ACH payments, or Automated Clearing House payments, are electronic payments that move funds between bank accounts using the ACH network, which is based in the United States. The ACH network, which is managed by Nacha, processed nearly 31.5 billion payments in 2023. ACH payments are used for direct deposits, bill payments (e.g., utility bills, mortgages, loans), business-to-business (B2B) transactions, and government transactions such as social security benefits and tax refunds.

This guide will explain how ACH payments work, how long they take to process, and what businesses can do to improve the speed and lower the cost of ACH payments.

What’s in this article?

• ACH transfers vs. wire transfers
  
• How are ACH payments used?
  
• How does ACH payment processing work?
  
• How long do ACH payments take to process?
  
• How much do ACH payments cost?
  
• Benefits of using ACH transfers for businesses
  
• ACH payment challenges for businesses
  
• ACH payment processing best practices
  

ACH transfers vs. wire transfers

ACH transfers and wire transfers are two different methods for sending money electronically. Each method has different features, processing speeds, and associated costs.

Speed

ACH transfers are slower than wire transfers, and typically take 1–3 business days to complete. Wire transfers typically process within the same day or even within minutes.

Cost

ACH transfers are typically free or have a very low fee, while wire transfers are more expensive.

Security

ACH transfers are considered more secure because of their stronger verification process and potential for reversal in case of errors. Wire transfers are difficult or impossible to reverse, which makes them riskier if the sender or bank enters incorrect account information.

International payments

Although the ACH network is US-based, businesses and individuals can send ACH payments to other countries with local equivalents of ACH, including Canada, Australia, and the United Kingdom. Wire transfers are a more common choice for international transfers, however, because users can send a wire transfer to any country.

Frequency

ACH transfers can be used for recurring payments, while wire transfers are typically one-time transactions.

How are ACH payments used?

ACH payments are a cost-effective payment method for many different types of businesses. These payments simplify operations and support the global shift toward electronic and paperless environments. Here’s how businesses can use ACH payments for making and receiving payments.

• Payment collection: Businesses can use ACH payments to collect payments for invoices, services rendered, or recurring subscriptions. ACH payments are less expensive and often easier to manage than processing credit cards, especially for recurring billing.

• Direct deposit for payroll: Employers use ACH transfers to pay wages, salaries, bonuses, and expenses to their employees’ bank accounts. This simplifies the payroll process and eliminates the need to issue physical checks.

• Supplier and vendor payments: Businesses can pay their suppliers and vendors via ACH.

• Tax payments: Businesses can use ACH to make state and federal tax payments.

• Intercompany transfers: For businesses that operate with multiple divisions or entities, ACH payments are an important tool for intercompany fund transfers.

• Lease and rent payments: Property management companies and real estate firms use ACH to collect rent and lease payments, which minimizes the need to handle checks and cash.

• Utility and service bills: Businesses can use ACH to pay for regular operational expenses such as utilities, internet, and phone services. This automates the process and prevents interruptions in essential services.

How does ACH payment processing work?

Here’s how the ACH payment process works.

• Payment initiation: The initiator authorizes an ACH transaction by providing their bank account number, routing number, and the transaction amount. The initiator specifies whether it’s an ACH credit (pushing money into an account) or an ACH debit (pulling money from an account).

• Payment creation: The Originating Depository Financial Institution (ODFI) creates the ACH payment file based on the initiator’s instructions.

• Batching: The ODFI groups similar ACH transactions into batches for efficient processing.

• Routing and sorting: The ACH operator sorts the transactions based on the destination bank (the Receiving Depository Financial Institution, or RDFI) and routes the batches accordingly.

• Processing: The RDFI receives the ACH transaction file from the ACH operator. They validate the account information and process the transaction, either crediting the recipient’s account or debiting the payer’s account.

• Settlement: The funds move between the ODFI and the RDFI, typically within 1–3 business days. Usually, the originator and the payee are notified when the transaction is complete.

• Returns: Errors such as insufficient funds or incorrect account information can lead to payment returns, which is when the RDFI sends the funds back to the ODFI.

How long do ACH payments take to process?

ACH transfers typically take 1–3 business days to complete, but the exact timing can depend on a few factors.

• Type of transfer: There’s a small difference between ACH credits (pushing money in) and debits (pulling money out). Debits generally process faster than credits.

• Initiation time: ACH payments are batched throughout the day for processing. A transfer initiated later in the day might not be included in the earliest batch, adding a day to the processing timeline. Make sure to initiate transfers early in the business day for a better chance of inclusion in the earliest batch.

• Initiation date: ACH payments are not processed on weekends or holidays. Payments initiated on these dates will not start processing until the next business day.

• Same-day ACH: Some financial institutions offer same-day ACH processing for an additional fee. This is a good option for urgent payments.

• Payment returns: Errors or insufficient funds can lead to payment returns, extending the processing time. The initiator should verify all account information (e.g., routing number, account number) before beginning the transfer.

How much do ACH payments cost?

Many banks offer free or low-cost ACH transfers for personal use, especially for bill payments or transfers between accounts within the same bank. ACH payment fees tend to be much lower than credit or debit card processing fees, but the exact cost of an ACH payment varies depending on the following factors.

