How Do ACH Payments Work?

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Updated on Thursday, April 18, 2019

Ever wonder what those little notations about ACH credits and debits in your banking statements mean? You’re not alone. As consumer spending habits have evolved, ACH payments have become an integral part of our financial lives — even if most people don’t understand what’s happening behind the scenes.

ACH is short for Automated Clearing House, a network and processing system that financial institutions use to transfer funds electronically. It’s been around since the mid-1970s, when it began facilitating direct deposits of paychecks and social security payments. The ACH now processes 25 billion electronic transactions each year, totalling $43 trillion. The system is overseen jointly by the Federal Reserve Board and the National Automated Clearing House Association (NACHA), which groups more than 10,000 member financial institutions.

“The ACH Network really does serve as the backbone for money movement in today’s economy,” says NACHA Senior Director & Group Manager Victoria Day. “It’s one of the few payment systems that has the ability to reach all U.S. bank accounts, so it provides real value to consumers and business, fintechs and financial institutions.”

Indeed, ACH is the foundation of today’s fintech app ecosystem, as funds transfer services (e.g. PayPal, Venmo, Zelle, Square Cash and Google Wallet) use it to process transactions linked to bank accounts.

How ACH transactions work

ACH Network transactions begin and end with banks. Though the originator of a transaction might be an individual or a company, ACH transactions require bank accounts at both ends. An ACH credit — say, a tax refund or a single bill payment by a consumer — pushes funds into the receiving account. An ACH debit — such as a consumer’s recurring monthly bill payment — automatically pulls money from the originating account.

The process sounds straightforward enough, until you consider the sheer volume of transactions that must be verified and securely processed. An Originating Depository Financial Institution, like your bank, aggregates transactions from all its customers and transmits them in batches at predetermined intervals to the ACH. The batches are processed by ACH and settled — during normal business hours — and then transmitted to each Receiving Depository Financial Institution, where transactions are finalized in the designated receiver’s bank account.

Until a few years ago, NACHA rules required each ACH credit transaction to be settled in one to two business days, and ACH debit transactions to be settled in one business day. However, in 2016 the ACH began offering Same Day ACH, an expedited option that increases the movement of funds between financial institutions from one to three times each day.

“There are times when a consumer or a business needs to send or receive money quickly,” notes Day, and Same Day ACH was designed to help facilitate that.

Benefits of ACH payments for banks and consumers

Safety and reliability are two of the top benefits of the ACH Network, says Day. But there are other advantages as well.

Benefits of ACH transfers for consumers:

  • No fees, typically: Most financial institutions don’t charge customers a fee for ACH transfers. The ACH Network is funded, primarily, by NACHA member financial institutions, who pay fees to cover the costs of operation.
  • Convenience: Paying bills by writing and mailing checks each month takes can take considerably more time and effort than online bill payments via ACH transfers. The ACH system lets consumers feel confident their payments will arrive on time, limiting the risk of late fees or damage to their credit ratings.

Benefits of ACH transfers for banks:

  • Same Day payday: In the past, financial institutions have profited little, if at all, from the ACH Network. The earnings situation has improved somewhat, however, with Same Day ACH. Banks receiving Same Day ACH credits on behalf of customers will be paid an interbank fee of $.052 per transaction by the originating financial institution.
  • New features for bank customers: Same Day ACH give banks new value propositions to include in their products and services for a new generation of consumers. That includes expedited bill pay, better P2P payment service, and cheaper wire service.

What’s the difference between ACH, wire transfers, and EFT?

ACH payments vs. EFT

There is some confusion when it comes to comparing ACH payments and electronic fund transfer (EFT) payments. That’s because various companies commonly refer to ACH payments as EFTs or EDIs (electronic data interchange). Here’s something else that probably doesn’t help: Because the ACH network is electronic, all ACH payments are EFTs, but not all EFT payments are ACH.

Here’s the deal: The banking industry thinks of EFTs as a general term for any method of transferring funds electronically from one bank account to another, including wire transfers, credit card payments and online purchases. Because the ACH Network is backed by the federal government, though, it boasts a higher level of security than other EFT options.

ACH payments vs. Wire Transfer

Both wire transfers and ACH transactions involve one financial institution sending funds to another electronically. However, wire transfers use a different network, Fedwire, and can move funds domestically and internationally with equal ease. (International ACH transfers, on the other hand, are more complicated.)

Speed is the great advantage of a wire transfer, which can send funds from one bank account to another instantly. For certain transactions where speed is essential — closing on a new home, for example — wire transfers may be a requirement. A wire transfer’s speed does come at a cost, though: wire transfer fees can range from $15 to $30 or more for domestic wire transfers and $35 to $45 or more for international ones.

Another caveat is that a wire transfer’s speed can sometimes be a vulnerability. Because the money moves instantly, this type of transfer is particularly appealing to criminals who might try to, say, scam home-buyers into wiring funds into the wrong account.

Payment typeProsCons
ACHMost secure, free of chargeSomewhat less speedy
EFTFacilitates online purchasesLess secure
Wire transferHigh speedFees, risk of outsider fraud

Examples of ACH payments

The 25 billion annual transactions handled by ACH covers a lot of ground, yet they tend to fall into a handful of general categories. Consumers use them for direct deposits of payroll earnings, tax refunds and government benefits, such as Social Security payments.

They are also used to pay taxes and bills, to make payments to individuals, and to move funds from one bank to another. Businesses use them to pay other businesses for goods and services.

Basically, you can use ACH to pay for just about anything that you might previously have paid for by paper check — only more quickly, reliably and securely.

The bottom line

ACH payments have radically changed the way we manage money, and are integrated into the modern fabric of how most of us receive and send funds. There are times, though, when ACH isn’t available — say, with many online stores — and you’ll be paying with a different type of ETF. And there are other times, still, when a wire transfer or money order might make more sense.

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