How Do ACH Payments Work?

August 18, 2021

Your Guide to Understanding and Enrolling in ACH 

As a small business owner, any work you do to lower costs and increase growth is time well spent. One strategy often discussed online is to offer more payment methods, and of the options available today, ACH payments stand out. These electronic payments help you improve sales and boost profit for strong growth.  

How does ACH work, and how can you get started? In this article, we look at the process of setting up and placing ACH payments and the time it takes to take to receive those higher profits.   

How Do ACH Payments or Transfers Work? 

ACH transactions are processed in two ways: credits and debits. An entry is made to the consumer's bank account, which then withdraws funds for the amount due (debit). Conversely, an ACH credit process deposits money into a person or business' account without withdrawing any funds from that same location (credit). 

Whether it be an ACH credit or ACH debit, the low cost and automatic payments capability of ACH electronic transfers make it one of the more popular types of payments. It is so popular that you may currently use it at home. ACH is used for many everyday transactions, such as bill paying from a utility company, phone company, or electric company. 

In your business, you can use ACH in a debit process, credit process, or both. You can use it as a debit to request customer payment, or as a credit to complete B2B payments or direct deposit payroll. 

Let's take a closer look at ACH better to understand this system and the flow of payment.  

What is ACH?  

ACH stands for Automated Clearing House, a network of participating US banks overseen by a board of governors at NACHA (National Automated Clearing House Association). ACH provides Electronic Fund Transfers (EFTs). Like wire transfers via banks and credit unions, the transfer of funds is done bank-to-bank, but this direct payment also brings benefits like ultra-low fees and automatic payments capability. 

During a transaction, a customer provides payment authorization for a one-time withdrawal or recurring withdrawals. The automatic withdrawals of funds allow for more stable and timely bill payments.  

How do I Receive an ACH Payment? 

What is Needed for ACH Payment?  

You will need to connect your bank or financial institution to the customer's bank.  

Here is the process: 

Set up an ACH Merchant Account at Your Bank or Through an Outside Provider 

An ACH merchant account is a bank account that allows direct, bank-to-bank transfers using the ACH network. You can set up an account through your banking institution or by using an outside payment service provider.  

You will need to provide the institution with your correct bank account information, your federal tax ID, the time your business has been active, and an estimated number of transactions over a given period. Final approval takes just a few days.  

A merchant service provider (MSP) can set up your credit card payment terminals and accounting software to your ACH merchant account. As an MSP, we here at BNG Payments do this work regularly. 

Set Up Your Customer on Your ACH System 

Your customer will need to complete an ACH application form, provide ACH files (bank account details such as the account number and routing number) and provide personal information for authenticity (typically a phone number or email address.) 

Application forms are available online, and BNG Payments offers standard and customizable forms. The form can be placed on your website and filled out online, in person, or over the phone. Online forms are more popular since they are easy for customers to fill in at their own pace.  

Set Up Your Payment Details 

Set up the dollar amount, time, and frequency of payments such as monthly or annually. This is usually done while creating an invoice in your billing software.  

The Payment Process 

With each transaction, there are two banks involved: (1) the originating merchant bank or processor, called the ODFI, and the receiving bank called the RDFI. 

Whoever initiates the transaction is the ODFI. For example, when you withdraw funds from your customer's account (when you initiate an ACH debit), your provider is the ODFI because it requests approval to pull funds from the customer's bank account. The customer's bank can be the ODFI if the customer pushes payment to you.  

In most cases, you will be the ODFI because you will request ongoing withdrawals from your customer. Here is how this process works: 

  1. You start by initiating an ACH transaction through your accounting software. 
  2. The ODFI (your processor) submits your request along with other orders to the ACH network operator (the Federal Reserve). All the grouped orders are called a batch, and there are three batches sent each business day. 
  3. The ACH network operator reviews which orders are ACH deposits and which are ACH credit transactions.  
  4. Since your order is an ACH deposit, the ACH network operator transmits the order to the customer's financial institution (the RDFI) requesting a withdrawal. At the same time, the network operator provides you with payment. 
  5. If funds are available from the customer's bank, the RDFI will debit the customer's account, and the funds from the network operator remain in your account. If funds are not available (if the customer has insufficient funds, the account was closed, etc.), the request is returned, and the funds are removed from your account. 

