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Shams Syed

ACH Payments: What Are They and How Do They Work?

ACH Payments Overview

There’s a lot of buzz surrounding electronic payments nowadays.

With an emphasis on speed and convenience, ACH payments have blazed a trail in the United States to standardize and secure the world of online commerce.

ACH payments are an affordable and easy way to resolve transactions online. They are more efficient than traditional methods, such as paper checks and wire transfers, and provide a level of unrivaled security for online payments in the United States.

What is ACH, Anyways?

ACH stands for the automated clearing house, which is the national online payment network for the United States and is regulated by Nacha; once called the National Automated Clearing House Association.

ACH transactions are versatile; they can be used to set up recurring payments, as well as one-time online transactions. As a result, these payments are a type of electronic funds transfer.

ACH payments are popular in the United States, so much so that, according to Nacha records, a total value of $76.7 trillion dollars was processed in 2022 alone![1]

ACH Payment Types

There are two major ways ACH transactions get processed; direct payments and direct deposits.

Despite the limited options at first glance, ACHs cover a wide range of potential digital transactions.

These include but are not limited to:

  • Direct debit to pay bills
  • eChecks
  • Setting up recurring payments
  • Settling one-time payments
  • Supporting direct deposit from an employee to an employee
  • Transferring funds from one account to another

Using Direct Deposit

Direct deposit can be used for several different purposes:

1. B2B – Business-to-Business

Business-to-Business transactions refer to transactions between two businesses, usually when a retailer needs to restock their inventory from a wholesale supplier.

As opposed to interactions between companies and customers, business-to-business interactions tend to be transactions orchestrated within the supply chain, ie., paying for raw materials needed to create products, stocking additional inventory for retail stores, and cross-brand advertising.

2. B2C – Business-to-Consumer

Business-to-consumer describes the interactions between a business and its consumers. B2C transactions involve the direct selling of a product to a customer via business.

The important aspect to note is that B2C interactions omit the need for a middleman, meaning that the company itself sells the goods or services in question.

Most business-to-consumer transactions are the result of e-commerce, as the new retail solution is cost-effective and accessible. This new online commerce model is a game-changer, threatening the traditional brick-and-mortar retail method.

3. G2C – Government to Consumers (Citizens)

Government-to-citizen payments describe financial transactions issued by a government to its citizens.

G2C transactions provide supplementary living payments (social security), subsidize income in the event of a national crisis (stimulus checks), and authorize tax refunds.

4. G2B – Government-to-Business

Government-to-business transactions describe interactions between government and private businesses. These interactions describe government-initiated relationships.

This can either be the result of private contracting for public services (ie., the state government using a private company for public transportation services, the government paying for the use of private data centers for hosting website data), private consulting, or refunds for online startup registrations.

Direct Payments

ACH payments that use either ACH credit or debits are known as direct payments. There are two different methods that are used to transfer funds across bank accounts; ACH debit and ACH credit.

ACH Debit

If you have recurring bills, such as a utility bill, debits are handy to ensure the lights stay on. Debit payments automatically pull the necessary funds from your account once you’ve provided your bank account and routing information.

As you’ve already given consent in advance, your billers don’t need your authorization to process.

During an ACH debit payment, the receiver sends a request through the ACH network to send payment and move the requested funds to their account.

The process is as follows:

  • The receiver sends the ODFI (Originating Depository Financial Institution) the requested debit amount, the target settlement date, and the categorization code to describe the request.
  • The ODFI or processing partner sends the requested information to the ACH network.
  • The ACH network then collects information received from ODFIs and organizes it into individual messages (representing transactions). From there, the ACH network bundles the messages and delivers them to the appropriate RDFI (Receiving Depository Financial Institution).
  • The RDFIs then convert the message received from the ACH network into their systems, process the transactions, and return any error codes reported.
  • If there are no errors reported by the settlement cut-off time, the ODFI and RDFI settle the transaction.
  • Funds assigned for the transaction are then sent to the receiver.

Debit can also be used to streamline recurring online payments. Pre-authorized debits (PADs) give billers permission to pull directly from a bank account without asking for permission each time.

As a result, PAD payments give you the ability to set and forget, eliminating the risk of missing a monthly payment.

ACH Credit

If you want to be proactive with your payments, you can start the request yourself through an ACH credit. Credits push funds directly to the payee.

