Accepting ACH payments can make your business more accessible to more customers, even if most of your customers pay using credit or debit cards. ACH usage is steadily climbing: In 2020, the ACH network processed 26.8 billion payments, a 10.8% increase over the previous year. Despite many other technological advances in how people send and receive payments, more businesses are extending ACH as a payment option to their customers.

This article explains what ACH payments are, how they work and how to set them up for your business.

What's in this article?

• What does ACH stand for?
  
• What are ACH payments?
  
• ACH payments vs wire transfers
  
• How ACH payments work
  
• How to accept ACH payments as a business
  
• How much do ACH payments cost for businesses?
  

What does ACH stand for?

ACH stands for Automated Clearing House, which is an electronic payment system that facilitates the transfer of funds between banks and financial institutions. ACH provides a cost-effective alternative to paper cheques and bank transfers and it is widely used by individuals, businesses and government entities to make and receive payments electronically.

ACH operates under the governance of Nacha (the National Automated Clearing House Association, formerly known as NACHA), a non-profit organisation that establishes and enforces the rules and standards for ACH transactions. Nacha is responsible for the development, implementation and administration of the ACH network, which enables the secure and efficient movement of funds between financial institutions within the US.

What are ACH payments?

ACH payments are transfers of funds between accounts at different financial institutions made using the ACH network. The ACH network supports a diverse range of financial activities, including direct deposits, payroll management, vendor payments and personal transactions such as bill payments and fund transfers.

Other types of ACH transactions include:

• Tax refunds
  
• Tax payments
  
• Retirement and investment account contributions
  
• Commercial purchases
  
• Charity donations
  
• University tuition payments
  
• Funds sent between family and friends
  

There are two categories of ACH payments:

ACH Direct Deposit

With ACH Direct Deposit, an employer initiates the transfer of funds from its bank account to the employee’s bank account. The employee provides their bank routing and account numbers to the employer, which uses this information to set up the direct deposit. ACH Direct Deposit is also used for other types of payments, such as social security benefits, tax refunds and vendor payments.

A split ACH deposit is a type of direct deposit in which an employee can allocate their pay into multiple bank accounts or other financial accounts. Instead of having their entire pay cheque deposited into one account, the employee can specify a percentage or a fixed amount to be deposited into one account and the remainder into another account.

ACH Direct Payment

ACH Direct Payments are initiated by a payer and transferred directly from their bank account to a payee’s bank account using the ACH network. They’re basically the reverse of a direct deposit made using the same network. Direct payments can be used for a variety of transactions, such as bill payments, online purchases and recurring payments such as insurance premiums or mortgage payments.

ACH payments vs wire transfers

Both ACH payments and wire transfers carry funds between banks, but they’re actually a bit different. Unlike ACH transfers, which go through the centralised Nacha network, wire transfers travel through the Fedwire Funds Service, formerly known as the Federal Reserve Wire Network. The mechanism for processing both types of transfers through banks is pretty similar, but when they’re processed through a third party, ACH payments are cheaper and easier, because most banks charge higher fees for wire transfers.

Historically, the biggest difference between ACH and wire transfers was that wire transfers were much faster. Wire transfers were settled at the end of each business day, after which the funds were immediately available in recipients’ accounts. ACH payments could be processed within a day or two, but could take three to ten business days, depending on the banks involved.

As of 19 March 2021, ACH transfers got faster. Nacha changed its operating rules and same-day settlement is now available for most ACH transactions.

How ACH payments work

The following key players make ACH payments work:

• National Automated Clearing House Association
  Nacha is the organisation that oversees the governance and maintenance of the ACH network, sets its policies and manages ACH transfers.

• Originating Depository Financial Institution (ODFI)
  The ODFI is the banking institution that issues the ACH transfer request.

• Receiving Depository Financial Institution (RDFI)
  The RDFI is the banking institution that receives the ACH request.

To initiate an ACH transfer, the ODFI sends a request to the RDFI for the amount of the payment. At that point, the two banking institutions communicate to ensure that adequate funds are available in order to complete the transaction. If the funds are available, the transfer is approved.

Unlike wire transfers, which are most often handled in real time, one at a time, every ACH payment that’s submitted within a given window of time is bundled together. Four times a day on business days, Nacha "settles" all the outstanding ACH payments and the funds are sent to their final destination.

Payments can be sent as late as 02:15 ET (these transfers will be settled at 08:30 ET). Three additional same-day ACH processing schedules are scattered throughout each business day when the Federal Reserve’s settlement service is open. Currently, the Federal Reserve’s settlement system closes every business day at 18:30 ET and after Friday, it reopens on Monday at 07:30 ET (or Tuesday if Monday is a bank holiday).

How to accept ACH payments as a business

ACH payments require the routing and account numbers from both parties along with the amount of funds to be transferred. ACH transfers can usually be initiated directly from the online member portal of most banking institutions. Online checkout flows can redirect customers to their banks to authorise ACH payments for purchases. For businesses, there are a few additional steps to take in order to accept ACH payments from your customers:

• Open a business bank account.
  If you want to accept ACH payments, you’ll need a bank account, because ACH payments are transfers between two bank accounts.

• Add ACH payment support from your payment processing provider.
  ACH payments aren’t always included in the standard payment options in your payment flow. The exact steps that you need to take to add ACH payments to your POS will vary depending on who your payment processor is, but you should be able to set it up without too much hassle. Stripe customers can find more information about integrating ACH payments in our docs.

• Get consent from customers to initiate ACH payments drawn from their bank accounts.
  You’ll also need to present customers with an ACH mandate that says that they agree to let you request ACH payments from their account, either as a one-off event or on a recurring basis.

ACH transfers between your business and your customers can work in one of two ways: Either you collect their account details and initiate the ACH payment on your end or you give the customer your business bank account details and have them initiate the payment. Either way works, although the former is more common and exponentially more scalable.

Stripe customers can initiate ACH Direct Debits as a payment method. These bank debits allow businesses using Stripe to pull funds directly from a customer’s bank account, either for one-time or recurring payments. Initiating an ACH Direct Debit through Stripe works in largely the same way as other bank debits: The customer provides their banking details during checkout and gives the business permission to debit their account. Businesses that use Stripe can do this directly from their Dashboard.

How much do ACH payments cost for businesses?

ACH payments cost 0.80% for Stripe customers, with a $5.00 cap and no monthly fees or verification fees. For example, a $200.00 payment would cost a Stripe customer $1.60 and any payments above $625.00 would cost $5.00. This pricing model is favourable if you charge customers large amounts on a regular basis. Different payment processing providers and financial institutions will charge varying fees for businesses to use ACH transfers as a payment method with their customers.