ACH Payment Processing: Everything You Need to Know

What is ACH Payment Processing?

ACH payment processing is the banking industry’s definition of moving money between bank accounts in the United States. ACH stands for Automated Clearing House and the ACH network of financial institutions is responsible for the movement of funds. It is managed by Nacha, the organization that sets and enforces the Rules for ACH. The physical network that processes transactions is run by the ACH Operators, notably, the Federal Reserve and The Clearing House. 

According to Nacha, more than 29 billion ACH Network payments were made in 2021, valued at close to $73 trillion.

What is an ACH Payment?

ACH payments are quite common, and chances are that you use them in your personal and business settings. The most common types of ACH payments are between consumers, government agencies, businesses, and employers/employees. Think of ACH as an “electronic check” or “e-check.” It is typically used for paycheck deposits, paying bills and invoices, utility payments, mortgages and tax payments. ACH payments are also commonly used for businesses with customers on recurring payment plans or subscription services that prefer to pay via bank account withdrawals instead of credit cards.

Business owners—especially those that know their customers—like the convenience of ACH payments. They are faster and more reliable than paper checks and they cost less to process than payments made by credit and debit cards or wire transfers. For businesses with recurring payments, the savings really add up.

What are the Types of ACH Payments?

There are two primary categories of ACH: direct deposit and direct payment.

Direct deposit is the fastest and most reliable method for an employer or the government to pay an employee or constituent. In fact, 96% of American workers are paid via this method because they receive their funds quickly and pay no fees. Direct deposits also encompass reimbursements, tax refunds, stimulus checks and payouts (like employee tips or gig worker payments).

Direct payment is used for the movement of funds to make or receive payments, whether by individuals, businesses, or organizations. Examples include making purchases, paying bills or tuition, and donating to a favorite charity. ACH direct payment is the primary focus of this article.

What are ACH Transfers?

There are two primary methods of ACH transfers associated with direct payments, defined by whether money is pushed or pulled into a bank account:

• ACH credit funds are pushed to a bank account, such as when a customer chooses to send funds to a payee, whether that’s a government agency, school, medical practice or business. The most common use is when consumers set up online bill pay through their bank and use ACH credit for one-off bills or payments. Payers securely input banking details and any necessary credentials or reference information.
• ACH debit funds are pulled from a bank account when payment is due. The most common use is for recurring or subscription payments that follow an agreed upon payment schedule (i.e. your cable bill) where ACH Ddebit is used by the payee to automatically debit the consumer’s bank account.

What are the Types of ACH Transfers?

There are more than a dozen types of ACH debit categories, officially identified by Standard Entry Class (SEC) codes, each representing specific use cases. Some are used for one-time payments and others for recurring payments. In all cases, customers must provide permission for the debit to occur, either in writing, online or verbally. The primary use cases for businesses with customer records on file for recurring payments are:

• WEB - Internet Initiated Entry is used when payment is made online 
• TEL - Telephone Initiated Entry is used when payment is taken over the phone 
• PPD - Prearranged Payment and Deposit Entries are used for recurring or single entry authorization by consumers, usually related to a contract or for pre-authorized bill payments
• CCD - Cash Concentration or Disbursement is used when ACH entries are made from a business instead of a consumer

How Does ACH Payment Processing Work?

Before we describe how ACH payments work, let’s understand the parties involved. There are multiple entities that have a purpose in the ACH transaction flow, primarily aligned with either making the payment or being paid. The naming doesn’t have anything to do with who is sending or receiving funds; instead, the name simply identifies which party originates the request: 

• Originator: This is an individual, corporation or other entity that initiates a transaction (ACH credit or debit) using the ACH network.
• Receiver: This is an individual, corporation or other entity that receives an ACH transaction (ACH credit or debit).
• ODFI: This stands for Originating Financial Depository Institution, and it’s the bank or credit union used by the originator to send transactions through the ACH network.
• RDFI: This stands for Receiving Financial Depository Institution, and it’s the bank or credit union that receives ACH entries on behalf of the receiver. 
• ACH Operator: A clearing facility—the Federal Reserve or The Clearing House—that receives ACH entries from the ODFIs, distributes entries to the appropriate RDFI and performs the settlement functions for the financial institutions.

