ACH payments are transactions that use the Automated Clearing House (ACH) network to electronically transfer funds between banks. This system, which transferred $80.1 trillion in 2023, facilitates both credits and debits. ACH payments are commonly used for payroll, automatic bill payments, and tax refunds.

Here’s a closer look at how ACH payments work:

• Initiating: An originator (such as an employer or utility company) initiates the payment process by submitting an ACH entry to their bank.

• Batching: The originating bank collects these transactions in batches and sends them at regular intervals to an ACH operator (either the US Federal Reserve or The Clearing House).

• Processing: The ACH operator processes the batches and routes the entries to the recipient’s bank.

• Settlement: Funds are credited to or debited from the recipient’s bank account, typically in one to three business days.

ACH payments typically have much lower processing fees than credit cards, making them a cost-effective option for regular and bulk payments. They are also generally considered secure and are governed by Nacha regulations. Below, we’ll cover how ACH payment processing works, how to set up ACH payments, and how to troubleshoot common payment issues.

What’s in this article?

• What are ACH payments used for?
  
• How does ACH payment processing work?
  
• Security measures in ACH payment processing
  
• Benefits of using ACH payments with Stripe
  
• How to set up ACH payments with Stripe
  
• Troubleshooting common ACH payment issues
  

What are ACH payments used for?

ACH payments are known for their efficiency, quick processing, and low cost for handling bulk transactions. Although they’re typically used within the United States, ACH payments can be sent from the US to other countries through international ACH transfers. They’re also a preferred method for many types of financial transactions.

ACH credits

An ACH credit involves pushing funds into a bank account. They’re commonly used for:

• Direct deposit of paychecks: Employers use ACH to electronically transfer payroll funds directly to employees’ bank accounts.

• Government payments: The US government uses ACH to disburse Social Security benefits, tax refunds, and other payments to citizens.

ACH debits

An ACH debit involves moving funds out of a bank account. They’re often used for:

• Business-to-business (B2B) transactions: Companies often use ACH to pay vendors or suppliers.

• Online bill payments: People commonly set up automatic ACH payments for recurring bills such as utilities, rent, tuition, automotive, or mortgage payments.

• Tax payments: Businesses and individuals use ACH to make tax payments directly to tax agencies.

• Online transactions: Customers use ACH for online shopping payments, especially for recurring charges such as subscriptions, donations, and memberships.

• Peer-to-peer (P2P) payments: Venmo, PayPal, and other services use ACH to facilitate transfers between individuals’ bank accounts.

How does ACH payment processing work?

ACH payment processing involves a series of steps between multiple parties including the payment originator, the originator’s financial institution, the ACH operator, and the recipient’s financial institution. Here’s a step-by-step overview of how ACH payments are processed.

ACH credits

• Transaction initiation: The process begins when an originator (typically a company or government entity) wants to send funds to another bank account. To initiate the transaction, the originator needs authorization from the recipient in the form of a signed agreement, a recorded verbal agreement, or an online acceptance of terms.

• Transaction submission: The originator sends the transaction details to their bank, which is known as the Originating Depository Financial Institution (ODFI). These details typically include the amount of the transaction, the recipient’s bank account details, and the date the transfer should occur.

• Transaction batching: The ODFI aggregates multiple ACH requests into batches. These batches are then sent at predetermined times throughout the day to one of the ACH operators (either the Federal Reserve or The Clearing House).

• Transaction clearing: The ACH operator receives batches of ACH entries from many ODFIs. It sorts the transactions and makes them available to the payment recipients’ banks, or the Receiving Depository Financial Institutions (RDFIs).

• Transaction delivery: The RDFI receives the ACH entries intended for its account holders. The RDFI then processes these entries and updates the account balances accordingly, making sure that the credit transactions are posted to the correct accounts.

• Transaction confirmation and settlement: Once the RDFI processes the transactions, the funds are credited to the recipient’s account, usually within one to three business days after initiation. Settlement, or the actual movement of funds between banks, occurs through the bank’s Federal Reserve accounts.

• Transaction notification: If a transaction can’t be processed for reasons such as insufficient funds, incorrect account information, or a closed account, the RDFI notifies the ODFI. The ODFI then informs the originator. There can be fees for failed transactions, and the originator might need to address the issue and initiate the transaction again.

