Automated Clearing House (ACH) processing is a system used in the US to electronically transfer funds between bank accounts. The ACH network is regulated by the National Automated Clearing House Association (Nacha), which establishes rules for secure and accurate transactions. ACH processing is commonly used for large-scale or recurring payments such as payroll, government benefits, tax refunds, bill or mortgage payments, and business-to-business (B2B) transactions. The ACH network handled nearly 31.5 billion payments worth $80.1 trillion in 2023, marking an annual growth of 4.8% in volume and 4.4% in value compared with the previous year.

This guide will cover what ACH processors do, how long ACH processing takes, and best practices businesses should follow when dealing with ACH processing.

What’s in this article?

• Types of ACH transfers
  
• How does ACH processing work?
  
• How long does ACH processing take?
  
• Challenges with ACH processing—and how to solve them
  
• How to choose the right ACH processor
  
• ACH processing best practices
  

Types of ACH transfers

There are two types of ACH transfers: ACH credits and ACH debits. ACH credits send funds to a bank account, while ACH debits withdraw funds from a bank account. Both types of ACH transfers are commonly used in business and personal transactions.

Common types of ACH credits

• Direct deposit: Employers use ACH credits to send salaries and wages to employees.

• Government payments: Government agencies use ACH credits to send benefits (e.g., Social Security) or tax refunds.

• Vendor payments: Businesses often use ACH credits to pay suppliers and contractors.

• Person-to-person payments: Some services let people use ACH credits to send money to one another.

Common types of ACH debits

• Automatic bill payments: Customers use ACH debits to pay bills such as utilities or insurance premiums.

• Loan or mortgage payments: Financial institutions use ACH debits to automatically collect monthly loan or mortgage payments.

• Business-to-business transactions: Businesses use ACH debits to collect payments from clients or other businesses.

• Subscriptions and memberships: Service providers often use ACH debits to collect subscription fees.

How does ACH processing work?

The ACH network operates as a batch processing system. Financial institutions gather and process groups of transactions at specific times, usually during overnight cycles. The typical process for an ACH transaction involves these steps:

• Authorization: The originator (individual, business, or government entity) obtains authorization from the recipient or account holder to initiate the ACH transaction. This can be in the form of written, verbal, or electronic consent, depending on the type of transaction.

• Submission: Once authorized, the originator submits the ACH transaction to their bank, known as the Originating Depository Financial Institution (ODFI). The ODFI is responsible for ensuring the transaction complies with Nacha rules and regulatory requirements.

• Transmission: The ODFI transmits the batch of ACH transactions to an ACH operator, typically the Federal Reserve or The Clearing House. The operator processes the transactions in batches, sorting them based on destination and other factors.

• Delivery: The ACH operator routes the transactions to the Receiving Depository Financial Institution (RDFI), which is the bank of the recipient or account holder. The RDFI is responsible for posting the funds to the appropriate accounts.

• Settlement: The ACH operator facilitates the settlement of funds between the ODFI and RDFI. This involves debiting the ODFI’s account and crediting the RDFI’s account, completing the transfer of funds.

• Reconciliation: The RDFI reconciles the incoming transactions and posts them to individual accounts.

How long does ACH processing take?

ACH processing times depend on factors including the type of ACH transaction, the processing schedule of the ACH operator, and whether the transaction is same-day or standard. The ODFI and RDFI might also have different internal processing times, affecting when transactions are sent or received. Errors in transaction details or issues with authorization (such as requiring additional verification for large transactions or new accounts) can cause additional delays in processing.

Standard ACH processing

Standard ACH transactions usually take one to three business days to process. The exact timing depends on when the transaction is submitted and the batch processing schedule of the ACH operator. ACH transactions are processed in batches at specific times, typically overnight, and transactions submitted after a certain cutoff time will be included in the next batch. ACH processing typically occurs on business days, excluding weekends and public holidays. Transactions initiated on weekends or holidays will be processed on the next business day.

Same-day ACH processing

Same-day ACH transactions are processed and settled on the same business day, usually within a few hours. To qualify for same-day processing, transactions must be submitted before a specific cutoff time. Same-day ACH is often used for urgent payrolls, emergency bill payments, or time-sensitive business transactions, and it might incur additional fees because of the expedited processing.

Challenges with ACH processing—and how to solve them

As with any payment processing, ACH processing comes with costs, security risks, regulatory requirements, and potential for operational hurdles. Here are solutions for handling common challenges that arise with ACH processing:

Fraud and unauthorized transactions

Fraudulent or unauthorized ACH transactions can lead to financial losses and reputational damage.

Solutions

• Strong security measures such as multifactor authentication (MFA) and encryption to protect sensitive data.

• Anomaly detection and fraud monitoring systems to identify unusual transaction patterns.

• Requiring proper authorization such as signed agreements or electronic consent for ACH debits and credits.

• Employee and customer education on phishing, social engineering, and other fraud risks.

Compliance with Nacha rules and regulations

Nacha has strict rules governing ACH transactions, and noncompliance can result in penalties.

Solutions

• Staying updated with Nacha rules and changes.

• Implementing internal compliance programs, including regular audits and staff training.

• Documenting all authorizations, and maintaining records of ACH transactions for compliance verification.

• Working with legal and compliance experts to address complex regulatory issues.

