ACH payments are among the most popular payment options for business entities in the US.
ACH transactions, carried out between two banks and supervised by the NACHA, are secure and convenient due to their online, automated nature.
In this article, you’ll learn what ACH payments are and how ACH payment processing works.
What Are ACH Payments and ACH Payment Processing?
ACH payments are electronic transactions in which money is transferred between two bank accounts, under the supervision of the NACHA (National Automated Clearing House Association). ACH payment processing refers to the procedure that includes sending and receiving an ACH request, and approving the payment.
Payment processing companies carry out ACH payment processing at their clients’ requests. Banks send and receive the money transferred via ACH transactions, making them a part of ACH payment processing.
How Does ACH Payment Processing Work?
There are three main parties in every ACH transfer:
- Originator. An individual or a business organization that wishes to make an ACH payment. Their bank is called the Originating Depository Financial Institution (ODFI). It launches the ACH transfer at the originator’s request.
- Recipient. An organization or an individual that receives the ACH payment. Their bank is called the Receiving Depository Financial Institution (RDFI).
- ACH network. The supervising network of financial institutions that either approves or declines requests for ACH payments.
When an originator sends an ACH request, their bank initiates the ACH transfer. The NACHA or any other ACH network receives that request and checks whether all the payment data is correct.
Once they identify that all the payment requirements have been met, the NACHA approves the ACH payment.
The recipient’s bank receives a request for the transfer in question.
It’s good to know that the money stays on the payer’s account all the time until the NACHA approves the transaction.
Features of ACH Payment Processing
Since several interested parties are included in every ACH payment procedure, it’s not an instant payment process. It takes some time for the originator’s bank and recipient’s bank to do their share of work. The inspection of payment data and conditions performed by the NACHA slows down the transfer, as well. If the payment request does not fulfill the necessary requirements, an ACH return code indicates the reason.
Therefore, ACH payment processing consists of some specific features.
ACH Payment Processing Time
When it comes to ACH payment processing time, the NACHA clears an ACH payment within 3-4 days from the moment of submission of an ACH request. It normally takes 2-3 days for the recipient’s bank to complete the ACH transaction.
In some cases, it is possible to finalize an ACH payment within one day. The NACHA allows same day ACH transactions of up to $100,000 USD. However, the limit may be lower depending on the bank.
Individual clients who use ACH transactions to pay their bills or for P2P (peer-to-peer) payments usually don’t pay any fees to payment processors.
On the other hand, business entities pay fees, ranging from 0.5% to 1.5% of the total amount of money transferred via ACH transaction. Such fees are charged when those organizations send out or receive batch ACH payments, like employees’ salaries or subscribers’ payments, respectively.
Since every ACH payment includes three participating parties, they ensure several layers of reliability and control. The existence of the NACHA assures payers and payees that all payment requests are either completed or returned, eliminating the risk of losing money.
ACH payments are a secure online payment option for businesses and individuals for two main reasons:
1. ACH returns can be revoked. In the following cases, merchants and their clients are allowed to revoke an ACH return:
- The transferred amount of money was different from the one defined in the authorization.
- The authorization was not issued for the ACH payment or it was terminated in the meantime.
- The money transfer was requested before the agreed upon date.
2. NACHA monitoring. The participation of NACHA guarantees that ACH transactions are supervised and carried out by a reliable third party.
ACH Payment Processing and Legal Requirements
Every account for ACH payments needs to be approved and verified by the relevant ACH system.
In the US, this refers to the NACHA, which constantly complies its organizational rules with the legal regulations of the US. So, if an ACH account is verified by the NACHA, it’s in compliance with the US law, as well.
These requirements for the approval and verification of ACH payments contribute to the stability of the US financial network.
Once a financial institution processing ACH payments via the NACHA is approved by the US law, it is referred to as an ACH operator.
Every ACH operator needs to meet the following legal requirements regarding ACH transactions:
- Encrypt all the consumers’ banking data and send them via a protected network to comply with the customer data protection and privacy laws.
- Secure the banking data both on premises and on the cloud, using hardware and software that meets the Payment Card Industry Data Security Standard (PCI DSS).
- Check every customer in line with the Customer Due Diligence (CDD) and Know Your Customer (KYC) regulations.
- Ensure protection against money laundering and financial crimes from abroad by checking every ACH payment against the Office of Foreign Assets Control (OFAC).
- Provide multi-factor authentication for privileged accounts.
- Carry out extensive inspection and vetting of all third-party service providers.
ACH payment processing companies in the US are regulated by the following legal acts and bodies:
- GDPR and CCPA
- NACHA operating rules
ACH Payments Pros and Cons
- Reliable and secure due to NACHA supervision.
- Convenient because they’re carried out electronically.
- User-friendly, especially for recurring payments (once they’re set up, they’re easy to launch).
- Many businesses are registered to send and receive ACH payments.
- ACH payments are restricted to the US only.
- They have a threshold of $100,000 per day.
- It usually takes 3-5 days to complete an ACH payment.
How Does an ACH Payment Compare to Other Payment Types?
- Credit Cards vs ACH Payments. When compared to credit card payments, ACH payments are less expensive in terms of fees, but slower than credit card transactions.
- Wire Transfers vs. ACH Transfer. In the US, wire transfers are faster than ACH transfers, but more expensive. If the money transfer is submitted before the bank cutoff time, the transfer is usually completed within the same bank day. For international transfers, 48 hours is an acceptable time frame for transfer completion. Wire transfers inside the US are charged from $10 to $30 per transaction. International transfers normally include higher fees.
- ACH vs. eCheck. ACH payments are restricted to the US, while eChecks can be used both for US-only and international payments. Both payment options are supervised by the NACHA, which makes them equally secure. Business entities are charged for ACH transactions from 0.5% to 1.5% when paying workers’ salaries or making other business payments. Fees for eChecks range from $0.2 to $1.50 per transfer. ACH transfers are cleared within 2-3 days from the payment date. It takes 2-5 business days for eChecks to be completed.
How to Accept ACH Payments?
If you want to accept ACH payments, follow the next six steps .
- Find a reliable ACH payment processor.
- Study the terms and conditions.
- Specify payment details.
- Go through payment information with the payer.
- Send the ACH form to the payment processing company.
- Wait for NACHA to clear the transaction .
With all the details on ACH payment processing described above, it’s easier to calculate how much time and money it takes for these transfers to complete.
Based on all the data provided in this guide, business entities are able to decide when ACH payments are the right option for their needs.