How ACH Payment Processing Works and Its Better Alternative

How ACH Payment Processing Works and Its Better Alternative

As the US payments industry continues to expand, credit card payments occupy a big slice of the pie. Automated Clearing House Payments (or ACH payments) offer their own impressive processing volumes.

In February 2023, the National Automated Clearing House Association (NACHA) reported that the nationwide ACH Network processed 30 billion payments in 2022. These payments were valued at $76.7 trillion for the period.

These figures marked respective increases of 3% and 5.6% compared to the 2021 figures. In fact, the 2022 results showed 10 consecutive years in which ACH payments’ total value rose by at least $1 trillion.

Now that recent changes have made ACH processing faster and easier to use, you may be looking at this payment method with fresh curiosity. How can business owners take advantage of ACH payments? And how do ACH payments compare to credit card payments and other electronic payment options?

We’ve got answers. Learn the basics of ACH payment processing for small businesses and service providers in this article. Then see how ACH payments and credit card payments stack up by cost, wait time, and reliability.

What is ACH Payment Processing?

ACH refers to the Automated Clearing House, a U.S. payment processing network that’s managed by the National Automated Clearing House Association (or NACHA). 

Back in the 1970s, the Federal Reserve system introduced ACH payments in partnership with the banking industry. These electronic payments were designed to be more efficient compared to cash and checks. Today, the Federal Reserve still oversees ACH services while continuing to protect this financial services infrastructure from harmful disruptions.

Overview of NACHA functions

NACHA primarily maintains oversight of the wide-ranging ACH Network (or Automated Clearing House Network). This efficient payment system enables seamless direct payments (such as bill payments). The ACH Network also handles direct deposit functions.

These wide-ranging ACH transactions can involve any United States financial institution, such as a bank or credit union. For perspective, NACHA (or the National Automated Clearing House Association) oversaw 30 billion ACH payments in 2022.

By any account, these ACH transactions are a reliable payment method that clears in just a few business days. Today, same-day ACH payments are also available. Both payment options are more efficient (and more secure) than paper checks.

NACHA also develops operating rules applicable to all ACH Network participants. Finally, NACHA offers ACH education and advisory services to Network members.

ACH payments are electronic fund transfers between banks. So, ACH payment processing is a convenient way to send and receive money using only a bank account number and a routing number—no cash, checks, or cards are necessary. 

Two Types of ACH Transfers

Two forms of ACH transfers regularly travel through the United States’ ACH Network. An ACH direct deposit benefits the consumer while ACH direct payments are sent to a business. Both transaction types are considered bank transfers.

ACH direct deposit

A type of electronic payment, an ACH direct deposit is sent from a government entity or business to a consumer. Here are five common examples of ACH direct deposits:

  • Paycheck deposits
  • Government benefits payments
  • Tax refunds
  • Interest payments
  • Annuity payments

ACH direct payments

An individual, business, or government entity can send money via ACH direct payments. To illustrate, a consumer who makes an online payment with their bank account is making an ACH direct payment. A consumer who sends money to a family member is also executing an ACH direct payment.

Here, the sender will see an ACH debit in their bank account. This debit entry contains the recipient’s name and the funds transfer amount. The recipient of the money records an ACH credit to their bank account.

Businesses save time using ACH payments because they eliminate the need to deal with fraud-prone paper checks or mailed payments. ACH transfers are also ideal for recurring payments. You simply ask your customers or vendors to authorize ACH transactions. Also, businesses can now send up to $1 million per same-day transaction, making it a better option for large B2B payments. 

How ACH “Batch Processing” Works

Banks gather ACH transactions into “batches” and process them two to three times each day. Batching transactions lets banks reduce operational costs and pass the savings to your business as lower transaction fees. 

The trade-off? It can take two to three business days to receive your funds with this stop-and-go process—a deal-breaker for businesses with tight cash flow or thin margins. There are now same-day ACH options, which we’ll cover later. 

The same-day processing option

Until 2015, ACH transactions typically required up to five days’ processing time. However, industry lobbying and customer demand led NACHA to add more daily processing windows. Today, same-day ACH transfers enable debit, credit, and return transactions to be processed several times daily.

Same-day ACH payments enable more responsive payroll, more timely bill payments, and fast insurance claims payments. After a natural disaster, victim assistance payments can now be processed more quickly.

Banks differ in their cut-off time for ACH file receipt. If an ACH request is submitted after the cut-off time, next-day processing will take place.

How Does ACH Payment Processing Work?

Here’s a high-level example of what happens when you request an ACH payment. For a large or small business or a non-profit organization, the ACH payment processing protocol is the same.

Requirements for ACH transfers

Small businesses’ ACH transfer requirements are very straightforward. Each ACH transaction requires the account holder’s name and the dollar amount to be transferred. The bank’s routing number and the recipient’s account number (often for a checking account) will also be needed.

