You’ve probably been involved in ACH without your knowing it. Ninety-six percent (96%) of Americans get paid via Direct Deposit, which is a crucial ACH feature. In the first quarter of 2022, even if some forms of pandemic-related government assistance ended, business-to-business (B2B) payments and the increase in ACH’s Same Day ACH dollar limit to $1 million fueled the ACH Network’s growth to $1.2 trillion, with 154 million payments in a single quarter.
What is ACH?
ACH stands for Automated Clearing House. ACH transfers are electronic, bank-to-bank money transfers processed through the ACH Network managed by the National Automated Clearing House Association (NACHA) since 1974.
The ACH Network is an electronic system serving more than 10,000 financial institutions to facilitate transactions in the United States. It works as a financial hub, moving money from one bank account to another. ACH transactions consist of Direct Deposits and Direct Payments, including consumer transactions, B2B transactions, and government transactions.
Direct Deposit lets consumers access their pay quickly through electronic payroll and puts them in control of their finances. Aside from payroll, consumers can receive money through Direct Deposit for:
- Bonuses and commissions
- Pension or 401k payouts
- Social Security and other government payments
- Tax and other refunds
- Travel and other employee expense reimbursements
Along with Direct Deposit, consumers can also choose to use Split Deposit. It is an ACH feature that lets them split their funds into primary deposit and savings or investment accounts. They can opt to have a fixed amount or a percentage of their pay directed to their savings or investment account each pay period, helping them save automatically
Direct Payment is making payments through the electronic transfer of funds, whether sending or receiving. With Direct Payment, consumers can pay their bills, school tuition, make donations to their favorite charity, make purchases, or send money to someone from their savings or checking accounts.
There is also Direct Deposit for Business and Direct Payment for Business. The ACH Network facilitates secure, efficient, and cost-saving financial transactions for businesses big and small.
How Does the ACH Network Work?
How do ACH payments through the ACH Network work?
First, an originator starts a Direct Deposit or Direct Payment transaction through their bank, the Originating Depository Financial Institution (ODFI). Originators can be individuals, organizations, or government bodies. Transactions can be debit (money coming in) or credit (money going out).
Next, the ODFI takes the ACH transaction made by the originator and batches it together with other ACH transactions. Batch transactions are sent at regular, pre-set times during the day.
Then, the batch transactions are received by an ACH operator. There are only two (2) ACH operators in the United States: FedACH and the Electronic Payments Network (EPN).
FedACH, or the Federal Reserve Bank’s Automated Clearing House, is composed of all the Federal Reserve Banks and handles most ACH transactions between commercial banks in the United States.
EPN is a private-sector ACH operator. It facilitates bulk debit and credit transactions for payroll, Social Security benefits, tax refunds, loan payments, and insurance premium payments. It also processes recurring payments, aside from one-time transactions. In fact, the network was originally used to process recurring payments.
After the operator receives the batch transactions, it sorts the batch, then makes transactions available to the bank or financial institution of the intended recipient. This bank or financial institution is known as the Receiving Depository Financial Institution (RDFI).
The recipient’s bank account receives the transaction, reconciling both the sending and receiving accounts and ending the process.
Since the ACH Network batches financial transactions together and sends them at regular times throughout the day, online transactions are very fast and easy. NACHA rules state that debit transactions settle within one day, while credit transactions settle within one to two days. This always benefits the recipient since money coming in is processed faster than money going out.
How Does ACH Work for Businesses?
ACH payments help businesses with quick and secure electronic payment processing since money is moved directly from one bank to another. This is faster and easier than dealing with different credit card networks for processing card payments.
Here are five (5) ways ACH payments can help your business:
(1) Receive payments from your customers.
Customers simply authorize the transaction to transfer funds from their bank to yours. This makes it fast, easy, and user-friendly, and user-friendly payments processing always drives revenue growth.
