Automated Clearing House (ACH) transactions are an electronic method of transferring funds between bank accounts. Though credit card payments offer the convenience of almost instantaneous processing and the potential for rewards, they have higher fees and greater potential for fraud. ACH transactions can take a few days to settle but incur lower costs and are at a lower risk of unauthorized charges.

Given their lower costs, ACH payments are particularly appealing for recurring payments, high-volume transactions, and business-to-business (B2B) operations. The ACH network handled 8.2 billion ACH transfers in the first quarter of 2024.

Below, we’ll explain how ACH transactions work, how they compare with credit card transactions, and the benefits and drawbacks of each method. Here’s what you need to know.

What’s in this article?

• What are ACH transactions?
  
• How ACH transactions work
  
• How credit card transactions work
  
• Pros and cons of ACH transactions vs. credit card payments
  

What are ACH transactions?

ACH transactions are a form of electronic funds transfer in the US, and they electronically transfer money between bank accounts through the ACH network.

Managed by the National Automated Clearing House Association (Nacha), the ACH network plays a major role in the US financial system. It operates as a central processing system that batches transactions and routes them to financial institutions. Banks use this network as an intermediary for transactions rather than connecting with each bank individually, reducing costs and boosting efficiency.

ACH transactions can process large volumes of payments electronically. They’re a reliable alternative to manual payment methods such as paper checks and are commonly used for recurring transactions such as subscriptions, automatic bill payments, or payroll. ACH transactions are also commonly used for bill payments and B2B transactions.

ACH transactions can be credits or debits: credit transactions, also known as direct deposits, involve depositing funds into a bank account. Debit transactions, or direct payments, involve withdrawing funds from an account.

How ACH transactions work

Here’s the general process to initiate and complete an ACH transaction:

• Initiation: The process begins when a party (the originator) initiates a transaction. This could be an individual, a business, or a government entity. The originator submits a request to their bank or payment processor to credit (deposit into) or debit (withdraw from) a bank account.

• Batching: ACH transactions aren’t processed individually; they are batched. The originator’s bank, known as the Originating Depository Financial Institution (ODFI), collects multiple ACH transactions and batches them before sending them to the ACH network.

• Processing: The ACH network processes the batches at regular intervals, typically overnight or several times throughout the day. During processing, the ACH network sorts transactions and sends them to the appropriate financial institutions.

• Settlement: The ACH network sends each transaction to the Receiving Depository Financial Institution (RDFI), which is the bank where the receiving account is held. The RDFI updates the account balances accordingly, crediting or debiting as needed.

Once the funds are moved, the transaction is complete. The process typically takes 1–3 business days, though same-day ACH transactions are becoming more common.

How credit card transactions work

Here’s the general process to initiate and complete a credit card transaction:

• Authorization: When a cardholder makes a purchase, they swipe or insert their credit card or enter card details online. This triggers an authorization request, which the business’s point-of-sale (POS) system sends to the acquiring bank (the financial institution that processes credit card transactions for the business). The acquiring bank then sends the request to the credit card network (e.g., Visa, Mastercard, American Express), which routes it to the cardholder’s issuing bank (the bank that issued the credit card).

• Approve or decline: The issuing bank reviews the cardholder’s account to ensure there’s enough credit available and the card is in good standing (not stolen or blocked). If the account passes this review, the issuing bank authorizes the transaction, sending an approval back through the credit card network to the acquiring bank and then to the business. If there’s an issue, the issuing bank declines the transaction and sends a corresponding message to the business’s acquiring bank.

• Batching: Businesses typically batch approved transactions and submit them to the acquiring bank for settlement. This happens at regular intervals, typically at the end of each business day.

• Settlement: The acquiring bank processes these transactions with the credit card network, which then passes them to the issuing bank for settlement.

• Funds transfer: The issuing bank transfers the funds to the credit card network, which routes them to the acquiring bank. The acquiring bank then deposits the funds into the business’s account, usually within a day or two.

• Billing: The cardholder receives a monthly statement from their issuing bank detailing all their transactions and the total amount owed. The cardholder must pay at least the minimum payment by the due date to avoid late fees and interest charges.

Pros and cons of ACH transactions vs. credit card payments

ACH transactions and credit card payments are widely used for electronic fund transfers. Both methods eliminate the need for physical cash or checks, and both can be used to pay bills, purchase goods or services online, and transfer funds between individuals. Reputable ACH processors and credit card companies implement security measures to protect financial information during transactions.

Beyond these similarities, ACH payments and credit card payments differ in some key aspects. ACH transactions are ideal for cost-effective, bulk, and recurring payments. They’re known for their security and large-scale processing capabilities but lack the flexibility and real-time authorization provided by credit cards. Credit card payments are ideal for retail and online transactions, but they incur higher transaction costs for businesses and potentially higher interest rates and additional fees for cardholders. The choice between ACH and credit card payments depends on the context and priorities of the user or business.

ACH transactions

Pros

• Lower costs and fees for businesses: ACH transactions typically incur lower fees for businesses compared with those of credit card payments, making them cost-effective for bulk transactions and regular transfers. Transaction fees typically range from pennies to a few dollars per transaction.

• Secure: A centralized network securely processes ACH transactions, reducing the risk of fraud and unauthorized transactions.

• Large-scale processing: ACH transactions can handle large volumes of transactions in batches, making them suitable for businesses that need to process multiple payments or payroll.

Cons

• Slower processing times: ACH transactions typically take 1–3 business days to settle. There are options for faster ACH transfers, but these might come with additional fees.

• Limited real-time authorization: ACH transactions aren’t authorized in real time, so retailers typically don’t use them. ACH transactions also don’t offer a guarantee of funds and can be rejected because of insufficient funds in the payer’s account, potentially causing delays or failed transfers.

• Less flexibility for customers: ACH transactions are typically used for specific purposes such as bill payments or direct deposits and lack the versatility of credit cards in retail settings.

Credit card payments

Pros

• Real-time authorization: Credit card payments can instantly authorize and confirm transactions, which is useful for in-store and online purchases, and they offer a guarantee of funds. The credit card network verifies the payer’s credit limit before approving the purchase, and if there are insufficient funds, the transaction is declined.

• Faster transactions: The payment is processed immediately, and funds are deducted from the payer’s account right away, though it might take 1–2 business days for the transaction to appear on the recipient’s statement.

• Customer flexibility: Customers can use credit cards for a wide range of transactions, including shopping, travel, dining, and entertainment.

• Rewards: Credit cards often provide additional benefits such as rewards, points, or cash back.

• Customer protection: Credit cards offer stronger customer protection compared with ACH transfers. If you experience fraudulent charges on your credit card, you can usually dispute them and get your money back, while ACH transactions offer limited protection in such cases.

• Credit building: Responsible credit card usage can help build a positive credit history and credit score.

Cons

• Higher fees for businesses: Credit card payments often involve higher transaction fees and interchange fees, which can affect businesses’ profits. These fees can vary depending on the network (e.g., Visa, Mastercard), card type, and issuer—but they typically range from 1.5% to 3.5% of the transaction amount, plus additional per-transaction charges.

• Potential for debt and fees: Credit card holders might face high interest rates, annual fees, and other charges, leading to debt accumulation if not managed properly.

• Security risks: Credit card information can be targeted by hackers, leading to potential fraud or identity theft. Disputes and unauthorized transactions can add complexity to the resolution process.