Automated Clearing House – or ACH for short – refers to a national network that handles electronic money transfers.
ACH transactions have been around since the 1970s. E-transfers can include governmental, ordinary consumer, business, and international payments.
ACH payments are exclusive to the United States.
Read on to learn more about ACH payments, how they work, the different types of payments, and the advantages and drawbacks of using this transaction method.
What is an ACH payment?
Also called ACH transfers or ACH transactions, ACH payments are electronic bank-to-bank transfers. The financial body that oversees all ACH payments is the National Automated Clearing House Association.
ACH payments are an alternative method to traditional credit and debit cards, such as Visa and Mastercard, which you cannot use to make these types of payments.
As of 2020, ACH has handled more than $60 trillion in transactions, and that amount continues to rise steadily.
Two main categories of ACH transfers exist: direct deposits and direct payments. Governments and businesses use the former when paying consumers, such as for their salaries or reimbursements. The latter refers to the specific types of funds used to complete the payments.
Lastly, ACH payments can add money into retirement and savings accounts as well.
Types of ACH transfers
The most significant difference between the two main transfer types is how the money shifts from one account to another.
ACH credits
ACH credit refers to funds that one party moves into another party's account. That means that the party paying the transfer, also called the sender, is responsible for initiating the transaction. It is a recurring bill payment system.
Direct deposits are the most common form of ACH credits. Business employers frequently use this method to pay their employees their wages.
ACH debits
ACH debits refer to funds that move from one party's account to another, but the receiver of the funds initiates the transaction instead of the sender. ACH debit transfers are slightly less secure than their sister method because confidential information such as bank routing and personal account numbers are necessary for ACH debits.
How do ACH payments work?
Two main components make up the actual transaction process: initiating the payment and receiving the payment.
Initiating the ACH payment
Step 1: The individual, bank, or company starts the transfer. This party is the originator.
Step 2: The originator's banking institution submits the ACH request.
Step 3: The bank sends the day's ACH batches to the overall network, including the example transaction from Step 1.
Step 4: A network operator sorts through the batch of ACH requests.
Receiving the ACH payment
Step 1: The network operator sends the ACH payment request to the institution that will collect the funds.
Step 2: The receiving bank makes sure that the funds are sufficient.
Step 3: The receiving bank charges the sender's bank account for the predetermined amount. The receiver collects payment.
How long does an ACH payment take to process?
First and foremost, it is important to remember that the ACH process is not instantaneous. On average, it takes up to three business days to successfully transfer the money.
Usually, the process is as follows:
On the first day, the receiver's bank obtains your ACH file. The bank then charges you for the payment amount. On the second day, the bank records any transactional failures. On the third day, the ACH network notifies your bank when the payment is complete.
The length of the process also depends on the day and time when it begins. ACH processes transfers, especially debit payments, only three times daily. So, if you miss a deadline, it will most likely be processed late. Up until 2016, processed payments occurred only once daily.
It is helpful to note that ACH transfers can be unsuccessful if a party submits the ACH file incorrectly, the sender's account has insufficient funds, or the bank receives incorrect payment details.
Same-day ACH payments do exist, but not all U.S. banks participate, and there are restrictions to this method as well, such as additional fees and a $25,000 transaction limit.
ACH payment fees
The average cost to make a single payment is 29 cents per transaction. Ultimately, however, the fees depend on the institution.
Some banks charge a flat rate, usually 25–75 cents. Banks that take a percentage will typically charge 0.5–1 percent of the transaction amount. Monthly fees may also apply, ranging from $5 to $30.
The most significant factor when it comes to setting fee rates is the transaction amount. The larger the payment volume, the less the fees.
What is needed for ACH payments?
For each ACH payment, there are four necessary pieces of information.
One: The name of the bank or credit union receiving the funds.
Two: The type of bank account. Is the money coming from checking or savings?
Three: The bank's ABA routing number. Again, this is mandatory since ACH payments are made exclusively between banks.
Four: The recipient's account number.
Wire transfers versus ACH transfers
On the surface, wire transfers and ACH transfers appear very similar. Both are electronic means to shift money around and don't require the use of a credit card. But there are notable differences as well, outlined in the following table.
Benefits of ACH payments
First, ACH payments have lower transaction fees. Again, most transfers are free of charge. On average, if there is a fee, the cost is less than $1 per transfer and an interest fee of less than 2 percent.
Next, these payments are quick and convenient. Despite needing three or so days to move from one institution to another, it only takes one day to approve the actual ACH payment. And, you don't need to go out of your way to make a trip to the bank.
These transactions are recurring and flexible, designed to establish an easy flow of money. You can schedule payments to happen automatically as well.
Finally, fewer declines occur because – unlike credit and debit cards – bank accounts don't expire.
Drawbacks of ACH payments
ACH payments happen in batches three times daily, and overall, the entire process takes about three to five days in order to gather and distribute all the mandatory information.
Furthermore, cutoff times exist as well. Not every bank processes ACH at identical times, so if you miss a deadline, it will take longer, which could be detrimental if you need the money to pay bills.
There are also daily or monthly caps. Most institutions put limitations on the amount that you can send in one payment.
Also, ACH payments are exclusive to the United States only.
Point's contributions
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