For one-time transactions, you simply provide the customer with your business bank details and customers initiate the payment from their end. However, you’d like your customers to keep coming back, so you need to set things up for recurring payments and many ACH payments.
To enable this, you must first set up a merchant account with the ACH Network. Find a third-party payment processor (TPPP). If you already accept credit cards, ask your credit card company if they are also an ACH processor. If not, find a processor that makes it easy to accept payments through a point-of-sale system or a payments gateway. Make sure that the processor forwards payments promptly, has an easy-to-use dashboard, and charges reasonable fees.
Once you’ve decided on a payments processor, register for your merchant account. Make sure you know how to initiate transactions through your processor to receive funds from your customers’ accounts. This is usually done through a dashboard or gateway.
Once you’re set up, take the details of your customers’ accounts and initiate transactions from your end, which your customers will simply authorize If they’re concerned about security, they can also enter their payment details themselves via a payment gateway, and the processor will pull funds from their account to your merchant account.
(2) Get rid of card brand fees.
ACH fees have the lowest fees, among the different payment systems. Credit card fees are usually around 2.5% of the value of the transaction, in addition to processing fees. ACH fees are only around $0.30. The savings from fees can quickly add up if you have a large volume of your customers paying via ACH instead of their credit cards.
(3) Pay suppliers.
More than 83% of businesses in the United States use ACH. Your supplier might likely prefer to accept only electronic payments. With the risk of fraud significantly diminished in ACH payments, you won’t have to worry about losing money. You don’t have to spend a lot of your attention, time, and energy on the administrative tedium of issuing paper cheques, too, so you can redirect these to focus on more important aspects of your business, like generating more sales.
(4) Pay employees.
With the ACH system, you don’t have to immerse yourself in the same administrative tedium of issuing paper cheques when paying your employees. You simply have to set up a payment instruction using your employees’ bank account numbers and routing numbers, and secure the necessary authorization from your bank.
(5) Pay taxes.
You can use the internal Revenue System’s (IRS) free Direct Pay service or the Electronic Federal Tax Payments System (EFTPS) service, which are parts of the ACH Network. With Direct Pay or the EFTPS, you can make tax payments online from your bank to the IRS. Direct Pay is for paying for individual tax returns, while EFTPS is for paying for business tax returns.
ACH Benefits for Businesses
The key benefits of ACH for businesses are that it is cost-effective, secure, convenient, and enables recurring payments.
You’ve already seen how credit card processing fees are a lot higher than ACH processing fees. The very low ACH fees are made possible by ACH’s batch processing system, which lowers the flat rate per transfer.
The ACH Network is very strictly regulated, as it connects the U.S. Federal Reserve with the financial system, with several layers of security. For example, ACH rules are explicitly set out for disputing charges with clearly-defined reasons, compared to credit card charges which can be disputed for any reason. You can rely on the ACH system for safer and more secure electronic transactions, too.
It has also already been emphasized how the ACH system makes financial transactions faster and easier with electronic transfer. With a few taps on your device, you can both receive payments from customers and pay suppliers, employees, and taxes at almost the same time!
For business transaction processing, it normally takes 3 to 5 days to clear. Although it’s not the fastest method, it’s way faster than paper cheque payments. Also, when credit card transactions go wrong, they can take weeks to settle. With ACH and its stringent regulations, you have a more reliable and convenient system.
(4) Enables recurring payments
If your business requires regular or subscription payments, the ACH system allows for recurring payments, too. You simply have to set up a regular billing schedule, so your customers can also set up their recurring payments schedule for this. It saves you from investing more attention, time, and energy to routine administrative tasks, and it could significantly lessen or even eliminate your accounts receivables.
ACH helps consumers, businesses, and the government facilitate faster, easier, and more secure financial transactions every day. This fosters more economic activity as well which grows the economy as a whole.
If you haven’t done so yet, sign up for a merchant account (or any other ACH service your company offers) with (your company name, and hyperlink this to your website) now.