Automated Clearing House (ACH) payments drive payroll, recurring billing, vendor payments and B2B transfers across the US, accounting for 33.6 billion payments in 2024. While they have a low profile compared to newer payment methods, they are core financial infrastructure that powers some of the most important money movements in the US economy. When and how businesses use ACH payments shapes their costs, cash flow predictability, efficiency and scalability.

Below, we'll explain the advantages of ACH payments, why ACH payments are widely used for recurring transactions, and what businesses should consider before they adopt them.

What's in this article?

• What are ACH payments?
  
• How do ACH payments work within the US banking system?
  
• Why are ACH payments cost-effective?
  
• How do ACH payments improve reliability and predictability for recurring transactions?
  
• What advantages do ACH payments offer finance teams?
  
• What should businesses understand about using ACH payments?
  
• How can businesses determine when ACH payments are right for them?
  
• How Stripe Financial Connections can help
  

What are ACH payments?

ACH payments are electronic bank transfers that move money directly between bank accounts through the US's ACH network. Because they're low-cost, simple and predictable, they're used for a large share of everyday financial activity, from payroll deposits and tax refunds to bill payments, vendor payouts and subscription charges.

How do ACH payments work within the US banking system?

ACH payments move money through a shared banking infrastructure that's designed for efficiency and scale. The process is standardised, highly automated and based on transaction batching.

Here’s how it works step by step:

• The originator initiates the transaction: A business, individual, or government entity starts an ACH transaction by submitting instructions to their own bank or payment processor. These instructions include the payment amount, the recipient's account number and the ACH routing number of the recipient's bank.

• The payer's bank reviews the payment: The originator's bank, known as the originating depository financial institution, validates the payment details, confirms that the authorisation requirements have been met, and groups the transaction with other ACH payments in a batch.

• The batch is sent to the ACH network: Batches are sent at scheduled intervals to an ACH operator, which serves as the central clearing layer for all participating banks.

• Transactions are sorted and routed: The ACH operator sorts each transaction and routes it to the appropriate receiving bank based on routing numbers.

• The receiving bank processes the payment: The receiving depository financial institution posts the transaction to the recipient's account, either crediting funds (e.g. for payroll) or debiting them (e.g. for bill collections).

• Banks settle: Behind the scenes, banks settle net balances through accounts held at the Federal Reserve, which completes the funds transfer between institutions. Standard ACH payments typically settle within one to three business days, while eligible same-day ACH payments clear within the same business day as long as they're submitted before the cutoff time.

Why are ACH payments cost-effective?

ACH payments are designed for efficiency at scale. As a result, they're consistently one of the lowest-cost ways to move money domestically.

Here's how ACH payments maintain a low cost compared to other money transfer methods:

• Low, flat transaction fees: ACH payments typically incur a small, flat fee per transaction, measured in cents rather than percentages. ACH payments are especially cost-effective for large transactions (e.g. rent, tuition, invoices, payroll) because fees don't grow with their size.

• No interchange or network percentage fees: With card payments, card networks and issuing banks take a percentage. ACH payments move outside of card networks, which eliminates this fee.

• No wire transfer fees: Electronic transfers often incur fees for both the sender and recipient, which makes them unsuitable for recurring transactions. ACH fees are charged per transaction and don't add up as quickly.

• Functional efficiency: ACH's batch-based, automated processing minimises manual handling. This can lower labour costs tied to reconciliation, exception handling and payment follow-up.

How do ACH payments improve reliability and predictability for recurring transactions?

The ACH system is based on stable bank relationships. Banks talk to banks, which improves reliability and predictability.

Here's why it works:

• Settlement timing is consistent: ACH payments follow predictable clearing timelines so businesses know when funds will arrive and can plan with confidence.

• Automation is the default: Typically, recurring ACH payments are set up once and then run automatically. Payments can go through without manual action or follow-up.

• Payments rarely fail: Card-based payments often fail because they're vulnerable to reissues, fraud blocks and limit changes. Once a recurring ACH authorisation is in place, failures are rare.

• Bank accounts don't expire: Unlike credit cards, bank account numbers don't have expiry dates, which minimises payment failures caused by outdated payment details.

