What is ACH and How Does it Work for Businesses?

ACH is used for payments such as payroll direct deposit and authorized bank-account collections. Distinguish a credit to an account from a debit, and standard ACH from Same Day ACH when comparing timing and limits. Network totals, a particular service’s transaction volume and a per-payment limit describe different things; check the applicable provider and network terms for the payment you need to make.

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 connects participating financial institutions for electronic transfers in the United States. Nacha explains the roles of banks and ACH operators; Nacha establishes operating rules but does not itself process payments.

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
Annuities
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 is the Federal Reserve Banks’ ACH service. The Electronic Payments Network is operated by The Clearing House.

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.

Settlement timing depends on the entry type, submission window and applicable rules. Ask your provider about standard ACH, Same Day ACH, availability of funds and return handling; settlement does not eliminate the possibility of a return.

How Does ACH Work for Businesses?

Businesses can use ACH for authorized bank-account payments. Compare its timing, costs and return procedures with the other payment methods your customers use.

Here are five (5) ways ACH payments can help your business:

(1) Receive payments from your customers.

Customers must authorize ACH debits using the method appropriate to the transaction. A convenient payment process can help customers complete payment, but does not guarantee 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.

Arrange ACH origination through a bank or payment provider. Review eligibility, authorization collection, account validation, fees and return procedures before accepting payments.

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.

Collect and retain the required authorization before initiating a debit. Use the provider’s secure payment flow for bank details and confirm how to handle changes, cancellations and returns.

(2) Compare payment costs.

ACH pricing varies by provider and agreement. Compare transaction charges, monthly fees, return fees and any minimums with your expected volume. Do not assume a single flat price or that ACH will always cost less than cards.

(3) Pay suppliers.

ACH can reduce the need to issue and reconcile paper checks when suppliers accept it. Verify payment instructions and protect account access: electronic payments still face fraud, error and return risks.

(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.

Review the IRS payment options for the tax and taxpayer type involved. Available services and enrollment requirements differ; confirm the correct method before scheduling a payment.

ACH Benefits for Businesses

The key benefits of ACH for businesses are that it is cost-effective, secure, convenient, and enables recurring payments.

(1) Cost-effective

Evaluate the total quoted cost for your payment mix, including returns and account fees. Batch processing alone does not establish the price a business will pay.

(2) Secure

ACH uses authorization and operating requirements, but it is not risk-free. Protect bank details, verify changes to payment instructions and follow the applicable return and dispute procedures. See the Nacha guide to ACH roles and authorization.

(3) Convenient

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!

Confirm submission cutoffs, settlement timing and when your provider makes funds available. A payment shown as submitted or settled may still be subject to return under applicable rules.

(4) Enables recurring payments

ACH can support recurring payments with appropriate authorization. Explain the schedule and cancellation process, monitor returns and reconcile each collection; recurring billing does not guarantee payment.

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.

Explore Payline’s ACH payment options and discuss eligibility, authorization requirements and pricing for your business.