What is an ACH Payment? Everything You Need to Know About ACH

Here at Orum, we’re all about money movement and instant account verification.

One way to accomplish money movement is through an ACH transfer, the fastest-growing payment method in the US, increasing in volume by 3.06% in 2022 alone.

So why do 87% of organizations use ACH for their payment transactions?

A few advantages of ACH, or the Automated Clearing House, are convenience, security, speed, cost savings, and simply the ease and consistency of use.

To truly understand why this particular payment rail has these advantages over alternative money movement methods, let’s take a quick look at what ACH is, who runs it, and how it all works.

What is an ACH payment and how does it work?

An ACH payment is an electronic funds transfer that enables direct debit or credit transactions between bank accounts in the United States. It works by offering a safe, convenient, and cost-effective option for businesses and consumers to make payments, including payroll, bill payments, taxes, and government benefits.

ACH payments can be used anywhere in the United States and are dependent on bank account credentials, rather than cards or wallets. You can set them up through your bank directly or by partnering with a third-party payment processor. 

ACH payments can be used by consumers, businesses, and government organizations alike. This network was initially used for recurring transactions, however, transfers can now be both recurring and one-off.

Certain financial institutions may also help you send money internationally while still using the ACH network. These international ACH transactions are known as IAT.

What is the ACH (automated clearing house) network?

The Automated Clearing House (ACH) network is a payment system operated nationally within the United States. It’s administered by Nacha (formerly known as the National Automated Clearing House Association), which was formed in 1972 in efforts to begin digitizing payments and moving away from paper checks.

While Nacha does make the rules for ACH, the payments themselves are operated by two organizations– the Federal Reserve and the Clearing House.

Who Can Participate in an ACH Transaction?

One common area of confusion with ACH or payment rails is the list of all the parties that could be involved. While ACH is split into multiple types of payments, here are the 7 most common

definitions of who the possible participants in an ACH transaction could be:

ACH Categories Explained: ACH Payment Types 

Direct Deposit (ACH Credit)

The first type of ACH payment is also the most common. Known as Direct Deposit or ACH Credit, this payment method is typically used for businesses and government organizations to send money to individuals. 

Common use cases for Direct Deposit include:

• Payroll

• Worker expenses

• Bonuses

• Pensions, 401(k)

• Annuities

• Dividends

• Government benefits

• Tax refunds

ACH Credit is also known as “ACH Push”, because the sender initiates the transfer, “pushing” money out of their account so that they can pay another party at a different bank.

Direct Payment (ACH Debit)

Direct Payment is also an electronic transfer of funds, but it is almost entirely used by consumers.

Unlike ACH Credit where the sender starts the transfer directly, in ACH Debit the payment includes a few additional steps:

1. The sender, typically an individual consumer, wishes to pay another person or a business.
2. The sender grants authorization to that receiving party (individual or business) to initiate the payment on their behalf.
3. The payee then provides the sender’s authorization to the payee’s bank.
4. The payee’s bank submits a payment request to the sender’s bank. 
5. The sender’s bank then “pulls” money out of the sender’s account. 
   
   

Common use cases for Direct Payment are:

• Bill Pay

• Charity Donations

• Purchases

• Sending money to a friend or relative

Split Deposit

Split Deposit is not fully its separate payment type. Instead, Split Deposit can be used together with Direct Deposit. 

Instead of pushing all of the money from their employer or a government fund, an individual can elect to have some of their deposit amount go straight into another account. This way, someone can automate part of their savings by routing a portion of their payment into a savings or investment account. 

Another example would be an individual having a portion of the funds go into a joint account with a partner, and another portion go into a personal checking account. 

FAQs Surrounding ACH Payments and ACH Transactions

What is an ACH payment type?

An ACH payment type refers to the different types of transactions that can be processed through the ACH Network, such as direct deposits, recurring payments, B2B payments, internet payments, and same-day ACH transfers. Each payment type has its unique characteristics and benefits.

The most common ACH payment types are:

• CCD (Corporate Credit or Debit): A B2B payment transaction between two companies or a company consolidating its cash across financial institutions.

• CTX (Corporate Trade Exchange): A B2B payment similar to a CCD, but with additional remittance data encoded in ASC X12 or UN EDIFACT format for invoice payments.

• PPD (Prearranged Payment and Deposit): A consumer credit or debit transaction, typically used for single-use or recurring B2C payments.

• TEL (Telephone-initiated): Consumer debits authorized via phone calls, requiring a pre-existing relationship or initiated by the consumer.

• WEB (Internet-initiated/Mobile): Consumer debits authorized online or through wireless networks for single-use or recurring payments.

Source.

How long does it take to process an ACH payment?

An ACH payment method used to be regarded as quite slow.

Typical transfers get posted within 3 working days. There can also be delays because ACH transfers are not settled on weekends or national holidays. This process is the same for both ACH Credit and ACH Debit, so both push and pull transactions.

The ACH network settles payments 4 times a day. Full settlement schedules can be accessed on the Federal Reserve’s site.

The modern ACH network has improved significantly and now provides 3 speed choices for ACH credits:

• Same-day

• Next-day

• 2-day

For ACH debits there are only two options, but both of them are quite fast:

• Same-day

• Next-day

How much does it cost to process ACH payments?

ACH payments are one of the cheapest payment methods.

