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Banking 101: The Beginners Guide to ACH Payments

Written by Paul Schrodt | Published on February 12, 2020

Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.

ACH payments are electronic money transfers that move funds into or out of your bank accounts. ACH payments are used by individuals and businesses for collecting money from friends and customers, and companies use ACH to pay their employees.

In this article we will cover:

What is an ACH payment?

An ACH payment is a transfer of funds made over the Automated Clearing House payment network. This system handles a variety of common electronic payments, including direct deposits, online bill pay, and mortgage and loan payments. The National Automated Clearing House Association (NACHA) maintains the rules that govern ACH payments.

The ACH payment network handles recurring and one-time payments across three core areas:

  • Person-to-person (P2P) payments
  • Business-to-customer (B2C) payments
  • Business-to-business (B2B) payments

ACH has largely replaced paper checks in the business world, and it can reduce costs associated with other payment methods like credit cards.

What are the types of ACH transfers?

There are two types of ACH transactions: direct deposits and direct payments. Direct payments may be processed as either credit transactions or debit transactions.

  • ACH direct deposit: This is the deposit of funds into the account of a recipient for things like payroll, reimbursement of employee expenses, government benefits, tax refunds, annuity payments and interest payments. These transfers are made by a business or government entity to a consumer.
  • ACH direct payment: Credit direct payments push funds into an account: for example, when a person proactively triggers a transfer of funds from one account to another via a bank account or a P2P payment app. Meanwhile, debit direct payments pull funds from an account. So when you set up recurring payments for your cable TV subscription linked to your checking account, the money is automatically debited.

How to send and receive ACH payments

Electronic payments via ACH happen when an originator authorizes a receiver to move funds into an account. Either party to these transactions may be an individual or an institution.

Unlike credit card and debit card transfers that can happen within seconds, ACH payments are not approved in real time. Instead, two national ACH operators, the Federal Reserve Banks and the Electronic Payments Network (EPN), are sent batches of ACH payments from originators. They then collectively edit and sort the payments and deliver funds to the receivers. This is why ACH payments can take one or more business days to complete.

Here are the financial details you may need to have on hand to send or receive payments:

  • Account number: Whether you’re transferring funds into or out of your bank account, you’ll need the account number, which you can generally find printed on your checks or on your bank’s website.
  • ACH routing number: A routing number is required in addition to the account number. Banks sometimes have the same code used for the ACH and ABA routing numbers, making them interchangeable, but you should check with your bank to be sure.
  • Other identifying banking information: You may need to confirm some other basic information, such as your full name or address.

You can make a personal ACH payments using a variety of online and mobile platforms, including  your bank’s app or website. Third-party apps like Venmo, Zelle, and OFX also enable transfers through the ACH system. Zelle in particular has partnered with numerous banks, allowing for quick and seamless electronic transactions, sometimes on your bank’s own app.

How long does an ACH transfer take?

NACHA rules require ACH payments to be processed and funds delivered the next business day. In 2016, the organization adopted a rule allowing for customers to opt for same-day ACH payment delivery, for an extra fee.

Are there fees for ACH payments?

Sending and receiving ACH payments is typically free of any fees for individuals. NACHA collects network administration fees from depository institutions that are plugged into the network. These include both annual fees and per-entry fees that help keep the network running. As noted above, there can be fees when individuals opt-in to expedited transfers.

Pros of ACH payments

  • Paperless processing: You can ditch your checkbook when using this electronic system for moving funds among accounts.
  • Relatively low cost: ACH payments come with zero fees for individual users — by contrast, wire transfers can involve hefty costs for businesses and consumers on both sides of a transaction. Fees may be charged for expedited transfers.
  • Enables mobile payments: The ACH payments network is used by countless payment apps, like Venmo and Zelle.
  • Safety: NACHA provides a high level of security and encryption for ACH payments. Nevertheless, you still need to confirm the identity of anyone you are sending money to via ACH.

Cons of ACH payments

  • Not the quickest available method to send money: There are other ways to transfer funds between accounts that are faster than ACH, though they come with higher fees.
  • Transaction limits: Beginning on March 20, 2020, NACHA will impose a per-transaction limit of $100,000 on same-day ACH payments. Individuals and businesses hoping for extremely large and rapid transfers may need to look elsewhere.

ACH payments vs other transfer methods

Wire transfers, in which funds are sent from one bank or credit union to another, can be faster than ACH payments. Wire transfers can generally be completed the same day they’re sent, so if you make a wire transfer at Western Union location, the recipient could get the funds in just a few hours. 

However, wire transfers also come with larger fees. Domestic wire transfers cost $4 at Walmart, while at some banks and financial services companies, prices can rise to $20 or $30. Plus, the fees for international wire transfers get even heavier.

ACH payments are just another form of electronic funds transfers. EFTs cover credit card network payments, PIN transactions and wire transfers, and they’re also the method by which businesses send electronic billing statements. Some of these other EFT payments are faster than ACH, and in some cases occur instantaneously.

Previous Comments
  |     |   Comment #1
According to NACHA, amounts up $25,000 are required to be processed the same day (morning submission deadline: 10:30 am ET; afternoon submission deadline: 2:45 pm ET).

When I spoke with a CSR at Cit bank yesterday, he indicated that ACH can take 2 o 3 days. Perhaps he hasn't been advised of the new regulations. In regards to amounts over $25,000, I believe they must be processed the next day based on the following info. on the NACHA web site, :
(NACHA) National Automated Clearing House Association

Why are large dollar transactions (above $25,000) ineligible? Faster velocity of payments is expected to introduce risks that must be managed and mitigated. A per transaction dollar limit is one way to mitigate risk. Financial institutions and businesses will also have to adjust their end-of-day balance forecasting and funding, and the dollar limit is a way to limit the impact. Currently, more than 99% of ACH transactions are under $25,000, so the overall impact of the same-day limit is expected to be modest. Will Same Day ACH be available for all account types? Any account that is able to receive ACH entries today could receive Same Day ACH entries. The ACH OPERATORS WILL EDIT FOR THE $25,000 LIMIT FOR SAME DAY ACH TRANSACTION, AND WILL ASSIGN NEXT DAY SETTLEMENT TO ANY TRANSACTIONS ABOVE THE LIMIT.

  |     |   Comment #2
I just inquired with a CSR at Ally Bank and he quoted the bank's policy on regular and expedited ACH processing, which may take up to 5 days. When I mentioned the NACHA regulation, his response was that he is certain that the bank follows federal regulations. When I asked to escalate the call to a supervisor or manager, he placed me on hold; after a few minutes, the call was disconnected.
  |     |   Comment #3
Daily Saving ACH, A wise budget strategy is to establish an emergency savings fund with enough money to cover at least three months of expenses. It’s especially important to keep your emergency savings separate and untouched from other accounts, so you’re not tempted to dip into funds reserved for emergencies. High-yield savings accounts are the best option for emergency savings, as you will earn a higher rate of return on your reserves.
  |     |   Comment #6
So what is the bottomline? How can ach helps consumers in need of money?

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