Recurring ACH payments 101: what they are and how they work

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  1. Introduction
  2. What are recurring ACH payments?
  3. Where are recurring ACH payments available?
  4. How do recurring ACH payments work?
  5. How long do recurring ACH payments take?
  6. Business benefits of using recurring ACH payments
  7. Business challenges of using recurring ACH payments

A majority of businesses in the US use ACH payments, an electronic payment method that can handle most types of business transactions. In the third quarter of 2023, the total transaction volume on the ACH network was 7.8 billion payments, a 3% increase from the same period the previous year. Businesses rely on ACH transfers to pay their employees, receive investor funds and accept payments from customers.

ACH payments are usually more cost-effective than other forms of electronic payments, such as wire transfers and credit card transactions, making them a preferred method for routine payments. Although they are not instantaneous, ACH transfers offer a combination of speed and security and are typically completed within a few business days.

While some ACH payments are one-off transactions, many ACH payments happen on a recurring basis. Businesses need a solid operational strategy for managing these recurring payments and the right kind of payment system support. Below, we'll cover what businesses need to know about recurring ACH payments.

What's in this article?

  • What are recurring ACH payments?
  • Where are recurring ACH payments available?
  • How do recurring ACH payments work?
  • How long do recurring ACH payments take?
  • Business benefits of using recurring ACH payments
  • Business challenges of using recurring ACH payments

What are recurring ACH payments?

ACH payments are a popular method of electronic funds transfer in the United States, conducted via the Automated Clearing House network. They provide an alternative to paper cheques and direct cash transactions by enabling direct bank-to-bank transfers. The ACH system is primarily used by employers for direct deposit of payroll and by customers for paying bills and making other payments.

Recurring ACH payments involve moving money electronically from one bank account to another on a scheduled, automated basis. This system is widely used for arrangements where regular financial transactions are made, such as paying mortgage or utility bills, subscriptions or membership fees. The bank and the account holder set up an agreement to deduct a certain amount at regular intervals, which could be weekly, monthly or any other agreed-upon frequency.

This type of transaction is popular because it eliminates the need to pay manually each time a bill is due. Once the schedule is set, the payments are deducted automatically, ensuring that bills are paid on time without any additional action from the account holder. It's a common way of managing recurring expenses that helps individuals and businesses maintain a timely payment record without needing to remember each due date.

Where are recurring ACH payments available?

Recurring ACH payments are available primarily in the United States. The Automated Clearing House network is a US-based network managed by the National Automated Clearing House Association (Nacha). This network processes fund transfers between US financial institutions, including direct deposits and direct payments.

While the ACH network is specific to the United States, many other countries have their own versions of automated payment systems that function similarly for domestic transactions. For instance, Canada has the Electronic Funds Transfer; the UK has Bacs Payment Schemes Limited for direct debits and credits; and across the European Union, Single Euro Payments Area (SEPA) euro-denominated transfers are used.

The ACH network does not support international transactions directly. Businesses and individuals in the US typically have to use alternative cross-border payment methods such as wire transfers, international payment services or other solutions. These services often work with local banks and financial institutions worldwide to enable payments.

How do recurring ACH payments work?

  • Authorisation setup
    First, the account holder (i.e. the payer) must agree to allow automated withdrawals from their bank account. This involves filling in a form that specifies the payment details: the account number, routing number and amount to be withdrawn. This form also includes the schedule for the payments, such as monthly for a utility bill or bi-weekly for a loan payment.

  • Payment scheduling
    After authorisation, the payee – the company or individual receiving the money – sets up the payment schedule with their bank based on the agreed terms. They input the dates and amounts into their banking system, preparing it to request the funds from the payer's bank account at regular intervals.

  • Transaction initiation
    When the scheduled payment date arrives, the payee's bank initiates the payment process through the ACH network. The bank sends a request to the payer's bank for the specified amount of money.

  • Funds transfer
    The payer's bank receives the request and checks the account to ensure that sufficient funds are available. If the account has enough money to cover the transaction, the bank then deducts the specified amount from the payer's account and sends a message through the ACH network confirming the transfer.

  • Confirmation and receipt
    The funds are then credited to the payee's bank account. The payee's bank provides confirmation to the payee that the funds have been received. The account holder also gets a notice, usually via an account statement or an online banking notification, that the funds have been withdrawn.

  • Ongoing monitoring
    Both parties monitor the transactions over time. The account holder ensures that they have sufficient funds in their account before each scheduled payment in order to avoid fees or declined payments. The payee checks that they receive each payment on time, maintaining records of all transactions for their financial tracking.

  • Adjustments or cancellation
    If the account holder needs to change the payment amount or frequency or cancel the service, they contact the payee to update the agreement. The payee then makes the necessary adjustments to the payment schedule in their banking system and the payment schedule continues (or ceases) according to the new terms.

