Early in the evolution of digital payments, a delegation of California bankers embarked on transforming manual check clearing systems when check payments volumes soared before accepting ACH payments came around. Then, in 1972, this group formed the California Automated Clearing House (ACH) Association, now WesPay. It became the original U.S. model for operational ACH payments, and other regional associations followed.
In 1974, the National Automated Clearing House (Nacha) established the organization to serve as a trustee for the ACH Network. They linked U.S. financial institutions. In Q1 of 2022, the ACH Network processed 7.3 billion payments. The network continues to support a significant percentage of the consumer and government financial transactions that fuel the U.S. economy today by accepting ACH payments.
What Is an ACH Payment?
An ACH payment is an electronic payment sent from one bank account to another via the ACH Network. The ACH credit or debit transaction is processed as a direct electronic funds transfer (EFT) by financial institutions at specific times of a work day in batches. An ACH credit is a direct deposit transfer that pushes funds into a bank account. This includes payroll, vendor, tax refund, benefits program, and other disbursement payments. An ACH debit 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 options include the customer, employee, or organization authorizing the transaction.
- The originator options include the customer, employee, or organization that pushes the transaction and maintains the authorization to accept ACH payments.
- The originating depository financial institution (ODFI) accepts and processes the originator’s ACH transaction.
- The ACH operator, 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 the speed of receiving their funding. Since the phased rollout of Same Day ACH in 2016, processing times have improved, and ACH transaction settlement averages 1-3 business days.
With ACH recurring billing, your business or institution has more control over revenue cycles— including provisions for integrating payment installment plans. This 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’s 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 the account holder requires account authorization to process an ACH transaction, merchants rarely encounter fraud and error issues. However, merchants/individuals can reverse fraudulent transactions if they are reported within 60 days to the financial institution. By design, customers and merchants depend on ACH payments as safe, accurate, and timely transactions. Here are some other benefits of accepting ACH payments.
ACH Payments vs. eChecks
The term eCheck (electronic check) and ACH payment are often used interchangeably. An eCheck functions like a paper check, and the exception presents itself when the ACH Network processes electronically. 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 allow your customers 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 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 pose as reversible. Consider domestic and international wire transfers are irreversible. Wire transfers occur without a bank hold. Unlike ACH, they 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. Learn more about the differences between ACH and wire transfer.
All electronic payments fall under the electronic funds transfer (EFT) umbrella. Accepting ACH payments works like 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.
How to Accept ACH Payments?
To accept ACH payments as a business, you must first obtain a merchant account. Open this 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. An ACH provider will then provide a system to process ACH payments, including collecting and verifying customer account information and obtaining necessary customer approvals. Thorough ACH processors 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 can begin accepting ACH payments. Learn how to set up ACH for payment processing with a step-by-step guide.
Processing Costs of ACH Payments
Transaction fees vary among ACH payment providers. While some ACH providers charge a low flat fee per transaction, others charge a percentage per transaction typically well below prevailing credit card processing rates. The flat fee option may be more affordable if your business plans to process large volumes of ACH transactions. 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 accepting ACH payments, 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, a merchant can only void it before it is sent to the banking system for processing. Once a transaction sends, the transaction can no longer be canceled or refunded. An ACH credit occurs when funds are deposited into the receiver’s account. Because ACH credit transactions must be pre-funded, a merchant must maintain a credit reserve balance in your merchant account to fund submitted credit transactions.
To avoid returned ACH payments, do not neglect to verify customer bank account information. Standard ACH payment reject codes include:
- Insufficient funds found in the customer account (code R01).
- A previously active account is now closed (R02).
- Customer account or name associated with the account does not match bank records or is nonexistent (R03).
- Account number is invalid or does not contain the correct number of digits (R04).
Access the complete list of check 21 return codes on our comprehensive guide. Customers can dispute an ACH transaction for only three acceptable reasons:
- Payee did not authorize the transaction;
- Transaction was processed earlier than permitted; or
- Transaction amount is different than the allowed amount.
An ACH return or reversal/chargeback fee can be expensive but is avoidable with basic due diligence.
Speed, accuracy, security, efficiency, simplicity, convenience, and low cost define the light burden of accepting 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. Speak with one of our experts today to start your payment processing journey.
Date Originally Published: November 12, 2020
Date Updated: August 1, 2022