Here’s an example of how ACH debit payments work. Let’s follow the ACH direct payment flow for a yoga studio that has customers set up on a recurring monthly billing cycle to automatically collect payments:

1. Customers sign up for a yoga membership, enroll in autopay and schedule monthly payments by providing checking account details.
2. The yoga studio obtains each customer’s authorization to initiate a request to withdraw funds from their bank account on the first of every month. The yoga studio is the “originator” in this scenario.
3. When the business closes the books at the end of the month, payment details—bank, account information, amount and effective date— for customers who enrolled in ACH autopay are submitted through its payment gateway or processor (i.e. PayJunction) to route the ACH transactions to the ODFI (the yoga studio’s bank). 
4. The ODFI collects and submits a batch of payments at a predetermined time to an ACH operator.
5. The ACH operator sorts the ACH transactions received from all the ODFIs and sends a file of payment details to each customer’s RDFI.
6. The RDFI posts the debits to the customers’ accounts on the scheduled day. 
7. Funds from the ACH transaction are available in the yoga studio’s bank account one to two days later.

How to Make an ACH Payment via the ACH Network

There are two options available to make a payment through the ACH Network: ACH credit and ACH debit.

ACH credit payments typically don’t require consumers to enroll in a service or provide authorization for funds to be withdrawn. Consider them “push” payments that the consumer initiates from within their checking account to instruct their bank to send funds to a payee. Common examples of ACH credit payments are direct deposits for payroll or using a bank’s online bill pay to pay an invoice. Other good examples are when a consumer visits a nonprofit's website to make a donation for a cause or when a medical billing service allows the patients of a practice to pay bills online using their checking account details.

ACH debit payments are considered “pull” payments that a payee (business, utility, etc.) initiates and require a consumer to authorize the organization’s request to withdraw funds from the consumer’s account. Permission may be obtained through a paper form, online form or webpage, or over the phone. The frequency and payment amount must remain the same, otherwise, the organization needs to provide the customer an ACH notification seven-ten days before the amount will be taken, specifying the changes. ACH rules allow a payee to skip this step if customers agree to terms regarding flexible payment amounts or transaction dates when they enroll and authorize ACH payments. Common examples of ACH debit payments are digital app/game subscriptions, religious organization collections, Internet service provider bills or insurance premiums.

How to Accept ACH Payments

Every financial institution in the US is ACH-ready to process ACH credit and ACH debit payments. 

One of the easiest ways to accept ACH payments is through a payment provider like PayJunction that supports the acceptance of credit cards and debit cards. This streamlines all your transaction activity and gives you one point of contact for all payment inquiries.

Be sure that the provider can accept ACH payments for any use cases needed by your business, including online payments, recurring payments, telephone payments and digital invoices. Be sure to choose a reputable provider that complies with all ACH rules and offers you best practices that help you reduce risk.

Businesses that accept ACH payments via a checking or savings account are required to obtain a valid email address and a signed agreement (ACH Authorization Form) that grants permission to charge or refund the bank account for a customer or business.

Monitor ACH transaction activity, especially rejects. ACH payments can return as non-sufficient funds, even if the transaction goes through at the time of purchase. If a customer fails to notify you of an account change, you might also incur a Notice of Change (NOC) charge. While some providers charge for every NOC, PayJunction’s Virtual Terminal autocorrects some account information so you only get charged once.

Which Businesses Should Use ACH Payment Processing?

ACH payments are convenient and cost effective, making them attractive to organizations of all sizes that accept one-time or recurring payments. Setting up autopay is quick and easy. 

Any business that has a large average ticket will benefit from the transaction savings. Here are some types of businesses where ACH payment processing makes good sense:

• B2B businesses that invoice commercial clients for goods and services
• Businesses that receive a high volume of paper checks
• Digital, subscription-based businesses
• Membership organizations, such as gyms or social clubs
• Rental businesses, such as property management companies or businesses that rent furnishings or equipment to individuals and/or companies
• Nonprofits and religious organizations that accept one-time, monthly or annual donations
• Schools, teaching academies and camps that charge tuition payments
• Insurance companies that offer recurring payment plans

Unlike credit cards, the bonus for collecting payments from rejected ACH transactions often falls to the business, not the bank, and notification of a decline may not occur until after the transaction has been processed and the customer is gone. Consider limiting ACH to ongoing, trusted clients and/or enacting a clear, transparent ACH policy that, where appropriate, passes along penalties to the customer.

What are the Benefits of ACH Payment Processing?

