ACH payment processing is growing in volume and boasts many benefits to businesses across several industries. In this guide, we’ll explore what ACH payments are, how they work, and how to accept them as a business.
What is ACH payment processing?
ACH payment processing is the electronic movement of money between banks across the Automated Clearing House Network (ACH Network) to facilitate payments. ACH payments are a way to transfer money from one bank to another without the use of paper checks, credit card networks, wire transfers, or cash.
The ACH Network is managed by NACHA, which is the governing body that establishes and enforces the processes and rules for ACH transfers.
How are ACH transfers different from wire transfers?
While both ACH transfers and wire transfers involve the movement of money between bank accounts, there are some critical differences. The main advantage of wire transfers is that you can send funds almost immediately. Typically, there’s no hold on funds sent by wire, meaning that the Receiver can access them right away.
Generally speaking, ACH transfers cost less than wire transfers. For businesses, ACH transfers cost between $0.10 and $2.50 per transaction, depending on processing volume and assessed risk. Wire transfers, on the other hand, can cost between $10 to $35 per transfer, and smaller institutions may also charge a fee to receive a wire transfer.
ACH and wire transfers are also rarely used for the same purpose. ACH transfers are often used for recurring payments, such as direct deposits or bill payments set on autopay. On the other hand, wire transfers are commonly used for larger and more immediate one-time transactions.
You can find more information in our post, ACH Transfer vs. Wire Transfer: What’s the Difference?
How are ACH payments different from eCheck payments?
Both ACH and eChecks require the ACH Network to process payments. The terms are often used interchangeably to describe the electronic movement of money using a consumer’s routing and bank account information.
Sometimes, an “eCheck” may refer to a paper check being processed electronically to make a one-time payment, using a consumer’s routing and bank account information. On the other hand, “ACH” may refer to a one-time or recurring transaction using routing and account information being processed without the use of paper checks.
That said, the compliance regulations and processing methods for both ACH and eCheck payments are the same.
Our blog, ACH vs eCheck: What’s the Difference? covers this topic in greater detail.
How does ACH payment processing work?
ACH transactions involve Originators (e.g., merchants, employers, suppliers & distributors) and Receivers (e.g., customers, employees, manufacturers & retailers). For most transactions, NACHA requires that the Originator receive authorization from the Receiver before being able to debit (or credit) the Receiver’s bank account.
ACH payments get processed in two ways, which can vary in processing speed and cost:
- ACH Debits: Transactions where funds are withdrawn from a Receiver’s account
- ACH Credits: Transactions where funds are deposited into a Receiver’s account
Once the Originator receives authorization and initiates the transaction, an ACH Entry is created and transmitted to the ACH Operator (either the Federal Reserve Bank or EPN/Electronic Payments Network). From there, the Receiving bank (RDFI) will settle the transaction by the ACH Operator’s deadline (e.g., 9:00 AM local time the following business day for standard ACH Entries and 1:30 PM/5:00 PM local time for same-day ACH Entries).
Not all banks have the infrastructure in place to fully offer ACH Origination services to their banking customers. In most cases, an intermediary processor, or a Third Party Sender, with an established account at an Originating bank (ODFI) will process ACH Entries on the Originator’s behalf.
You can find a more detailed introduction to the key players involved in ACH here.
You can find a glossary of key ACH terms here.
Is ACH payment processing secure?
While ACH payment processing does not have the same PCI-compliance guidelines required for credit card processing, it’s generally considered secure.
NACHA requires that all parties involved in ACH transactions implement processes, procedures, and controls to protect sensitive data. Their rules also dictate that the transmission of any banking information (like a customer’s account and routing number) be encrypted using “commercially reasonable” technology. Originators of ACH payments must also take “commercially reasonable” steps to employ fraud detection measures against ACH transactions, identity authentication, and validate routing numbers.
Also, NACHA conducts an annual information security audit to ensure that the financial information the Originator obtains from Receivers is protected by security practices that include “adequate levels” of physical security to protect against theft, tampering, or damage, personnel and access controls, and network security.
Most third party ACH processors should have these security capabilities, as NACHA compliance is a requirement. It’s also worth working with an IT or security professional to ensure your business or organization is processing ACH payments safely.
How much does ACH processing cost?
ACH payments are generally more affordable for companies to process than credit cards or wire transfers. The exact cost of processing ACH payments depends on your merchant account provider (or whatever entity you’re using to process ACH payments).
Some ACH processors charge a flat rate, which typically ranges from $0.25 to $0.75 per transaction. Others charge a flat percentage fee, ranging from 0.5 percent to one percent per transaction. Still, others charge a flat monthly fee that bundles processing, integration, and support costs. Meanwhile, Providers may also charge an additional monthly fee for recurring ACH payments, which can vary.
Actum charges a flat rate per transaction with no additional fees for processing, integration, support, or recurring payments. This means that you only pay for what you use. Often, our customers find that this pricing model is more cost-effective and scalable than monthly, subscription-based service fees.
Why are some ACH payments rejected?
Per NACHA Rules, the Receiving bank (RDFI) has two business days to reject a settled ACH payment. If an ACH payment gets rejected, your bank (OFDI) will reverse the bank transfer and provide the reason in the form of a Return Code. These reject codes, or “Return Codes,” are essential for delivering the right information to merchants as to why a payment didn’t go through.
Here are a few of the most common ACH Return Codes that businesses encounter, listed by order of frequency:
- R01 – Insufficient funds have resulted in not being able to make the requested transaction.