Operational errors and delays

Errors such as incorrect account numbers or submission timing can cause delays in processing and require manual intervention.

Solutions

• Implementing automated validation and error-checking systems to minimize manual errors.

• Using standardized processes for ACH transaction creation and submission.

• Communicating with the ODFI and RDFI to quickly address processing issues.

• Establishing clear cutoff times and processing schedules to avoid delays.

Account reconciliation and settlement issues

Reconciling ACH transactions and settling accounts between financial institutions can be complex and create potential for errors.

Solutions

• Using automated reconciliation tools to track and match incoming and outgoing ACH transactions.

• Maintaining records of transactions for reconciliation and auditing purposes.

• Collaborating with financial institutions to promptly resolve settlement discrepancies.

• Implementing business continuity and disaster recovery plans to minimize disruptions.

Limited processing windows

ACH transactions are typically processed in batches during specific times, which can lead to delays for urgent transactions.

Solutions

• Using same-day ACH for urgent transactions.

• Planning ACH transactions in advance, considering processing windows and business days.

• Communicating with customers and business partners about processing timelines to manage expectations.

Cost management

ACH processing can involve fees, especially for same-day ACH or large volumes of transactions.

Solutions

• Negotiating fees with financial institutions based on transaction volume and frequency.

• Optimizing ACH processes to reduce unnecessary costs (e.g., using direct deposit for payroll to minimize check processing fees).

How to choose the right ACH processor

Choose the best ACH processor for your business by considering factors including cost, reputation, security measures, and compatibility with your systems. Before committing to an ACH processor, request a demo or trial to test the platform and its features. Assess user-friendliness, functionality, and overall suitability for your business.

Business requirements

Identify your business’s needs regarding ACH processing.

• Transaction volume: Estimate the number of ACH transactions you expect to process monthly.

• Types of transactions: Determine whether you’ll need ACH credits, debits, or both.

• Special features: Identify additional features you might require such as same-day ACH, recurring payments, or integration with accounting software.

Compliance and security

Evaluate potential ACH processors based on these criteria:

• Nacha compliance: Ensure the processor adheres to Nacha rules and regulations for ACH transactions.

• Security measures: Look for processors that use encryption, MFA, and other security features to protect sensitive data.

• Fraud prevention: Check whether the processor offers fraud detection and prevention tools to safeguard against unauthorized transactions.

Compatibility and integration options

Integration with existing systems can save time and reduce errors.

• Software compatibility: Confirm the ACH processor integrates with your accounting, payroll, or customer relationship management (CRM) systems.

• API availability: Check whether the processor provides application programming interfaces (APIs) for custom integrations or automated processes.

Pricing and fees

Understand the ACH processor’s cost structure. Fees can vary by provider.

• Transaction fees: Fees for individual transactions.

• Monthly or annual fees: Ongoing fees for account maintenance or additional services.

• Volume discounts: Discounts for high transaction volumes.

Customer support

Reliable customer support can affect your experience.

• Availability: Ensure customer support is accessible during your business hours or 24/7 for urgent issues.

• Response time: Check how quickly the processor responds to customer queries or problems.

• Support channels: Find out which support channels (e.g., phone, email, chat) are offered by the processor.

Reputation and experience

Look for a reputable processor with experience in ACH transactions.

• Industry experience: The processor should have a proven track record and experience in your industry.

• Customer reviews and testimonials: Read reviews from other businesses to gauge customer satisfaction and identify potential issues.

• Business relationships: Check whether the processor has partnerships with well-known financial institutions or other reputable organizations.

ACH processing best practices

There are a couple of best practices businesses can implement to make processing ACH payments go smoothly.

Security and fraud prevention

• Dual control: Require at least two people to authorize and initiate ACH transactions to reduce the risk of internal fraud and errors.

• Strong authorization: Obtain written authorization for recurring ACH debits. Store authorizations securely for at least two years after the authorization is canceled in case of disputes.

• Account verification: Verify bank account information with customers before initiating ACH transactions. A simple test transaction (small amount) can be useful for initial verification.

• System security: Use secure file transfer methods (e.g., Secure File Transfer Protocol [SFTP]) when sending ACH files to your ODFI. Implement strong firewall and antivirus protection.

• Monitoring: Regularly reconcile bank accounts to catch unauthorized transactions. Use bank alerts for changes to recurring transactions or suspicious activity.

Operational efficiency and error reduction

• Data accuracy: Verify account and routing numbers to avoid returns and associated fees. Invest in data validation software solutions.

• Timeliness: Be aware of ACH processing deadlines and settlement windows. Batch payments accordingly for timely completion.

• Rejection management: Have a clear process for handling ACH rejections. Understand rejection codes, and take prompt corrective action for timely resubmission or resolution.

• Customer communication: Communicate with customers about recurring ACH payments. Notify them in advance of changes or issues.

Compliance

• Nacha rules: Stay up-to-date on Nacha operating rules, which are periodically revised. Regularly review changes, and adjust internal procedures as necessary.

• Recordkeeping: Maintain records of all ACH transactions, authorizations, and any return notifications for compliance and auditing purposes.

• Partners: Choose a reputable ACH processing software or provider and ODFI. Ensure all partners comply with relevant rules and regulations.