ACH payments: How they work and how they help your business

Technology has changed the ways we do business, including how we pay for goods and services. Cash has always been one of the common methods of payment, and it still is, but there's no denying that credit card transactions have transformed the financial landscape. In recent years, technology has provided entrepreneurs with a convenient, inexpensive, secure and now popular way to transact business: the ability to send and receive payments electronically.

What is an ACH payment?

ACH stands for Automated Clearing House, the financial network in the United States responsible for overseeing and managing ACH deposits. Regulated by the federal government, the network provides security and confidence in the payments while helping make the banking system fast, efficient and secure.

Chances are you're already using ACH payments, even if you're unfamiliar with the jargon. Any bill you pay electronically (instead of with a credit card) or any salary you receive via direct deposit is done using an ACH payment. Many electronic payment apps and platforms like PayPal and Venmo use the ACH network.

ACH payments differ from more traditional payment options, particularly in how they use routing numbers. They've become popular in recent years because they're fast and reliable, which helps streamline accounting for both sender and receiver. They're also cheaper in most cases. It costs less to process an ACH transfer than a credit card transaction, helping small businesses save money.

Types of ACH transfers

There are two types of ACH transfers:

• ACH debit transactions — money that's “pulled” from an account, such as a recurring bill payment that allows the company you're paying to withdraw from your account
• ACH credit transactions — money “pushed” to accounts at different banks from accounts you own

How does ACH work?

In addition to the Automated Clearing House network, two additional entities are involved in ACH payments: the Originating Depository Financial Institution (ODFI) — the financial institution initiating the transaction, and the Receiving Depository Financial Institution (RDFI) — the financial institution receiving the ACH transaction.

Here's the process for a customer to set up an automated monthly payment to your company:

1. The customer provides checking account information (routing and account number) to your company's bank and signs a recurring payment authorization, giving your company's bank (ODFI) permission to access the set amount.
2. When your customer's bill becomes due, your company's bank (again, the ODFI) sends a request to the customer's bank (the RDFI) to transfer the funds owed.
3. Those banks communicate to ensure enough funds are in your customer's bank account to process the transaction.
4. If sufficient funds are there, the transaction is processed and the money is routed to your company's bank account.

Benefits of ACH payments

ACH payments have become an attractive option for businesses of any size because:

• They have lower processing fees than other kinds of payment (other than cash payments).
• They save you time and money by eliminating the need for paper invoices, stamps, and paper checks.
• They allow customers to automate payments, letting them “set it and forget it” by signing up for recurring billing.

Drawbacks of ACH payments

While affordable and convenient, ACH payments do have limitations:

• ACH payments are processed in batches each day, meaning they may need more time to transfer between accounts (often in one to two business days, or the same business day with Same Day ACH).
• Some institutions set daily and monthly caps on how much money you can move using ACH payments. The same-day ACH per transfer maximum limit is $1 million.
• After a specific time during the business day, ACH payments won't be processed until the next business day, so there may be a delay if the transaction occurs on a weekend or holiday.
• Most banks don't allow ACH transfers to and from international bank accounts, but this might change.

Your business can expand its payment processing options by accepting ACH payments online, offering a time-saving convenience to customers and saving you money. To find out more, speak with a business banker to see whether ACH payments can help your bottom line.