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All About ACH Payments

It wasn’t long ago that paying bills or getting a paycheck meant waiting for a check to move through the mail system. Nowadays, many of these payments happen online through an electronic network called the Automated Clearing House or ACH. Trillions of dollars move through the ACH each year. Plus, people are increasingly using this network in place of credit card and debit card payments. But exactly what are ACH payments?

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What Are ACH Payments?

In the simplest terms, ACH payments are electronic payments sent from one bank account to another account at a different bank. They are called ACH payments because they go through the ACH, or Automated Clearing House. This is an electronic network that businesses, consumers and financial institutions use to accept and disburse payments.

As more and more business moves online, banks and businesses continue to use ACH payments more often. The ACH currently moves about $43 trillion each year through payments like payroll direct deposit, government and Social Security benefits, mortgage and bill payments and online banking payments.

ACH payments can occur between an individual and a business, between businesses or between individuals. You may have even sent money through the ACH without knowing it. For example, payments you make through Venmo, Paypal and Square Cash go through the ACH.

If you plan to make an ACH payment through your bank, you should check your bank’s regulations around these transactions. For one, banks often limit how much money you can send on a daily and monthly basis. You also generally cannot send money internationally. In the event that you don’t have enough funds in the originating account, you could also get hit with a fee (and a reversed transaction).

How ACH Payments Work

You’re probably already familiar with the direct deposit of a paycheck. This transaction is a common example of ACH payments. To understand how a payment moves through the ACH, let’s look at how your paycheck goes from your employer into your bank account.

The payment starts with the originator. The originator is the person or organization that initiates an ACH transaction. In this case, your employer is the originator. Your employer requests to send a payment from their account to your account.

Next, the ACH request goes to the originator’s financial institution, or Originating Depository Financial Institution (ODFI). This would be your employer’s bank. ODFIs collect all ACH requests and send them to an ACH operator.

The ACH operator is a middleman that processes all transactions moving through the ACH. It receives requests from the ODFI and distributes them to the appropriate institution. There are two ACH operators in the United States. One is FedACH, which stands for Federal Reserve Banks’ Automated Clearing House. It is the collection of all the Federal Reserve Banks and handles the majority of ACH transactions between commercial banks in the U.S. The other operator is the Electronic Payments Network (EPN). EPN is a private-sector ACH operator.

The ACH operator will then send the ACH request to the Receiving Depository Financial Institution (RDFI). The RDFI will then credit (or debit) the funds to the receiver’s account. In this payroll scenario, your bank is the RDFI and you are the receiver. You, as the receiver, will have already set up direct deposit by providing your employer with your bank account information and authorized the transactions.

How Long Do ACH Payments Take?

All About ACH Payments

ACH transactions don’t send in real time, meaning you don’t see money added to your account as soon as someone authorizes a payment. This is because ODFIs don’t send transaction requests as soon as they get them. Instead, an ODFI collects a number of requests and sends them in a batch. The Operator then collects a whole day’s worth of requests before processing and sending them to the appropriate RDFI.

Because of this, ACH payments can take a few business days to move through the system. However, it is likely that payments will one day move in real time (instantly). New rules from NACHA (previously the National Automated Clearing House Association) dictate that ACH debit transactions must now be processed by the next business day. This is only one kind of payment but it represents an increase in transaction speed.

ACH transactions can take even longer due to reversals. If there is an error in your bank account number or your employer’s information, a transaction can be reversed. The RDFI will notify the Federal Reserve about the returned payment. It is up to the ODFI to check with the Federal Reserve if any of their payments have been returned.

Who Runs the ACH?

The ACH is an electronic network for financial transactions. NACHA is the not-for-profit company that manages the network. NACHA is not directly involved in ACH transactions. Instead, it develops, administers and governs the ACH Network (all the institutions that use the ACH). Institutions in the ACH Network pay fees yearly and per transaction in order to help cover the ACH’s administration costs.

Why Use ACH Payments?

The main alternative to ACH payments is physical checks. People have used checks for years and they get the job done, sure. But ACH payments are faster, cheaper, more reliable and more secure. With electronic payments you don’t have to worry about the costs of buying, printing and processing checks. You don’t have to wait for checks to travel from the sender to the post office and then to the receiver. There’s no physical check to lose or damage in the mail. Plus, fraud is rare with ACH payments.

ACH payments are (and keep getting) easier for customers and businesses. For example, many people now pay their bills through online bill pay programs. You just have to connect a bank account to your online account. You can even set up recurring payments. Of course, you just have to make sure you keep an eye on your bills and bank account. That way you’ll know exactly where your money’s going.

ACH payments also provide a cheaper option than checks and credit card payments. As an individual, you can make most ACH payments for free, but some bank or bill pay systems might charge a fee of about $3. Businesses that use ACH payments pay a small fee per transaction, but this usually runs between 25 and 50 cents.

In recent years, ACH payments have become more common for person-to-person transactions. In particular, services like Venmo, PayPal and Square Cash allow you to easily pay others without the need for physical cash, checks or credit cards.

The Takeaway

All About ACH Payments

The important thing to know is that ACH payments refer to electronic payments. These payments have become the norm as the world moves to more online and computer-based banking. The result? You no longer have to worry about writing checks and sending them through the mail. You can now pay your friends back for that dinner last week electronically and almost instantly. Ultimately, ACH payments make it easier, faster and safer to send and receive payments.

Photo credit: ©iStock.com/Petar Chernaev, ©iStock.com/MicroStockHub, ©iStock.com/PeopleImages

Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society of American Business Editors and Writers and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
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