what is ach payment

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 8.7% in 2021 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:

  • Convenience
  • Security
  • Speed
  • 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 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 Clearing House

Those 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:

Participant Explanation
Originator

 

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
Receiver

 

Entity that authorized a transaction to be initiated by the Originator to the Receiver’s account
ACH Operator

 

Agency that processes and settles transactions. This is either the Federal Reserve Bank or the Clearing House
Third-Party Sender

 

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:

  • 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 an 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:

  • Pay bills
  • Donate to a charity
  • Make a purchase
  • Send money to a friend or relative

Split Deposit

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

How long does it take to process an ACH payment?

ACH payments 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:

  • 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 have to 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

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:

  • The transfer amount was not the exact amount authorized
  • The transaction was processed too early
  • The transfer was never authorized

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 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.

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.

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

ACH payment disadvantages

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

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

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!