ACH debits

• Transaction initiation: The process begins when an originator (either a company or an individual) wants to collect funds from another bank account. To initiate the transaction, the originator needs authorization from the recipient. This authorization can be in the form of a signed agreement, a recorded verbal agreement, or an online acceptance of terms.

• Transaction submission: The originator sends the transaction details to the ODFI. These details typically include the amount of the transaction, the payer’s bank account details, and the date the transfer should occur.

• Transaction batching: The ODFI aggregates multiple ACH requests into batches that are sent at predetermined times throughout the day to one of the ACH operators.

• Transaction clearing: The ACH operator receives batches of ACH entries from many ODFIs. It sorts the transactions and makes them available to the RDFIs.

• Transaction delivery: The RDFI receives the ACH entries intended for its account holders. The RDFI then processes these entries and updates the account balances accordingly, making sure the debited accounts have sufficient funds for the transactions.

• Transaction confirmation and settlement: Once the RDFI processes the transactions, the funds are debited from the payer’s account, usually within one to three business days after initiation. Settlement, or the actual movement of funds between banks, occurs through the bank’s Federal Reserve accounts.

• Transaction notification: If a transaction can’t be processed for reasons such as insufficient funds, incorrect account information, or a closed account, the RDFI notifies the ODFI. The ODFI then informs the originator. There can be fees for failed transactions, and the originator might need to address the issue and initiate the transaction again.

Security measures in ACH payment processing

ACH transaction security protects sensitive financial data and prevents payment fraud to maintain the integrity of the ACH network. Here’s an overview of the key security measures.

• Encryption: All ACH payment data is encrypted in transit and at rest to protect sensitive banking information (e.g., account and routing numbers) from unauthorized access. Encryption ensures that, even if a breach occurs, the data remains unreadable without the decryption key.

• Authorization: Customers must provide explicit authorization for ACH debits, either through a written agreement or online consent.

• Fraud prevention: Financial institutions and ACH operators use risk assessment tools to detect suspicious activity and potential fraud attempts. These tools monitor ACH transactions for unusual patterns or anomalies that might indicate fraudulent activity.

• Account verification: Financial institutions use services to verify that businesses and organizations that initiate ACH transactions are authorized to debit those accounts. Small test transactions can be used to verify account information and ownership before processing larger payments.

• Security policies and procedures: To use ACH payments, organizations are required to have written security policies for protecting sensitive data, mitigating risk, and responding to any incidents. Staff involved in ACH processing are trained to identify and prevent fraud, and security audits are regularly conducted to ensure that security measures are up-to-date and effective.

Best practices

For additional security in ACH transactions, follow these best practices:

• Dual control: Implement procedures that require two individuals to authorize high-value or sensitive transactions.

• Limited access: Restrict access to ACH data and systems to authorized personnel only.

• Strong passwords: Use complex passwords and change them regularly.

• Multifactor authentication: Require a second form of authentication (e.g., a code sent to a mobile device) in addition to a password.

• Regular software updates: Keep all software used in ACH processing up-to-date to address security vulnerabilities.

• Incident response plan: Have a plan in place to quickly respond to any security breaches.

Benefits of using ACH payments with Stripe

Stripe can process several types of transactions. Accepting ACH debits can help your business in various ways, including:

• Lower processing fees: ACH processing fees are lower than credit card processing fees. This translates to substantial savings for businesses, especially those that process a high volume of payments.

• No interchange fees: Unlike credit card transactions, ACH payments do not involve interchange fees, which are fees paid to the cardholder’s issuing bank. This further reduces processing costs.

• A rate cap: Stripe caps ACH processing fees to minimize percentage-based fees on large transactions.

• Reduced risk of fraud: Stripe allows customers to securely share their financial data with you, which can help to reduce the risk of fraud and simplify payments.

• Broader customer base: Accepting ACH debits along with credit cards allows businesses to serve a broader range of customers, including those who do not have or prefer not to use credit cards.

Specific Stripe features

Stripe has several features to make ACH debits as easy as possible for customers and businesses to navigate. Here’s a closer look:

• Instant bank account verification: Stripe’s instant bank account verification allows customers to verify their bank account details quickly and securely to improve the success rate of ACH payments.

• Increase conversion: With Link, Stripe’s accelerated checkout, you can reduce drop-off at checkout by enabling your customers to autofill their bank details.

