ACH Payments, What They Are, and How They Work

Kim Porter

If you’ve ever used direct deposit to pay employees or send money to vendors, you’ve likely benefited from the Automated Clearing House (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?

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). 

The ACH network can facilitate transactions for 23.25 hours each business day and settles 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. 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:

  • Nonsufficient 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 processing provider. 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. 
Kim Porter Kim Porter covers personal finance topics for AARP The Magazine, Bankrate, U.S. News & World Report, Reviewed, Credit Karma, and more. When she’s not writing, you can find her training for her next race, reading, or planning her next big trip. Twitter | LinkedIn
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