The 5-step ACH payment processing sequence

  1. A company invoices a client for a provided product or service.
  2. The client sends the invoice to their bank. This entity is called the Originating Depository Financial Institution (ODFI).
  3. The client’s bank records the account information and invoice amount. Next, the bank includes this transaction data in the day’s scheduled ACH “batch” payments.
  4. The batched payment clears the client’s bank before being routed to the company’s Receiving Depository Financial Institution (or RDFI).
  5. The company’s bank credits the business’s merchant account for the invoiced amount.
Ach Payment Processing_How It Works_Infographic

3 electronic funds transfer types

The term “electronic funds transfer” covers three types of electronic payments. Each payment type has certain characteristics.

  • ACH Payment: This term often refers to a direct deposit to the customer’s account. Individuals, businesses, and government entities can send ACH direct payments for products or services.
  • eChecks: The Automated Clearing House Network can process an eCheck. These virtual checks are taken from the customer’s checking account, just like paper checks. For reference, eChecks and ACH payments have different processing rules.
  • Wire Transfers: Wire transfers (or simply “wires”) are real-time bank transfers between two financial institutions. In contrast, ACH transfers require batch processing and typically require several days for completion.

Credit Card Processing Snapshot 

By now, it’s common knowledge that modern businesses need to accept credit cards to serve the majority of consumers. (One survey showed that 90% of small businesses take credit cards.) Note that debit cards are also among customers’ preferred payment solutions. For a debit transaction, the merchant only needs to confirm that the customer’s checking account has sufficient funds available.

How credit card processing works

All credit card payments (or credit card transactions) follow the same sequence. Here’s an outline of the six-step credit card processing cycle:

  1. The customer provides the merchant with credit card details (via a swipe, tap, or dip function).
  2. The customer’s card information goes to the payment processor, where the request is authorized for processing.
  3. The payment processor routes the request to the card-issuing bank (a partner with the card networks). Ideally, the bank verifies that the cardholder’s bank account (or their credit) has sufficient funds available.
  4. The card-issuing bank approves or declines the card payment request.
  5. The payment processor receives the transaction approval or denial. The processor notifies the merchant of the outcome.
  6. If the card is approved, the merchant processes the transaction. If the card is declined, the customer is notified that they must present another form of payment.

Well-known payment processing providers include Payment Depot, Stripe, Square, and Helcim. Note that all credit card transactions are subject to transaction fees (or processing fees).

Some payment processors also charge a monthly fee and other nuisance fees. Note that Payment Depot’s membership-based pricing structure minimizes fees. This results in proven customer savings.

Business owners still need to understand the major differences between card payments and ACH payments. Use this side-by-side comparison:

ACH Fees vs. Credit Card Processing Fees

ACH paymentsCredit card processing
2-3 business days processing time2-3 days processing time
Fees range from a percentage of 0.5% to 1.5% per transactionFees range from 1.5% to 3.5% (or more)
Ach Payment Processing_Differences With Card Processing_Infographic

ACH transfer fees

ACH payments tend to cost less than credit card payments. ACH payment providers charge a percentage fee of 0.5% to 1.5% per transaction. 

By contrast, the average credit card processing fee ranges from 1.5% to 3.5% (or more). Reputable merchant services providers and payment processors like Payment Depot will help you get the lowest rates regardless of which processor or method you choose.  

ACH payment processing time

ACH payment processing time is now about the same as credit and debit card payment processing time. The typical turnaround for ACH payments is two to three business days and two to three days for credit card transactions. Same-day ACH payments are now available.

The time of day you initiate an ACH transfer influences wait time, so ask your bank about its batch cutoff times. Same-day ACH payments became more widely available in 2019.

ACH transfer payment reliability

For each credit card transaction, card networks verify that cardholders have enough funds left for payment. If funds are approved, they’re guaranteed to the merchant—what’s known as a “guaranteed funds” transaction.

ACH payments don’t offer a comparable payment guarantee. An ACH transfer is first and foremost a fund request. Your transaction could be rejected or returned—days after receiving funds—because the sender was found to have insufficient funds or a closed account. 

ACH Payments Pros and Cons

ACH payments have several advantages along with some downsides. Small businesses should decide whether accepting ACH payments will benefit the company’s customer base.

Benefits of ACH payments

  • Convenient bill payment method
  • Ideal for recurring payments
  • More secure than other payment methods
  • Relatively quick settlement timeframe
  • Free or low-cost transaction
  • Syncs with widely used accounting software

Downsides of ACH payments

  • Potential bank-imposed transaction limits
  • Too many savings transfers can lead to a penalty
  • Bank-imposed cutoff times can delay ACH transactions

How to Set Up ACH Payments for Your Business

Thinking about accepting ACH payments in your business? Here are the steps you should take to do it right.

1. Select an ACH payment processor

The first step is to select a provider that can support ACH payments. If you already have an existing payment processor, it’s worth confirming that they offer ACH services. This way, a single provider can satisfy all your payment needs.

If you decide to shop around, look into multiple vendors and providers.

  • Payment processing platforms. Companies such as Payment Depot, Stax, and  Stripe offer ACH services in addition to credit card processing. 
  • Your bank. Check with your banker and ask if they support ACH transfers Most financial institutions, including U.S. Bank and Chase, offer ACH as part of their business banking offerings. 
  • Financial services software. Your accounting, bookkeeping, or invoicing software may also have features that support ACH payments. For instance, QuickBooks has built-in capabilities for accepting ACH transfers and eChecks. 

