If you’ve ever used direct deposit to pay employees or send money to vendors, you’ve likely benefited from the Automated Clearing House network, or ACH network.
The ACH network is a system that moves billions of dollars through the financial system every day, with the ability to reach every bank and credit union account in the U.S.
In addition to running payroll and paying invoices, you can accept ACH payments from your customers and other businesses you work with. This type of electronic transaction is a fast, secure, and potentially cheaper alternative to other types of payment methods—so it’s worth adding it as a payment option.
What is an ACH transaction and how do ACH payments work?
An ACH payment transfers your money from one bank account to another. The money flows through the ACH network, which is administered by the National Automated Clearing House Association (NACHA). Every ACH payment needs an Originating Depository Financial Institution (ODFI)—the bank that sends a payment request to a clearing house—and a Receiving Depository Financial Institution (RDFI), the bank that receives the money.
The ACH network can facilitate direct payments, bill payments, and electronic funds transfers for 23.25 hours each business day and settle payments four times a day. When you send or request an ACH payment, the network can process it the same day, the next day, or within two business days.
Businesses can use ACH transfers to pay vendors, send direct deposit payments to employees, receive payments from customers, and transfer money between bank accounts. And on a personal level, you may use ACH transfers to send money to friends and family members and pay your bills.
How ACH payments differ from wire payments
Like an ACH payment, a wire transfer moves money electronically between two bank accounts. But the funds transfer directly to the recipient without going through a third-party network, so they settle immediately and can’t be reversed. These features make wire transfers quicker—but also less secure and more expensive to initiate.
Types of ACH transactions
There are two main types of ACH transactions, and the key difference is the direction the money moves.
ACH debit transfers
ACH debit transfers allow you to pull money from another account into your own account. If your customers have authorized recurring payments, then you can pull money from their accounts using this type of transfer. Per Nacha rules, you must process debit transfers either on the same day or on the next business day.
Debit transfers are usually free to process, but you may pay a fee if you need one of these expedited.
ACH credit transfers
ACH credit transfers allow you to push money from your account to the recipient’s account at a different bank. Your customers and vendors can initiate one of these transfers to make a payment to you. Or, you might use an ACH credit transfer to send payroll direct deposits and move money to other business accounts.
Banks and credit unions can choose to process and deliver ACH credits either within the same day or in one to two business days. Banks and credit unions can decide whether to charge a fee when you trigger this type of transaction. The fee is usually around $3, but it can vary, and some institutions process them for free. There’s usually no fee to receive an ACH credit.
What kinds of businesses accept ACH payments?
Businesses that collect payments from customers, vendors, and other organizations may decide to accept ACH transfers as a form of payment. Small businesses and enterprises alike use ACH payments to make vendor payments or send a return to a customer’s account. For instance, your business may provide recurring subscription- or membership-based services or collect rent payments from tenants.
On the other hand, ACH payments may not be necessary if you have a physical storefront or otherwise do most of your business in person. In these cases, your customers likely won’t have their banking details on hand—and credit card or cash payments may be the way to go.
Cost of ACH payments
Each payment processing company can decide what to charge for ACH transactions, but it’s usually less than the fee for processing credit card payments. For instance, Square charges 1% of the value of an ACH transaction, with a $1 minimum, and there’s no monthly fee. For credit card payments, Square charges up to 3.5% plus up to 15 cents for each payment.
If your business handles a large volume of ACH payments, you may be able to negotiate with your payment processing company.
Benefits of ACH payments
Making this payment option available comes with several benefits, including:
Wider customer reach. Customers may appreciate this option if they have a bank account but can’t or don’t want to pay with a credit card or paper check.
No expiration dates. A customer’s payment can be interrupted if their credit card expires, but ACH payments go through as long as the customer’s bank account information hasn’t changed.
Lower processing fees. The base fee for each ACH payment is typically cheaper than fees associated with credit cards.
Safety. ACH payments are a secure way to pay vendor invoices, collect payments from customers, and deposit employee payroll. Less than 0.03% of ACH payments are returned as unauthorized, according to Nacha.
Drawbacks of ACH payments
Like all payment methods, ACH payments come with some downsides to consider:
Non-sufficient funds: You won’t be able to collect recurring payments if a customer’s bank account is empty.
Amount limits: While the same-day transaction cap is relatively high—$1 million—it’s still a limit you’ll need to work with.
Target for fraud: Scammers routinely target HR personnel and try to convince them to reroute employees’ direct deposit payments. You’ll need to train employees to avoid this risk.
How to accept ACH payments
If you want to accept ACH payments from your customers, vendors, and anyone else who works with your business, follow these general steps:
Open a business bank account. ACH payments move between bank accounts, so you’ll need one if you don’t already have a business checking account.
Contact your payment processor. You’ll need to work with the provider to add this payment option and complete any additional steps.
Get consent from your customers. They will need to authorize recurring or one-time payments and provide their account details.
Frequently Asked Questions
What are the fees or costs associated with ACH payments?
Vendors and employees don’t pay anything to receive ACH payments; businesses incur the costs. Depending on the payment processing provider you use and the types of ACH payments, ACH fees could be anywhere from 0.5-1.5% of the money you’re sending, which is usually more cost-effective than credit card processing.
Can ACH payments be reversed or canceled after being initiated?
Yes, you can reverse or cancel ACH payments, but you have to act quickly. You usually need to initiate a reversal or cancellation with your service provider within 24 hours.
What is the difference between ACH debit and ACH credit transactions?
The difference between ACH debit and ACH credit lies in who’s sending and receiving the money. ACH credit transactions are initiated by a bank or financial institution to send funds to a person (the payee). ACH debit transactions, on the other hand, are electronic payments initiated by a consumer to transfer funds from one account to another.
Are there transaction limits for ACH payments?
Technically, there are no transaction limits for ACH payments, though the Federal Reserve limits same-day ACH transfers to $1 million.
How should businesses handle failed or returned ACH payments?
Failed ACH payments happen for a number of reasons, usually when there are account or authorization issues, like incorrect routing numbers or banking information. Returned payments can cost your business money and time in administrative work, not to mention adversely affect your customer experience. To prevent returned ACH payments, you need to streamline your payment systems: send transactions in similar batches, create risk scores for new transactions, monitor suspicious activity, and strengthen your payment security.
