Here at Orum, we’re all about money movement.
One way to move money is through what’s called an ACH transfer, which is 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 credit for their payment transactions?
The main advantages of ACH can be summed up as follows:
- Cost Savings
- Ease and Consistency
To truly understand why this payment rail has these advantages, let’s take a quick look at what ACH actually is, who runs it, and how does it all actually work?
What is an ACH payment method?
An ACH payment is an electronic funds transfer that enables direct debit or credit transactions between bank accounts in the United States. It is a safe, convenient, and cost-effective option for businesses and consumers to make payments, including payroll, bill payments, taxes, and government benefits.
What is the automated clearing house (ACH) network?
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 makes the rules for ACH, the payments themselves are operated by two organizations:
The Federal Reserve
- The Federal Reserve is the central bank of the United States. It is responsible for regulating monetary policy, overseeing the financial system, and conducting research on economic and financial issues. It plays a critical role in the ACH network by operating the ACH Network and providing the settlement services that enable the transfer of funds between financial institutions.
The Clearing House
- The Clearing House is a bank-owned payments company that provides payment, and clearing services for financial institutions. It operates several payment systems, including the ACH network, which processes large volumes of electronic payments between financial institutions in the United States. The Clearing House plays a critical role in ensuring the smooth operation of the ACH network.
These Operators are the entities actually processing and routing transactions as they come in.
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.
Once you have set it up, this payment method is very versatile. ACH can be used by consumers, businesses, and government organizations.Initially this network was used mostly for recurring transactions, but now transfers can 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.
How does an ACH payment work?
One common area of confusion with ACH or payment rails in general is the list of all the parties that could be involved.
While ACH is split into multiple types of payments, here are the common
definitions of who all the possible participants in an ACH transaction could be:
|Consumer, business, or government agency that initiates an ACH transaction|
|Originating Depository Financial Institution (ODFI)
|A bank that sends the Originator’s payment instructions to the ACH Operator|
|Receiving Depository Financial Institution (RDFI)
|A bank that receives an ACH transaction and posts it on the Receiver’s account|
|Entity that authorized a transaction initiated by the Originator/ODFI to the Receiver’s account|
|Entitythat processes transactions. This is either the Federal Reserve Bank or The Clearing House|
|Entity that helps originators without direct contracts with the ODFI send ACH payments|
|Third-Party Service Provider
|Entity that interacts with the ACH network on behalf of other parties (Originators, ODFIs, RDFIs)|
Categories of ACH payments
Direct Deposit (ACH Credit)
The first type of ACH payments 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 Direct Deposit use cases include:
- Worker expenses
- Pensions, 401(k)
- 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:
- The sender, typically an individual consumer, wishes to pay another person or a business.
- The sender grants an authorization to that receiving party (individual or business) to initiate the payment on their behalf.
- The payee then provides the sender’s authorization to the payee’s bank.
- The payee’s bank submits a payment request to the sender’s bank.
- The sender’s bank then “pulls” money out of the sender’s account.
Common use cases for Direct Payment are:
- Pay bills
- Donate to a charity
- Make a purchase
- Send money to a friend or relative
Split Deposit is not fully its own 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.
Characteristics of ACH payments
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 own unique characteristics and benefits.
The most common transactions 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.
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.
Modern ACH network has improved significantly and now provides 3 speed choices for ACH credits:
For ACH debits there are only two options, but both of them are quite fast:
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.
ACH payment advantages
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.
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 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.
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 actually 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.
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.
By price alone, ACH has the best value for merchants who have to contend with the payment fees.
ACH payment disadvantages
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 own accounts.
- 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.
- 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 own 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.
- Attackers use a particular kind of malware that locks up files or computer networks, demanding ransom to release those files back to the victim.
Growth Outlook for 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 you can benefit from ACH transfers
At Orum, we’re passionate about helping you move money via ACH, or any payment rail, without the hassle and risks you may face by initiating those transfers yourself.
We can 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.
If you’re ready to implement ACH transfers into your product, get in touch!