Whichever option you choose, remember that ACH processing isn’t free. The good news is that the fees are typically minimal. QuickBooks, for example, charges 1% with a maximum cost of $10 (for certain businesses).

2. Setting up ACH transfer tools and procedures

The next step is to establish the software and procedures for accepting ACH payments. The nuts and bolts of this step will vary depending on your provider. The following tools are typically used to power ACH payments and transfers:

  • A virtual terminal, which you can use to input the customer’s banking info.
  • An eCommerce website, which can provide a self-service platform for shoppers who’ll enter their own banking information. 
  • ACH forms, which you’ll send to customers so you can obtain their banking details. 

Which Merchant Payment Method Wins Out?

If you have to pick one payment method, credit card payments have the advantage. They’re widely adopted, transmit funds quickly, and provide merchants with crucial payment protection. That said, ACH payments are a wise addition to your payment methods, particularly if you need recurring billing.

Which Businesses Should Use ACH Payment Processing?

If you answer “yes” to any of the questions below, ACH payments might be a worthwhile addition: 

  • Do your customers need to use recurring bill payments? 
  • Do you process a high volume of paper checks or invoices? 
  • Does your target market avoid using credit and debit cards, especially for card-not-present transactions (online, phone, etc.)? 
  • Is part of your target market currently ineligible for credit cards?
  • Are B2B goods or services a significant portion of your business?
  • Are you a high-risk business unable to set up a merchant account to accept credit cards? 

The Bottom Line

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Now that you know the ins and outs of ACH payment processing, you’re prepared to make the right choice. Consumers have different payment preferences. Therefore the more options you provide, the more likely you’ll have a happy customer and another sale. 

Payment Depot offers cost-effective, hassle-free ACH services

Merchants who choose Payment Depot as their ACH payment processor enjoy a “win-win” outcome. First, they will see better cash flow with reliable, secure bank transfers into their merchant account. In addition, Payment Depot’s membership-based pricing greatly minimizes account fees and eliminates nuisance fees.

Next, small businesses aren’t subject to long-term contracts and stiff cancellation fees. Equally importantly, Payment Depot delivers industry-leading customer support to every business. Contact us to learn more.

FAQs about ACH Payment Processing

Q: What is ACH payment processing?

ACH payment processing refers to electronic fund transfers between different banks via the Automated Clearing House Network. ACH transfers provide a convenient method to send and receive money using only a bank account number and routing number. This eliminates the need for cash, checks, or cards.

Q: How does ACH payment processing work? 

You send an invoice to your client, who then submits it to their bank, the Originating Depository Financial Institution (or ODFI). The ODFI enters the invoice amount and necessary account details and batches it with other ACH payment requests. Next, the ODFI forwards the invoice and payment to your bank. Your bank, known as the Receiving Depository Financial Institution (or RDFI), credits your account after clearing the invoice payment.

Q: What are the types of ACH transfers? 

Consumers receive ACH direct deposits from a business or government entity. In contrast, a consumer, business, or government entity can send an ACH direct payment.

Q: How long does ACH payment processing take? 

The typical processing time for ACH payments is two to three business days. Banks now offer same-day ACH payments if the transaction is submitted before the bank’s cutoff time.

Q: How do ACH payment processing fees compare with credit card processing fees?

ACH payment providers generally charge less than credit card processing services. ACH payments usually incur a percentage fee ranging from 0.5% to 1.5%. In contrast, credit card processing fees range from about 1.5% to 3.5% (or more).

Q: What is the transaction limit for ACH payments?

In March 2022, NACHA increased its per-payment maximum from $100,000 to $1 million. This increase applies to all eligible same-day ACH payments for consumers and businesses.

Q: What are the differences between ACH payments, e-checks, wire transfers, and EFTs?

EFT is an umbrella term for various types of digital payments, including ACH payments, eChecks, and wire transfers. ACH payments and eChecks can both be processed via the Automated Clearing House Network, but they follow different rules. Wire transfers are real-time bank-to-bank exchanges. ACH transfers are processed in batches and can take several days to complete.

Q: Why should businesses consider ACH payment processing? 

ACH payment processing can be a valuable business funding tool for several reasons. Examples include the need for recurring billing and handling a high volume of paper checks or invoices. Businesses that serve a target market that avoids using credit cards, or processes large B2B transactions, should consider ACH payments. 

Q: How can I start accepting ACH payments for my business? 

To start accepting ACH payments, first choose a provider that can support ACH services. Options include payment processing platforms such as Payment Depot, Stax, and Stripe. Banks offer ACH as part of their business banking services. Finally, financial services software (such as QuickBooks) can process ACH payments.

Q: Is ACH payment processing faster with modern changes? 

Yes, recent changes have made ACH processing faster and easier to use. Many banks offer same-day ACH options if transactions are submitted before the bank’s cut-off time.

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