- R08 – The Receiver has placed a stop payment order on the ACH Debit entry, which may be placed on one or more Debit Entries.
- R02 – A previously active account has been closed by the customer or the RDFI.
- R16 – 1) Access to the account is restricted due to specific action taken by the RDFI or by legal action; 2) OFAC has instructed the RDFI or Gateway to return the Entry.
- R03 – The account number does not correspond to the individual identified in the ACH Entry, or the account number designated is not an open account.
- R09 – A sufficient ledger balance exists to satisfy the dollar value of the transaction (i.e., uncollected checks), but the available balance is below the dollar value of the Debit Entry.
Here is a full list of ACH Return Codes, with advice on how to handle them.
Are ACH payments instant?
While the technology and processing times have vastly improved since its inception in 1978, ACH payments are not instant. Why is this the case? There are two reasons:
- ACH is processed in batches throughout the day.
- RDFIs can take up to 2 business days to reject an ACH transaction.
All federally insured depository financial institutions are members of NACHA and maintain master accounts at the ACH Operator level. This structure allows anybody with a bank account to be able to pay with, or get paid through, ACH. Because of this structure, all ACH transactions clear automatically between banks before the Receiver’s account or balance gets verified.
How long does it take for me to get paid on an ACH payment?
The answer: it depends. The type of ACH transaction (ACH Debit or ACH Credit) determines the amount of time that it takes to receive ACH funds.
For ACH Credits, funds can typically clear and become available on the next business day, if not sooner. If the Originator uses Same Day ACH, the transfer has earlier transmission times and can settle faster.
Successfully submitted ACH Credits will always post to the Receiver’s account by 9:00 AM (local time) on the following banking day – or later the same day if you’re using Same Day ACH.
For ACH Debit transactions, funds are subject to settlement periods. Assuming that the Originator (through its ODFI or processor) doesn’t receive a Return from the Receiver’s bank (RDFI), funds are typically made available in 3-5 business days.
Can ACH payments be expedited?
Using Same Day ACH, businesses can expedite ACH payments. Same Day ACH transactions are also getting new enhancements, which include faster transmission times.
According to a recent study, 66.7% of financial institutions are already making Same Day ACH (SDA) funds available by 5:00 PM (local time).
How can I accept ACH payments?
You can accept ACH payments through a bank or a Third Party Sender (i.e., “ACH payment processor” or “ACH provider”). Keep in mind that not all banks have the infrastructure in place to fully offer ACH Origination services to their banking customers. In most cases, a Third Party Sender with an established account at an Originating bank (ODFI) will be your best bet for accepting ACH payments.
To get started accepting payments, you’ll want to do your research and make sure that you find an ACH provider that works best for your use case. Here are a few questions for your consideration: What is the volume of transactions that you will submit? Will you submit transactions via web portal/virtual terminal, batch upload, or API? Are fast transmission times and same day processing important to you?
Once you select a processor, you’ll likely want to contact them to understand pricing and other details related to your use case. Assuming that the conversation goes well, you will then fill out a merchant account application and include the required supporting documentation. This part of the process allows your ACH provider to do their enhanced due diligence on your business or organization.
To get approved, you’ll need to have a risk score that’s deemed acceptable by the underwriting team of the processor you’re applying with. Based on this score, you will either be approved or declined for a merchant account. Many providers offer relatively fast approval times (within a few days or less, in most cases). Some providers market “instant approval,” but there’s a caveat to this approach. In these cases, merchants are generally expected to process few ACH transactions with enforced account validation methods that may either slow down funds or diminish throughput.
After receiving approval, you may, optionally, be seeking to integrate the ACH payment processing into other software platforms you’re already using to accept ACH payments. Many providers offer API documentation and test accounts to help you or your vendor embed payment functionality into your software.
Once you’re up-and-running, you’re ready to start accepting ACH payments.
Learn more about how to accept ACH payments with Actum at the following link: ACH Processing with Actum.
What are some of the best ACH providers?
Depending on your use case, some ACH providers may prove to be a better fit than others.
For instance, if you need to send payouts to global suppliers or a sizeable chunk of your customers have bank accounts outside of the USA, a cross-border payment processor can be a great option. While more expensive, these providers also offer basic accounting features, making it easy to manage supplier relationships and reconcile invoices.
If you’re already using a gateway for an existing credit card merchant account or you’d like to be able to manage your payments on the software platform that you’re already using, an ACH-specific processor may require additional integration time. Most gateways, however, have multiple, pre-integrated processing partners for you to choose from, and they provide a user interface that lets you collect the necessary transaction details to push to the processor of your choice.
Actum is an excellent choice when considering a US-based ACH provider. We support an open API that’s easy to integrate (and pre-integrated) with payment gateways.
If you’re searching to integrate with ACH payment processing, we’ve outlined some of the top factors to consider.
Why Actum for ACH payment processing?
It’s easy to set up and manage one-time and recurring payments using our web portal, powerful API, or batch upload method. Our advanced software also allows merchants across all industries to originate, track, and pull reports on submitted electronic transactions. Our API can also integrate seamlessly into new and existing systems. You can learn more in our Guide for Software Companies.
To minimize risks, we adhere to stringent, industry-standard compliance policies and procedures, with data protection as a top priority. We encrypt all payment data during transactions and offer the option to tokenize bank account numbers— thereby minimizing concerns around holding onto sensitive financial data.
If you’re in the market to start accepting ACH payments, we hope you choose Actum! We’re frequently recognized for our 20+ years of hands-on ACH expertise and client-focused support team.
To learn more about ACH and working with Actum, we invite you to Contact Us.