What is an ACH Payment?
As a consumer, you have likely made payments via ACH, even though you may not be familiar with the acronym. ACH stands for Automated Clearing House, which is the official network connecting US banks to the Federal Reserve. Electronic payments can be made directly from a bank account (ACH debit) using the routing and account numbers. ACH is also called an “electronic check” or “E-check.” It is typically used for bills, invoices, utility payments, and tax payments. ACH is also the method most commonly used for the direct deposit of paychecks (ACH credit).
The ACH network is an association governed by Nacha, which was previously known as the National Automated Clearinghouse Association (NACHA). Nacha develops and administers the private sector Nacha Operating Rules for ACH payments, which define the roles and responsibilities of ACH Network participants. Nearly 27 billion ACH Network payments were made in 2020, valued at close to $62 trillion, and the numbers continue to grow. In fact, the latest Federal Reserve Payments Study reports that the share of ACH grew more by number and value from 2019 to 2020 (during the pandemic) than from 2018 to 2019 (before the pandemic).
This article will explore everything you need to know to get started: How ACH payments work, the benefits of accepting ACH payments, what ACH reject codes mean, ACH best practices, and how to receive ACH payments in PayJunction.
How ACH Payments Work
Accepting ACH payments from your customers replaces paper checks with electronic funds transfer. Cash flow and operational processes related to one-time or recurring bill payments are improved since funds are automatically pulled from the customer’s account.
ACH payments can be accepted in person, over the phone, or online using a secure web form. To process ACH transactions, you simply enter the customer's routing and account numbers and run the transaction. From there, the customer's account is debited and your business receives its funds.
ACH transactions can accommodate much higher value transfers than credit cards. The current limit per ACH transfer is $100,000, and that will rise to $1 million starting in March 2022.
Unlike credit cards, the onus 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; therefore, it is recommended that you accept ACH payments only from trusted customers.
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. There are multiple parties involved in the technical steps of processing ACH payments. Here is a short summary of the process that a business owner should understand when requesting payments made directly from a customer’s bank account:
- The customer is the “receiver” who provides account details and authorizes ACH debits via phone, internet or written documentation.
- The business (merchant) is the “originator” who obtains authorization from the receiver and submits the ACH processing request to the processor (i.e. PayJunction).
- Financial institutions and operators within the ACH network (ODFI, Federal Reserve, and RDFI) exchange information electronically, validate that sufficient funds are available, debit the customer’s bank account, and credit the merchant’s bank account.
Standard settlement typically takes 3-5 business days and some providers, like PayJunction, make funds available the next day.
The Benefits of Accepting ACH Payments
Accepting ACH payments is cost effective. You pay a low flat rate or a flat percentage fee per transfer, which usually costs less than credit and debit cards, especially for high-ticket transactions.
Compared to traditional paper checks, ACH payment processing offers several benefits for both originators and receivers:
- Funds clear faster than paper checks. Get paid in 1 - 5 days vs. 7 - 10 days for a paper check.
- Paperwork and trips to the bank are reduced since everything is processed electronically.
- Unlike paper checks that can get lost or stolen, the ACH network is federally regulated and uses advanced security technology including data encryption.
- ACH payments can be set up for future one-time purchases as well as automated recurring and subscription payments.
- Disputes are reduced since customers must provide authorization for ACH debits and credits. Unlike a credit card chargeback dispute, an account holder can only dispute an ACH payment under three scenarios:
~ If ACH payments were never authorized by the account holder.
~ If the ACH payment was processed on an earlier date than was authorized.
~ If the ACH payment is for a different amount than authorized.
Understanding ACH Reject Codes
Unlike credit cards, ACH transactions act more like checks and are not authorized in real-time, which means transactions can be rejected (similar to a bounced check) and you could be left with costly write-offs unless you take action.
The network provides status codes when an ACH transaction is rejected. An ACH reject can occur for a number of reasons. For example, the bank account may be frozen or lack sufficient funds to cover the transaction.