• Transaction type (debit vs. credit): ACH debits (pulling funds) sometimes cost slightly more than ACH credits (pushing funds).

• Payment processor: Each payment processor or financial institution sets its own fee structure. This might be a flat fee per transaction, a percentage of the transaction amount, a monthly fee, or a combination of these fee types. Businesses that process high volumes of ACH transactions might be able to negotiate lower rates with their payment processor.

• Same-day ACH: Same-day ACH transfers usually have higher fees.

Benefits of using ACH transfers for businesses

ACH payments offer a variety of benefits for businesses. These include:

• Cost-effective: ACH transfers generally incur lower fees than credit card transactions and wire transfers. They are a cost-efficient choice, especially for businesses with high transaction volumes.

• Efficient: Businesses can automate recurring payments via ACH. This saves time, reduces the risk of manual error, and creates a lower administrative burden associated with payment processing.

• Predictable: ACH transactions are processed on a regular schedule, which creates a predictable cash flow for better financial planning.

• Secure: ACH payments are considered more secure than traditional check payments, which are susceptible to fraud tactics such as forgery and theft. The electronic nature of ACH transfers limits the exposure of sensitive banking information and further reduces the risk of fraud.

• Faster than checks: While not as fast as some electronic payments, ACH transactions are typically faster than check processing.

• Less paperwork: ACH eliminates the need for writing, mailing, and handling checks, which creates a simpler accounting process and supports environmental sustainability goals.

• Inclusive: ACH payments can be processed for almost any bank account, including those that are not eligible for credit or debit card transactions. This inclusivity enables businesses to reach a broader customer base.

• Scalable: As businesses grow, ACH provides a scalable solution that can handle an increasing number of transactions without a corresponding increase in cost or complexity.

ACH payment challenges for businesses

ACH payments are not immune to fraud and other security risks. Here are some of the main security features and potential vulnerabilities of ACH payments.

• Authorization: ACH rules require the originator to obtain explicit authorization from the customer for transactions. This protects customers but also requires businesses to maintain accurate records and manage authorization documents.

• Data protection: When handling ACH payments, businesses must comply with regulations such as the Gramm-Leach-Bliley Act in the US, which mandates that financial institutions protect the security and confidentiality of customer data.

• Fraud potential: ACH fraud can occur through tactics such as phishing, in which fraudulent actors trick businesses or individuals into providing sensitive account information. Businesses must educate their employees about such risks and implement strong internal controls.

• Reversal rules: ACH payments can be reversed under certain circumstances, such as when a transaction is processed in error or unauthorized. While this is a security feature for consumers, it can pose a risk of revenue losses to businesses if not managed properly.

ACH payment processing best practices

To take advantage of the benefits ACH transfers provide, businesses should prioritize authentication, fraud detection, and customer education. Here are some best practices for ACH payment processing.

Due diligence and authentication

• Advanced authentication: Implement layered authentication protocols, especially for initiating ACH transactions. Consider biometric verification (e.g., fingerprint or facial recognition) for mobile or online platforms.

• Customer verification: Use tools such as the US Treasury’s Office of Foreign Assets Control (OFAC) list and Anti-Money Laundering (AML) checks to avoid fraudulent transactions and regulatory penalties.

Risk management and fraud detection

• Behavioral analytics: Use machine learning and behavioral analytics to monitor account activity and detect anomalies that deviate from established patterns, and which might indicate fraud.

• Transaction limits: Set dynamic transaction limits based on the customer’s historical data, transaction context, and risk profile. This balances operational flexibility with risk control.

Batching schedules

• Intelligent batching: Optimize the timing of your ACH batching to align with your business cycle, cash flow needs, and the settlement periods of your major customers and vendors.

• Real-time monitoring: Implement systems to monitor ACH processing statuses in real time, allowing for quicker reactions to failed transactions or rejections.

Compliance and audit preparedness

• Automated compliance updates: Use compliance software that automatically updates your systems in response to regulatory changes in the ACH network.

• Regular audits: Regularly conduct internal and third-party audits of your ACH processes to ensure adherence to Nacha rules and other regulatory requirements and to identify areas for improvement in your fraud prevention and compliance strategies.

Data security and privacy

• Data encryption: Use advanced encryption methods for all data in transit and at rest, including newer encryption algorithms that meet or exceed industry standards.

• Privacy by design: Integrate privacy into the design of your ACH processing systems, protecting customer data through the entire transaction lifecycle and only making it accessible based on role-specific permissions.

Customer education and support

• Proactive customer education: Develop comprehensive education programs to inform customers about the security aspects of ACH transactions, common fraud scenarios, and preventive measures they can take.

• Support for ACH queries: Provide customer support teams with specialized training for handling high-level ACH queries.

Strategic partnerships

• Collaborate with banks and fintechs: Partner with banks and fintech companies to employ their technologies and expertise, particularly in areas such as fraud detection, risk management, and regulatory compliance.

• Participate in industry forums: Engage in forums and committees that discuss ACH regulations and trends to stay ahead of industry developments and influence policy making.