ACH is a convenient alternative to paper checks for both customers and businesses. It’s faster and more efficient than paper checks. And it’s more cost effective than credit card payments. Businesses that accept ACH can realize tremendous cost savings on their monthly processing statements. ACH per-transaction costs are typically 0.50% - 1%, compared to a typical range of 2% - 3% for credit cards. The savings really add up, especially for businesses with high average transaction amounts. 

Here are more benefits of ACH payments: 

• Businesses receive their money in one to three days vs. seven to ten days for a paper check.
• Back-office tasks and paperwork are reduced since everything is processed electronically.
• ACH payments can be set up to automatically collect future one-time and recurring payments.
• Unlike paper checks that can get lost or stolen, the ACH network is secure and federally regulated.
• Unlike credit cards that expire or are replaced, bank account details rarely change so service can continue uninterrupted.
• Disputes are reduced since customers must provide authorization for ACH debits and credits. A customer can only dispute an ACH payment under three scenarios:

- If customer authorization was never obtained.

- If the payment was processed on an earlier date than was authorized.

- If the ACH payment is for a different amount than authorized.

What are the Differences Between ACH Payments, Wire Transfers, and EFT Payments?

Electronic Fund Transfer (EFT) is a broad category that encompasses a variety of “cashless” transactions. In addition to ACH payments, other types of transfers include ATM withdrawals, PIN debit transactions, online bill payments, digital wallets, direct deposits, and wire transfers. Not all EFT transactions run over the ACH rails. 

ACH is the subcategory of EFT that deals with bank-to-bank transfers processed through the Automated Clearing House, a network of financial institutions. Only domestic transfers are supported by the ACH network. Unlike most other forms of EFT, ACH transfers are sent in huge batches instead of individual transactions, which is a primary reason that the costs are lower. As discussed earlier in this guide, ACH is used for payments like Social Security benefits, auto bill pay, subscriptions, and more. 

Wire transfers are also bank-to-bank transfers, however, they can be used to send money anywhere in the world. Each wire transfer is for an individual transaction. Funds are typically settled the same day; however, the cost of a wire transfer is higher.

ACH Payment Processing Times

ACH credit transactions—such as making a payment through a bank’s online bill pay—can be processed the same day, or within two days. The availability of funds in the recipient’s bank account depends on the financial institutions involved in sending and receiving the transfers.

ACH debit transactions must be processed within a day and funds are typically available in the recipient’s bank account within 1 - 3 days. ACH does not operate on weekends or bank holidays. There are multiple transfer windows available throughout the day and any files submitted after the cut-off time will be processed the next business day.

Nacha introduced rules a few years ago to support Same Day ACH, a more expensive option that can be used for transactions up to $1 million.

ACH Payment Processing Costs

ACH is an easy, safe and cost-effective method of sending and receiving money. ACH transaction fees are lower than most other forms of payment including paper checks, wire transfers, credit cards and debit cards.

Some payment processors will charge a flat fee for each ACH transaction, somewhere between $0.20 - $2, while others will charge a percent, typically in the range of 0.5% - 1.5%. Regardless, the fees are significantly lower than those incurred for credit card payments. Ethical providers like PayJunction have transparent pricing options and work with you to ensure you are getting the best rates with no monthly fees or hidden fees. 

Are There Penalty Fees With ACH Payments?

Unlike credit cards, ACH transactions act more like checks and are not authorized in real-time, which means transactions can be rejected for a number of reasons, such as if the customer does not have enough money in their account to cover the payment (similar to a bounced check). If you don’t pay attention and take action, you could be left with costly write-offs. Additionally, many banks and processors will charge the equivalent of an overdraft fee for each rejected transaction, which may range from $5 - $25. Some providers will tack on additional hidden fees. 

If you receive a Notification of Change (NOC) rejection, it is important to take immediate action. A NOC means there was a change regarding the bank account you are trying to debit and you risk being charged an ACH account number rejection fee for every NOC received. Some of the steps to remedy a reject can be automated, while others may require outreach to the customer to obtain updated information. While some providers charge for every NOC, PayJunction’s Virtual Terminal autocorrects some account information so you only get charged once.

Talk to your payment provider about ACH risks and associated costs to your business so that you can weigh the costs and benefits to determine if ACH payment acceptance is the right fit for your business.

Still accepting paper checks? What hesitations do you have about switching to ACH payment processing? Tell us below, we’re happy to address your concerns.

Editor's Note: This post was originally published in October 2018 and has been updated for comprehensiveness and accuracy.