How long do recurring ACH payments take?

Recurring ACH payments typically take a few business days to process. Here's how long each step of the process takes:

  • Transaction initiation
    Payment is usually initiated a day before the actual due date, on account of the processing time required. This is often referred to as the "lead time".

  • Processing period
    After the transaction has been initiated, the ACH network batches the payment with others and processes it on the next business day. This is when the payer's bank will officially transfer the funds out of the account.

  • Settlement period
    The receiving bank will typically see the transaction in its system the business day after the batch has been processed. However, the funds may not be available to the payee until they have been settled.

  • Availability of funds
    Once the receiving bank has the transaction, there's usually a period of one business day before the funds become available in the payee's account. Some banks may make funds available more quickly, depending on their policies.

In total, the ACH transaction process can take anywhere from three to five business days – from the time the payment is initiated to when the funds become available in the payee's account. Weekends and bank holidays can extend this time frame, as banks do not process ACH transactions on those days.

Business benefits of using recurring ACH payments

ACH payments are used widely for their convenience and adaptability to a wide range of payment use cases. Here are some of the key business benefits:

  • Steady revenue stream
    With recurring ACH payments, business revenue is more predictable. This reliability improves financial planning and resource allocation. Companies can schedule their operational activities with the confidence that funds will be available when they are needed.

  • Fewer administrative tasks
    Automating ACH payments reduces the need for manual data entry, as well as the oversight required for each transaction. This saves time and minimises human error in handling payments. Employees can redirect their focus from routine billing tasks to more strategic activities that impact business growth.

  • Lower transaction costs
    ACH payments generally incur lower fees than credit card payments, which can reduce a business's overall transaction costs. For businesses that process a large volume of transactions, the savings can be substantial, allowing them to allocate funds to other initiatives.

  • Improved cash management
    An automated payment schedule gives businesses a clearer overview of when money will be debited and credited, improving cash management. This makes it easier to maintain a healthy cash balance and avoid potential overdraft scenarios, which can be costly.

  • Higher customer retention
    Customers appreciate the convenience of ACH payments, which can improve satisfaction, boost loyalty and influence whether customers continue their relationship with a business. These effects can increase customer lifetime value.

  • Lower environmental impact
    By reducing the need for paper invoices and cheques, ACH payments support a business's sustainability initiatives. This may result in customers who value eco-friendly practices perceiving the business more positively.

  • Fewer late payments
    Since ACH payments are scheduled and automated, businesses experience fewer late payments and can maintain a healthy balance sheet. Late payments can disrupt cash flow and require additional effort for conducting follow-ups and sending accounts to collections.

  • Additional security features
    ACH transactions include security protocols that protect against fraud. These include authentication, encryption and banking regulations that safeguard financial data for businesses and customers – providing peace of mind and reducing the risk of unauthorised transactions.

Business challenges of using recurring ACH payments

To approach the use of ACH payments for your business strategically, you'll need to be aware of the potential challenges. These include:

  • Processing time
    ACH payments aren't processed immediately. Businesses need to plan for the three-to-five-day period of time it takes for funds to clear, which can delay access to funds and affect short-term financial planning.

  • Bank changes
    Customers may close bank accounts without notifying the business, resulting in failed transactions. Handling these account updates requires additional administrative effort and can disrupt the payment cycle.

  • Insufficient funds
    ACH payments can be declined due to insufficient funds in the customer's account. Follow-up actions to collect payment can strain customer relationships and administrative resources.

  • Error resolution
    When an error occurs in an ACH transaction, correcting it can be a lengthy process. Whether the issue concerns an incorrect debited amount or account details in need of an update, the resolution will involve coordination with banks and can take considerable time.

  • Setup and maintenance
    Setting up ACH payment processing requires an upfront investment of time and resources. Businesses must maintain compliance with banking regulations, which can involve ongoing due diligence and updates to security measures.

  • Transaction limits
    Some banks impose limits on the amount that can be transacted via ACH, which can be restrictive for businesses with high-value transactions. These limits may necessitate splitting payments or finding alternative payment arrangements.

  • Customer disputes and chargebacks
    Customers have the right to dispute ACH charges and request a refund within a certain period, known as a chargeback. Managing these disputes can be challenging and may result in lost revenue and additional administrative work.

  • Fraud risk
    While ACH payments are generally secure, they are not immune to fraud. Businesses must invest in security measures to detect and prevent fraudulent activity, which can increase operational costs.

  • Regulatory compliance
    Businesses using ACH must adhere to regulations set by Nacha, which can involve complex compliance requirements. Keeping up with these regulations requires a commitment to legal oversight and can be challenging for businesses without dedicated legal teams.

  • Limited international reach
    ACH is predominantly a US-based network. For international transactions, businesses often have to resort to other – sometimes more costly – payment methods, which can limit their reach or add operational complexity.

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