• Payments leave a record: Each ACH transaction is electronically recorded and traceable. This makes it easier to reconcile recurring revenue and investigate exceptions when they occur.

What advantages do ACH payments offer finance teams?

ACH transactions can simplify how money moves into and out of businesses. They do so by decreasing cost, manual effort and risk.

Consider the following advantages:

• Lower processing costs at scale: Meaningful savings accrue across large payment volumes.

• High transaction limits: Same Day ACH supports large individual payments so businesses can move substantial sums without resorting to expensive electronic transfers.

• More predictable cash flow: Known settlement windows make it easier to forecast inflows and outflows. This improves short-term liquidity planning and working-capital management.

• Simpler reconciliation: ACH transactions include consistent electronic records that map to existing documentation, which helps reduce reconciliation time and errors.

• Fewer disputes and reversals: ACH transactions generally generate fewer disputes compared to card payments. This can lower revenue volatility and time spent on dispute resolution.

• Strong fraud controls: ACH rules and bank-level controls protect authorisation and transaction validity.

What should businesses understand about using ACH payments?

Since the ACH system prioritises reliability and low cost, it operates differently from real-time or card-based payments. Here are the main things to keep in mind:

• Authorisation is required: Businesses must obtain and retain proper customer authorisation for ACH debits. They must also follow network rules regarding consent and notification.

• Settlement isn't instant: ACH payments clear on a scheduled timeline and usually take one to three business days. This is slower than real-time payment systems that confirm funds immediately when a payment is initiated.

• Reach is limited: ACH payments primarily work with US bank accounts. International ACH transfers to countries such as Canada and the UK are possible, but they use the local networks in those regions and can take longer to process.

• Security is necessary: ACH transactions involve sensitive bank data. Bank account and routing numbers must be stored and transmitted securely, which often drives teams to rely on tokenisation or third-party processors.

• A hybrid approach is possible: Rather than force a single option, organisations might offer ACH payments alongside cards and steer customers toward whichever is the better fit.

• Returns still occur: Although they're more reliable than credit card payments, ACH transactions still fail occasionally, usually due to insufficient funds, closed accounts, or incorrect details. Businesses that use these payments still need processes in place for notifications, retries and follow-ups. And because payment success or failure is reported after processing, these workflows must account for delayed payment status updates.

How can businesses determine when ACH payments are right for them?

ACH is most effective when cost efficiency, reliability and scale matter more than instant confirmation. As payment volume increases, the underlying mechanics stay the same. That makes it easier to grow.

Consider the following use cases:

• High-volume or high-value payments: ACH payments make sense for cases when transaction fees significantly affect margins (e.g. large invoices, recurring billing).

• Payroll: ACH allows businesses to pay employees in bulk through a single file. It works whether you're paying a handful of people or tens of thousands, with consistent timing and minimal administrative work.

• Recurring billing: The ACH system's stability makes it great for subscriptions, memberships, vendor payments and payroll. Payments grow along with customer counts.

• B2B payments: ACH supports large-value vendor and partner payments at a fraction of the cost of cards or electronic transfers, which makes it practical for routine accounts payable.

• Transactions during growth periods: With ACH payments, you can increase head count or add customers without changing your payments infrastructure.

How Stripe Financial Connections can help

Stripe Financial Connections is a set of application programming interfaces (APIs) that allows you to securely connect to your customers' bank accounts and retrieve their financial data, enabling you to build innovative financial products and services.

Financial Connections can help you:

• Simplify onboarding: Offer a seamless, instant bank account verification process that doesn't require manual identity and account verification.

• Access rich financial data: Retrieve comprehensive information about your customers' bank accounts, including balances, transactions and account details.

• Automate recurring payments: Enable your customers to securely link their bank accounts for recurring payments, improving payment success rates.

• Enhance risk management: Analyse customers' financial data to make more informed decisions about credit, lending and other financial products.

• Comply with regulations: Financial Connections helps you meet Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements.

• Innovate with confidence: Build new financial products and services on top of the secure, reliable Financial Connections infrastructure.

Learn more about Financial Connections or get started today.