There are a few ways to handle ACH rejects and, depending on the reason, some transactions may be corrected, resubmitted, and approved. If payments are unsuccessful, you are usually notified within two to four business days of the transaction (much quicker than the five to 10 days it takes with paper checks).
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 reject 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.
The most common ACH reject reasons include:
- “R01 Insufficient Funds” means the customer’s account does not contain a sufficient balance to cover the transaction; in this case, the customer will either have to add money to their account or use a different payment method.
- “R02 Bank account closed” means the account no longer exists; if this account is being used for recurring payments, you will need to contact the customer for a new payment method, as future payments would receive the same rejection.
- “R03 No bank account/unable to locate account” likely means there is a mismatch between the account data entered and the bank’s records. In such cases, your first course of action should be to confirm the account information and try again.
- “R29 Corporate customer advises not authorized” means the customer’s bank has preventative measures in place against ACH payments. In such cases, you will need to ask the account holder to provide the bank with an Originating ID, which will enable ACH withdrawals from your business.
In order to reduce payment delays and the risk of incurring NOC fees, it’s important to familiarize yourself with why, and to regularly monitor and address unresolved rejections.
Accept ACH Payments: Best Practices
If accepting ACH payments sounds like a good fit for your business, here are four tips and tricks to make the process run smoothly:
- Find a provider that processes ACH payments as well as credit and debit cards, presented in person, over the phone or online. You’ll streamline payment acceptance and back-office tasks: consolidate all transactions, easily reconcile and manage activity, maintain customer payment preferences, securely store card and bank account details, and get support through one source.
- Reduce time and keying errors by setting up recurring ACH billing. A cloud-connected Virtual Terminal allows you to automate these ongoing transactions. Recurring billing allows you to securely store a customer’s checking account information and, after receiving a one-time authorization from the account holder, automate transactions based on an agreed-upon billing schedule. When payments are declined, you’ll be notified. This saves the hassle of having to manually process ongoing ACH transactions.
- Make sure you are collecting the right information from customers, as well as obtaining authorization to debit funds from their bank account on an agreed-upon schedule. In order to receive ACH payments – whether on a one-time or recurring basis, here’s what you’ll need:
~ Account holder’s first name and last name
~ Type of banking account
~ Bank account number
~ Routing number
- 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 an NOC charge (while some providers charge for every NOC, PayJunction’s Virtual Terminal autocorrects some account information so you only get charged once). As such, you might want to consider limiting ACH to ongoing, trusted clients and/or enacting a clear, transparent ACH policy that, where appropriate, passes along penalties to the customer.
How to Receive ACH Payments in PayJunction
PayJunction allows you to accept ACH payments made in person, over the phone, and online via a website or a secure hosted checkout form for remote capture. Payments can be captured for one transaction, or set up in a customer’s file to automatically collect recurring and subscription payments.
PayJunction supports ACH payments from businesses, originated as a Corporate Credit or Debit (CCD), and from consumers, originated as a Prearranged Payment and Deposit (PPD). These are true “electronic check” payments. PayJunction does not support paper check conversion done at the point of purchase (POP), in the back office (BOC), or via accounts receivable collection through the mail or a dropbox (ARC).
ACH Authorization must be obtained prior to submitting an ACH transaction for processing and the signed ACH Authorization must remain on file for at least two years. Customer signatures for transactions can be captured in person or remotely, and receipts can be emailed to customers. The PayJunction Virtual Terminal stores electronic signatures as well as secure checking account information.
The Virtual Terminal allows you to email an authorization form to obtain an electronic signature for ongoing payments. You can then set the payment schedule as stipulated in your authorization form and receive ongoing ACH payments.
Want to learn even more? You can watch a video about how ACH payments work with PayJunction or review our Support articles about ACH acceptance. Lastly, you can speak with one of our team members to discuss the next steps to start accepting ACH payments at your business.
Speak with an ACH payment expert to learn more and get started today.
Which tip stood out to you the most and why? We’d love to hear how this piece may have helped you improve your ACH payments.
Editors Note: This post was originally published in November 2019 and has been updated for comprehensiveness and accuracy.