For the first quarter of 2023, just shy of $20 million in payments were processed through the ACH network. This channel has witnessed continuous growth since it first began in the late 1960s. And as a fast and secure alternative to other payment methods, ACH is still revolutionizing financial institutions today. But what is an ACH payment and how does it work? Details in this article.
What is an ACH payment?
ACH payments refer to a funds transfer through a specific network; the automated clearing house (ACH). The clearing house is owned by twenty-four of the largest banks in the US which means that each payment transfer from these institutions can be batch processed.
Because it’s run online, ACH payments don’t actually require the exchange of physical currency. Instead, individual payments are aggregated from various banks and electronically transferred in one go. This keeps costs down and ensures that funds are delivered in a timely manner. Compared to other payment methods, this balance between low cost and a reasonable timeframe hits the sweet spot.
ACH payments take approximately three days to complete, meaning that there is a small window of waiting (though still less than paper check processing). Having said that, the technology is cheap to use, with the average transaction costing just $0.29 to process. Same Day ACH does exist, but is significantly more expensive to process. And while it’s very efficient, it present significantly more risks around fraud.
ACH vs wire transfers?
Here’s a quick overview of ACH, wire transfer:
- ACH payments are formalized with a file system through the US network, which can take around three business days but costs only a few cents
- Wire transfers happen in real-time and work for international transfers, but are expensive at approximately $25 per transaction
- EFT payments are a form of wire transfer specifically for paying with card, making them slightly cheaper than wire transfers while still delivering instantly
ACH payments might be the most popular way to pay in the US, but they’re not the only payment method. As a business, it’s good to consider the advantages and disadvantages of each transfer type, so that you can choose the best method for your business.
Beginning with ACH payments, these can be summarized as cheap (costing well under a dollar to process) and fairly fast but not immediate, taking up to three days to clear. Domestic payments (US to US transfers) are preferred for each ACH transfer since the network is limited to US-based banks. But an international supplier with US bank accounts can participate in ACH processing too, allowing you to pay international merchants.
This is probably the best payment type for companies with a need to keep costs low that don’t require immediate funds. Plus, the automated financial nature of ACH makes it easy to set up a recurring payment to suppliers without having to validate or input any information each month.
Bearing that in mind, wire transfers are processed in real-time which means that recipients get the money immediately, and faster than through ACH payments. However, this is negated by the fact that wire transfers are incredibly expensive, and can cost up to $25 per transaction. But if you’re working with international suppliers, wire transfers might be the better option since there’s less friction (no need to sign up for a US bank account).
Finally, EFT payments (electronic fund transfer) are a type of wire transfer, so they carry the same advantages and disadvantages. But, EFTs are specifically for card payment transactions, making them slightly cheaper to operate.
Here is a comparison of ACH vs wire transfers:
|ACH payments||Wire transfers|
|Takes up to three days to deliver the funds||Funds delivered immediately in real-time|
|Incredibly cheap to process (less than $1)||Expensive to process (average $25)|
|Better for domestic-to-domestic accounts although can work internationally||Easily work internationally and domestically|
What are the types of ACH payments? (with examples)
There are two key types of ACH:
- Direct deposits
- Direct payments
Direct deposits are the money you receive as a business, aka, the money transferred into your account. A good example of direct deposits is subscription payments.
If your customers are transferring regular and recurring payments to you, it can be handy to tap into the ACH network. With these direct deposits, your customers won’t incur the security risks that are often associated with bank transfer fraud or paper check payments. And for your business, you’ll benefit from savings in the form of low processing fees compared to wire transfers.
Since subscription-based payment models don’t require immediate payments, the processing window shouldn’t be too much of an issue either.
Direct payments refer to the money that you authorize as a business to suppliers, utility providers, and partners. One case study in favor of the ACH payment system is for paying online bills. It’s perfect if you’re undergoing a digital transformation.
When you’re paying a merchant, you might not have access to company cards with a limit that’s high enough. In fact, many expense cards are capped at a transaction value of a few hundred dollars per day. This can be difficult for large orders. Instead, leveraging the $1,000 – 5,000 daily limits found in ACH direct payments would be more beneficial for companies operating at these higher levels.
Moreover, payroll can make use of ACH for each bill payment to members of staff, directly into their checking account from your originating bank (with the right routing number). The automatic debited nature of each ACH transaction removes the need for constant authorization after the payments have been validated, too.
Paypal and Venmo are also examples of ACH payments through online banking. These can be leveraged for personal or business use to send electronic bank transfers. No matter which account number you choose, good security practices are important in order to manage the risks of fraud. Need more advice on how to handle fraud? Download our latest fraud study!
How are ACH payments processed?
The technology behind ACH payments relies largely on a centralized bank exchange. The clearing house represents an electronic payment network that brings many organizations under one umbrella.
Batch processing means that many different transfer requests for routing can complete at the same time. Let’s say that you make a scheduled payment to a software provider for $250 on Tuesday morning. Your bank’s next digital exchange isn’t until Wednesday night when they aggregate all of the payments that their customers have made and make a large electronic transfer in one go. Therefore, your software provider will receive their payment on Thursday morning when the banks open again.
What is an ACH payment? It’s an effective and cheap way to transfer funds. Making payments with ACH are for personal and business purposes, and processed in batches. Compared to wire transfers, they’re a little slower, about as secure, and much less expensive. Before a business makes a payment of any kind, Trustpair can secure it by auditing supplier data to make controlled transactions.