Individuals are typically not charged for these payments at all, and the fees businesses pay tend to be quite low. The price is around $0.29 per transaction (slowest ACH).

Of course, there could be other fees imposed by your particular financial institution.

Are there advantages to using ACH payments?

Convenience: ACH payments are extremely convenient. Unlike paper checks, they cannot be lost in the mail. The payment can even be initiated on your computer or mobile device as long as you have the necessary routing and bank account numbers for the transaction. Additionally, ACH payments allow individuals and organizations to automate their payments by setting up recurring charges. 

Since this payment rail is so easy to set up, businesses can spend a lot less time on related administrative tasks.

Security: The most convenient payment method, credit and debit cards, can hurt merchants because they can be affected by disputes and chargebacks.

ACH transactions, on the other hand, are only reversed if:

Transfer amount was not the exact amount authorized

• If the payment recipient initiates an ACH transaction exceeding the authorized payment amount, the payer can dispute it. Their financial institution will then follow Nacha's rules by initiating a reversal of the excess amount.

Transaction was processed too early

• If the payment recipient processes an ACH debit before the authorized date specified by the payer, the payer can dispute the transaction with their financial institution. Following Nacha rules, the institution will initiate a reversal of the payment. The rules prohibit ACH debits from being processed before the authorized date.

Transfer was never authorized

• Unauthorized ACH debits initiated by the payment recipient can be disputed by the payer with their financial institution. Nacha rules require that ACH debits must be authorized by the payer before processing, and unauthorized ACH debits are strictly prohibited by federal law. Merchants initiating unauthorized ACH debits may face penalties or legal action.

Business and consumer security is guaranteed further with upcoming policy changes. Now, Nacha requires risk assessments from Third-Party senders and account information to be encrypted for any large entities operating ACH transfers.

Speed: As mentioned above, ACH has multiple speed options. However, even the slowest ACH transactions tend to get posted in 3 working days.

The other option is Same Day ACH, which is quite new. The payment limit for Same Day ACH was raised just in March of 2022 to $1 million per transaction. These transfers are continuously growing in popularity thanks to their fast turnaround.

Cost Savings: ACH transfers are much cheaper than many other popular payment methods, such as cards or wire transfers.

Even when slower, ACH payments can be worth the wait as they cost businesses around $0.26 and $0.50 per transaction. Paper checks, on the other hand, cost businesses between $1-4. Card payment fees are usually a flat fee and a percentage of the transaction’s value, so they are not cost-effective for high-value payments.

Talk with us today to get details about Orum’s ACH pricing.

By price alone, ACH has the best value for merchants who have to contend with the payment fees.

What are the disadvantages of using ACH Payments? 

Fees: While ACH fees are typically lower than other payment methods, these transfers are still not free. For a full schedule, you can look through the Federal Reserve ACH Fees Guide.

However, even outside of the fees outlined in the official fee guide, certain large banks can still charge you more money for initial transfers. 

Risk of Fraud: An ACH payment method is extremely secure, but it is vulnerable to stolen account access and social engineering. Some common types of fraud associated with ACH payments.

Business email compromise

• Attackers either gain control or impersonate a real email account to send payment instructions that direct money to their accounts.

Vendor impersonation

• Attackers pretend that they are a vendor working with an organization (public or private) and ask that organization to update payment credentials for that vendor.

Payroll impersonation

• Attackers ask employees of a company to send their account information on a fake payroll platform.

Mortgage closing scams

• Attackers redirect mortgage funds to their account by pretending to be the real estate agent, lawyer, or settlement agent involved in a transaction.

Confidence and romance scams

• Attackers persuade an individual to send them money by pretending to develop a personal relationship with the victim.

Ransomware attacks

• Attackers use a particular kind of malware that locks up files or computer networks, demanding a ransom to release those files back to the victim.

The Future of ACH Payments

The ACH payment system is experiencing significant growth in both transaction volume and partnerships with other companies. In 2022, the Top 50 financial institutions handling ACH payments saw an increase of 4.7% in volume, and the Top 50 receiving institutions experienced a 3.4% increase in volume, accounting for 92.2% and 62.8% of total volume, respectively. Nacha reported an additional 5.3 billion “off-network” ACH payments in 2022, bringing the total ACH payment volume to 35.3 billion, an increase of 4.4% from 2021.

The growth outlook for ACH payments remains strong, with the network processing a record-breaking 30 billion payments totaling $76.7 trillion in value in 2022. Notably, same-day ACH payments rose significantly, with a 15.5% increase in volume and an 86.3% increase in value over the previous year, totaling 697.5 million payments valued at $1.7 trillion. Additionally, business-to-business payments rose by 11.8% year-over-year, and same-day ACH for business-to-business payments saw a remarkable 44% increase last year.

We expect to see the convenience and security of ACH payments continue to contribute to its popularity. As ACH payments allow individuals and organizations to automate their payments and spend less time on administrative tasks, the shift to ACH will continue to grow.

How Orum.io Works with ACH (Automated Clearing House)

At Orum, we’re passionate about helping you with money movement via ACH, or any payment rail, without the hassle and risks you may face by initiating those transfers yourself.

We automatically determine the best possible speed for your transaction, picking between same-day, next-day, and 2-day ACH. On top of that, our smart routing system can mitigate the risks of financial fraud and identity theft with any ACH transfers you conduct.