or a percentage on each payment). Depending on your average ticket size, this cost can potentially rival the cost of processing debit card payments.

When analyzing alternatives, pay attention to the big picture: it costs

nothing to accept but what's the compromise? These checks are time-consuming to deal with, and funds are unlikely to get into your account as quickly. For some companies (consultants who only get a check or two per month and who have no cash flow), ACH can be more difficult to set up. But others may move forward by creating more time in the day.