Early in the evolution of digital payments, a delegation of California bankers embarked on transforming manual check clearing systems when check payments volumes were soaring. In 1972, this group formed the California Automated Clearing House (ACH) Association, now WesPay, which became the original U.S. model for operational ACH payments. Other regional associations followed.
In 1974, the National Automated Clearing House (Nacha) was established to serve as a trustee for the ACH Network, which links U.S. financial institutions. In 2019, the ACH Network processed 24.7 billion payments valued at $55.8 trillion. The network continues to support a significant percentage of the consumer and government financial transactions that fuel the U.S. economy today.
An ACH payment is an electronic payment sent from one bank account to another via the ACH Network. The ACH credit or debit transaction processes as a direct electronic funds transfer (EFT) by financial institutions at specific times of day in batches. An ACH credit transacts as a direct deposit transfer that pushes funds into a bank account, including payroll, vendor, tax refund, benefits program, and other disbursement payments. An ACH direct debit transfer pulls funds from a bank account, including consumer payment of mortgage loans, insurance premiums, and other one-time or recurring bills.
Five parties play a role in ACH transactions. The receiver can include the customer, employee, or organization that authorizes the transaction. The originator can include the customer, employee, or organization that pushes the transaction and maintains the authorization. The originating depository financial institution (ODFI) accepts and processes the originator’s ACH transaction. The ACH operator, either The Federal Reserve or The Clearing House, receives ODFI ACH entries and distributes them to the receiving bank. The receiving depository financial institution (RDFI) debits or credits the receiver’s account and manages exceptions, such as insufficient funds.
Benefits of ACH Processing
ACH payments pose many benefits to a merchant, including speed of receiving their funding. Since the phased rollout of Same Day ACH in 2016, processing times have improved. ACH transaction settlement averages 1-3 business days.
With ACH recurring billing, your business or institution has more significant control over revenue cycles— including provisions for integrating payment installment plans— which prevents late charges, negative points to credit profiles, and loss of service due to payment lapses. In March 2020, the Same Day ACH dollar limit per transaction increased from $25,000 to $100,000, a boon to the expedition of high-value transactions. Account setup for this type of service requires a secure link between the biller and the customer bank account.
While credit cards remain a popular form of payment, not everyone has access to them. ACH expands the reach of your business to accommodate customers who do not carry credit cards.
Industry regulation of the ACH Network ensures security and accuracy for all parties involved. Because account authorization is required by the account holder to process an ACH transaction, merchants rarely encounter fraud and error issues. However, fraudulent transactions can be reversed if they are reported within 60 days to the financial institution. By design, customers and merchants can depend on ACH payments as safe, accurate, and timely transactions.
ACH Payments vs. eChecks
The term eCheck (electronic check) and ACH payment are often used interchangeably. An eCheck functions like a paper check, except that it is processed electronically through the ACH Network. As with other optional ACH features, eCheck acceptance has distinct advantages, including low fixed-cost transaction rates, ease of use, public-key cryptography, and digital signature security features not available with paper checks. According to eCheck.org, eCheck payments offer the most security online.
eChecks give your customers the option to authorize a one-time or recurring payment directly from their bank account just as conveniently as a credit card transaction. This time-proven secure payment alternative for online businesses also applies to companies that choose to convert paper checks into digital payments at the point of sale using remote deposit capture (RDC).
Differences Between Wire Transfers, EFTs, and ACH Payments
ACH payments and wire transfers require a bank account and routing number to transfer funds from one bank account to another. ACH payments are reversible, whereas domestic and international wire transfers are irreversible. Wire transfers occur without a bank hold, unlike ACH, and are generally completed within 24 hours. Wire transfer fees tend to be expensive; however, initiating a wire transfer online can reduce costs. Merchants and customers find ACH transaction costs far less costly.
All electronic payments fall under the umbrella term electronic funds transfer (EFT). ACH is a type of EFT, as are wire transfers, payroll direct deposits, credit card payments, debits, eChecks, mobile payments, and PIN transactions involving ATM cash withdrawals or debit card usage at gas stations.
To accept ACH payments as a business, you must first obtain a merchant account, a specific type of bank account, separate from the business bank account that acts as a holding and settlement account for payment processing revenue.
The next step, you need to select a third-party ACH processing provider, ideally one that specializes in your business category. The ACH provider will then provide a system to process ACH payments, including collecting and verifying customer account information and obtaining necessary customer approvals. The ACH processor will also provide a payment gateway, an application that enables payment acceptance and authorization via a virtual terminal, secure hosted payments linking to your business website, and a check scanner, if needed.
With these pieces in place, your business is ready to accept ACH payments.
Transaction fees vary among ACH payment providers. Some ACH providers charge a low flat-fee per transaction, while others charge a percentage per transaction typically well below prevailing credit card processing rates. If your business plans to process large volumes of ACH transactions, the flat fee option may be more affordable. Some providers may negotiate ACH costs as an incentive to sign up for other services. Other fees may include one-time setup fees, monthly fees, batch fees, and high-ticket surcharges. Before signing with any provider, discuss all potential charges beforehand.
In processing an ACH payment, find it essential to understand that an ACH hold is placed on the bank account, meaning the bank has received the ACH entry, and the payment amount will soon be deducted and cleared as authorized. When an ACH transaction is scheduled, it can only be voided before it is sent to the banking system for processing; once sent, the transaction can no longer be voided or refunded. An ACH credit occurs when funds deposit into the receiver’s account. Because ACH credit transactions must be pre-funded, a credit reserve balance must be maintained in your merchant account to fund submitted credit transactions.
To avoid returned ACH payments, it is important to verify customer bank account information. Common ACH payment reject codes include insufficient funds in the customer account (code R01); a previously active account that is now closed (R02); the customer account or name associated with the account does not match bank records or is nonexistent (R03); the account number is invalid or does not contain the correct number of digits (R04).
Customers can dispute an ACH transaction for only three acceptable reasons: 1) the payee did not authorize the transaction; 2) the transaction was processed earlier than authorized; or 3) the transaction amount was different than authorized. An ACH return or reversal/chargeback fee can be expensive, but it is avoidable with basic due diligence.
Speed, accuracy, security, efficiency, simplicity, convenience, and low-cost define ACH payments and explain why the ACH Network adds more than 1 billion new payments to its U.S. network each year. For the best results, work with a Nacha Preferred Partner, such as iCheckGateway.com, who can deliver the latest ACH technology and offer digital solutions with multichannel capabilities for fast settlement, industry-compliant, and simple-to-navigate systems. ICG makes it convenient to accept eChecks, ACH direct transfers, recurring billing, and remote deposit capture payments (RDC) to get ahead in business.
Contact iCheckGateway.com for fast and secure ACH processing solutions.