• Reduced payment risk: Stripe Financial Connections lets your users securely share their financial data with you, or Stripe can manage risk for you with Instant Bank Payments.

• Faster settlement: ACH payments with Stripe can be settled within two business days, providing businesses with fast access to funds and better cash management.

• Stripe Dashboard integration: ACH transactions are integrated with the Stripe Dashboard, so businesses can track and reconcile payments along with other payment methods.

• APIs: Stripe has a strong set of application programming interfaces (APIs) that allow businesses to easily integrate ACH payments into their websites, applications, or accounting software.

• Customizable checkout: Stripe’s checkout experience can be customized to offer ACH as a payment option along with credit cards, making it simple for customers to select this option.

How to set up ACH debit payments with Stripe

Here’s how to set up ACH payments with Stripe as your payment processor.

Create a Stripe account

• Sign up for a Stripe account and provide your business information, including your legal name, address, and tax ID.

• Verify your business bank account by linking it to Stripe. This process typically involves providing your bank account and routing numbers.

Process ACH payments

• Collect bank account information: An ACH debit requires account and routing numbers and the name of the payer.

• Verify the customer’s bank account: ACH rules require that you validate customer bank accounts prior to debiting them. Financial Connections’ instant verification can assist with the best buyer experience; Stripe also supports micro-deposit verification.

• Get authorization from the buyer: Collect authorization to debit the customer’s bank account.

• Submit the payment: Once the account is verified and you have obtained authorization, Stripe will submit it to the ACH network.

• Await payment confirmation: ACH failures such as insufficient funds can be received from the buyer’s bank anytime within approximately four business days from payment submission. Once this return window ends, Stripe marks the payment as “confirmed.”

• Receive funds: Stripe will settle funds into your Stripe balance. We offer standard and faster settlement options.

• Manage disputes: In rare cases, customers can contact their bank and dispute an ACH debit up to 60 days after payment creation. When this occurs, Stripe creates a dispute and debits the funds from your Stripe account.

Troubleshooting common ACH payment issues

Like all payments, ACH transactions occasionally run into issues. These might be related to technical failures, manual errors, or insufficient funds. Some common payment issues and their solutions are outlined below.

Common ACH payment issues and solutions

Insufficient funds (R01)

• Issue: The customer’s bank account doesn’t have enough money to cover the payment.

• Solution: Notify the customer about the failed payment and request that they add funds to their account. Reattempt the payment after confirming sufficient funds. For future payments, consider implementing a retry mechanism to automatically reattempt failed payments after a certain amount of time.

Account closed (R02)

• Issue: The customer’s bank account has been closed.

• Solution: Contact the customer for updated account information. Update your records with the new information and resubmit the payment.

Invalid account number (R04)

• Issue: The bank account number provided is incorrect or invalid.

• Solution: Verify the account and routing numbers with the customer and double-check your data entry for typos or errors. Resubmit the payment with the correct account information.

Unauthorized transaction (R05, R07, R29)

• Issue: The customer claims they didn’t authorize the payment or revokes the transaction.

• Solution: Investigate the dispute and gather any supporting evidence, such as authorization forms or agreements. If the dispute is valid, reverse the transaction. Work with the customer to resolve the issue amicably.

Payment stopped (R08)

• Issue: The customer has placed a stop payment on the transaction.

• Solution: Contact the customer to understand the reason for the stop. If the stop payment is legitimate, cancel the payment. Address the customer’s concerns and attempt to resolve the issue.

Processing delays

• Issue: ACH payments take a few business days to process and any delay can prolong the process.

• Solution: Set clear expectations with your customers about ACH processing times. If payments are urgent, consider using same-day ACH transfers. Regularly monitor your ACH transactions for any unexpected delays and investigate the cause.

Best practices to avoid ACH payment issues

To minimize ACH payment issues, follow these best practices:

• Verify bank account information: Before initiating a payment, you can use Stripe Financial Connections’ instant bank account verification or micro-deposits to verify the customer’s bank account information.

• Obtain authorization: Make sure you have clear and documented customer authorization for ACH debits.

• Communicate with customers: Provide your customers with clear and transparent information about ACH payments, including processing times and potential fees.

• Monitor transactions: Regularly monitor your ACH transactions for any errors or discrepancies.

• Address disputes: Respond to customer disputes or chargebacks promptly and professionally.