Do ACH Payments Come Out Automatically? 

Yes, and this is one of its most powerful benefits. You can enjoy ongoing, automatic payments at a frequency for a more stable business framework. Once the customer provides authorization, your bank communicates to the customer's bank to request payment at the recurring date you specify. All transactions happen without requiring ongoing approval from you or your customer. 

You also benefit from automatic customer notifications of withdrawal, invoices, and receipts, freeing up billing time so you can focus on other aspects of your business.  

How Long Do ACH Payments Take? 

The process typically takes 3-5 days, and there are reasons for this. Like wire transfers, ACH uses electronic transactions, but wire transfers are done in real-time, and ACH transfers happen at set times per day for the customer's bank, called batches. In addition, sending and receiving the bank money transfers is done during working hours of depository institutions (the working hours of your bank and customer bank accounts). If a transaction request is sent after hours to a closed bank, the fulfillment process starts the next business day. Since your bank and the customer's bank are involved, the ACH transaction is subject to two cutoff times. 

Your bank also holds funds temporarily for evaluation, even after they are received. When factoring in potential holds and delays from working hours, weekends, and bank holidays, the actual settlement process can turn into a three-to-five-day processing time. You can speed up the process with same-day ACH payments, but since you are still restricted to bank hours, same-day is not guaranteed. 

These traits make wire transfers better for immediate purchases, but ACH is quite a bit cheaper than a wire transfer. ACH costs cents on the dollar, while wire transfers can be upwards of $30. Wire transfers are also not recurring transactions.   

Do ACH Payments Post Immediately? 

Funds post shortly after the payment request is made, but as stated earlier, funds can be returned if there are issues with the customer's account. It is a good idea to wait for the standard payment processing time of 3-to-5 days to complete the full "double-check process." 

What is the Difference Between a Direct Deposit and ACH? 

They are the same. A direct deposit is a form of ACH credit.  

What is the Difference Between ACH and Credit Card Payments? 

An ACH transaction and a credit card transaction each utilize electronic networks for personal and business transactions, but the networks function differently. With ACH, the consumer transfers funds directly to your bank. Direct payments are typically more beneficial because they require actual funds while also allowing higher dollar amounts. 

Credit card payments rely on third-party payment networks which credit the money to the customer. If you take credit cards, the reliance on credit and the lower dollar thresholds can lead to a greater chance of insufficient funds.  

Each system also has different transaction fees, and this is one area where ACH shines. Since ACH doesn't use a third party, it is a lower-cost payment method. Credit cards must charge a higher percentage cost to process each transaction plus a higher fee per transaction. ACH's lower fees and regular payment are ideal for frequent transfers, such as regular, automatic payments like recurring online bill payments and for businesses with high payment volume. This means it saves you significant money.  

In addition to different payment networks, credit cards can also be stolen, and signatures can be forged. ACH has much tighter requirements for approvals, resulting in fewer chargebacks.  

Is ACH Safer than Check Payments?  

ACH is a popular alternative to traditional paper checks, and one reason is safety. Checks are easy to steal, which means you could receive a forged check and face nonpayment after supplying your goods or services. Checks can also bounce, resulting in the same issue. If the checks are good, they can still be stolen or lost in your office or on the way to the bank.  

The computerized payments from ACH require deeper qualifications for participation and happen over encrypted networks for increased safety. Each transaction also requires sufficient funds at the outset. You also get the benefit of faster payments for high dollar amounts.  

If you have customers that still prefer checks, you can process them through ACH as an electronic check to ensure funds are on hand.  

Why the Right Managed Service Provider Helps 

At BNG Payments, we help you enjoy the benefits of ACH. We provide the authorization forms you need, include it in your website framework, and connect your internal software and systems to the ACH network. 

Participating with this network results in lower transaction costs for more profit and a convenient payment option that leads to more sales. You put your business on a more solid business foundation and save time by not having to manually generate paperwork and contact customers for payment. The ease of payment also increases the chance a customer will extend a contract, resulting in more money for you while helping them avoid late fees. ACH is a win for them and a win for you.  

To start enjoying ACH benefits, contact us here.


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