ACH credits work like a traditional paper check. With ACH credit, a sender informs the ACH network to transfer funds directly between accounts.

The process is as follows:

  • The sender of the funds submits information to the ODFI (Originating Depository Financial Institution) that includes the sender’s account information, the amount that needs to be sent, a categorization code to describe the nature of the payment, and the target settlement date desired.
  • The ODFI collects the information and sends the request to the ACH network.
  • Five times every business day, the ACH network consolidates the information received from ODFIs, bundles the requests into individual transactions and then bands the transactions to the receiver’s RDFI (Receiving Depository Financial Institution).
  • The RDFI then gathers the data received by the ACH network, processes as many transactions as possible, and returns any errors reported.
  • If there are no errors reported, the ODFI and RDFI settle the transaction using their account balances at the Federal Reserve.
  • Funds designated for settled transactions are delivered to the receiver by the RDFI.

How Do ACH Payments Work?

  1. Starting the transfer – ACH transfers start by being processed using either ACH debit or ACH credit. The payer then provides details for the payment, such as the routing numbers for both sides of the transaction, contact information, and the bank account numbers associated.
  2. Payment Sorting – The Automated Clearing House then asks the payer to decide between standard next-day ACH processing or Same Day ACH processing. Standard processing can take up to two to four business days, while Same Day ACH processing is reliant on Nacha cut-off times.
  3. Transaction Processing – Once the transaction is submitted, the information is sent to both the originating depositary financial institution (ODFI) and the receiving depositary financial institution (RDFI). The ODFI is then responsible for forwarding the same-day information to an ACH operator. From there, the ACH network sends the details to the payee’s bank. If the request was an ACH Credit, funds are then ‘pushed’ and the transaction is complete.
  4. Pulling Funds – If the request was an ACH Debit, the funds will need to move back through the clearing house before the payment is settled.

How Long Will My ACH Transfer Take?

Though the ACH network is always improving, unfortunately, it’s still reasonable to expect resolution times of three to five business days. This is due to the multiple checks and banking checkpoints that need to be reached to complete the transaction.

However, due to Nacha operating rules changing as of September 2020, most transactions are completed on the same day.

Are ACH Payments a Global Service?

The automated clearinghouse system is unique to the United States.

However, there are a few analogs across borders.

For example, Canada uses what is called EFT payments, also known as electronic funds transfers.

The difference is that ACH payments utilize the Automated Clearing House Network, a mandate not required in Canada.

For more information about EFTs and how they work, check out our article on EFTs!

Are you interested in making your ACH payments easier? Reach out to AptPay today!

AptPay helps merchants automate the collection of payments, including invoice payments and recurring payments. This service is designed to be affordable, reliable, and secure. By using AptPay, merchants can reduce the amount of financial administration work they need to handle and decrease the number of late or failed payments.

Understanding ACH Processors and Gateways

ACH processors and gateways are essential components of the ACH payment ecosystem, working together to facilitate smooth and secure transactions.

ACH Processors:

An ACH processor is a financial institution or third-party service that manages the transmission of ACH payment data between the ODFI and RDFI. They ensure the seamless processing of ACH transactions by validating payment information, initiating fund transfers, and handling any transaction issues.

ACH Gateways:

On the other hand, an ACH gateway is a software solution that connects a business’s payment system directly to the ACH network. It serves as a bridge between the company’s internal systems and the ACH network, providing a secure and efficient transmission of payment data. Integrating an ACH gateway simplifies the payment process, enhances security, and can help reduce transaction fees.

By leveraging the services of a reliable ACH processor and using an ACH gateway, businesses can:

  • Streamline their payment processes.
  • Improve security.
  • Minimize costs associated with traditional payment methods.

AptPay is one such solution that can help businesses automate their ACH payments. They offer a reliable, secure, and affordable platform for processing ACH transactions, including invoice payments and recurring payments. Reach out to AptPay today to learn more about how they can help you simplify and optimize your ACH payment processes.

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Author

  • Shams Syed

    Before becoming CEO at AptPay, Shams led Digital Partnerships in Canada for Mastercard, gaining insights into the entire payment ecosystem, including payment facilitators, aggregators, and the evolving six-party model. His experience extends beyond fintech, as he has collaborated with acquirers, direct merchants, consultants, and loyalty programs, allowing him to approach the financial ecosystem with a holistic perspective and develop solutions that address the needs of all stakeholders.

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