What is automated clearing house (ACH)

Run by an organization called Nacha, the ACH network works as a US financial network for electronic payments and money transfers. 

What is the Automated Clearing House (ACH) Network?

The ACH is a network that electronically moves money from one US bank account to another, allowing businesses and consumers to make electronic payments and money transfers. 

ACH transactions are available for checking accounts and savings accounts only, processed in batches three times a day. As a result, the typical ACH processing time is three to five business days. 

Nacha, formerly known as the National Automated Clearing House Association (NACHA), is in charge of the ACH network. While governing the network, Nacha maintains security and ensures that all operations are compliant.

The ACH system also connects other financial institutions, such as the Originating Depository Financial Institution (ODFI), which initiates the transaction, and the Receiving Depository Financial Institution (RDFI), which receives the ACH request.

What is an ACH payment?

Both the consumer world and the business landscape use the ACH payment system as a type of electronic bank-to-bank payment method.

These electronic payments and money transfers, also known as direct payments, allow the electronic transfer of money without paper checks, cash, wire transfers, or credit card networks.

How an ACH payment works

The automated clearing house network makes payments easy for businesses through the following steps;

• Setup - get permission from a customer’s bank account via an authorization form

• Initiation - originator sends data files to the bank (ODFI), including transaction type, routing numbers, and bank account details

• Batching - ODFI collects transaction files and forwards them to an ACH operator at regular intervals (either FedACH or the EPN)

• Distribution - ACH operator sends data files to the customer’s bank (RDFI)

• Completion - RDFI pulls funds from the customer’s bank account

Benefits of ACH payments

If you’re a business owner, you most likely have profit and growth as a top priority and strategize accordingly. For example, streamlining payroll saves money and increases profit. ACH payments can help by offering the following benefits.

• Save money - ACH payments have lower processing fees and bypass expensive card networks, making them cheaper than card payments

• Control over transfer date, frequency, and amount - ACH Debit allows you to manage cash flow better and decide when you get paid

• Improve customer retention - ACH payments have a low payment failure rate and reduce unnecessary customer churn due to credit and debit cards expiring

• Reduce the stress of late payments - by reducing late and failed payments, ACH Debit frees up time for more important business tasks

• Automate financial processes - integrating automated payment collection with the business accounting software helps to save time and money

• Collect payments with ease - enjoy the option to accept ACH payments from customers who complete the online form

Direct deposit vs. direct payment

ACH transactions fall into two main categories, namely direct deposits and direct payments_._ These work in both business-to-consumer as well as business-to-business scenarios.

Direct deposit

Businesses and the government commonly use direct deposits to make payments to a consumer. For example, a small business will use a direct deposit for payroll. Direct deposits may also be used for government benefits such as social security, as well as tax refunds, interest payments, etc.

Direct payment 

Both individuals and organizations use direct payments to move funds electronically. Whether a working son wants to send money to his elderly mother or a busy parent wants to pay utility bills efficiently — ACH direct payments are useful.

It’s also possible to sign up for recurring payments, which is especially effective for regular fixed expenses. 

Types of ACH payments

There are two main types of ACH transfers, namely ACH Credit and ACH Debit. Nuanced differences exist between the two, with the most notable being whether the money is pushed or pulled between two accounts. 

ACH Debit

ACH debit transactions pull funds out of an account based on customer authorization. In turn, businesses collect payments directly from a customer’s account without sending an invoice requesting an electronic funds transfer (EFT), wire transfer, or cash payment.

ACH Credit

ACH credit transactions push funds into an account. In this instance, the payer is responsible for initiating the transfer by moving funds from their account to the receiver’s account.

Streamline global payments with Deel

Adopting ACH transfers can streamline bill payments and payroll and reduce the hassle of dealing with payment processing.

Managing the hiring process, maintaining compliance, and managing paychecks in the modern working world have never been easier.