ACH Payment: What It Is and How It Works

ACH payments are electronic money transfers that move funds into or out of bank accounts using the Automated Clearing House (ACH) network. You might choose ACH for recurring payments, such as utility bills, subscription fees or other obligations.

Here’s more about how ACH payments work and how you might use them.

What is the ACH?

The Automated Clearing House system is a nationwide network through which banks and credit unions send and receive electronic payments. Consumers and businesses, working with banks, initiate and receive ACH payments through the ACH network.

What is an ACH payment?

An ACH payment is an electronic transfer of funds between two banks through the ACH network. The network’s two national operators are the Federal Reserve banks and the Electronic Payments Network. The National Automated Clearing House Association (Nacha) governs the ACH network, developing rules and standards.

Through banks and credit unions that access the ACH network, consumers and businesses can send and receive ACH payments. Two primary purposes for ACH payments include:

1. Direct deposit. Employers use ACH payments to deposit wages into employees’ bank accounts. Direct deposit is one of the most common uses of ACH payments, with 93% of American workers receiving their paychecks this way.
2. Bill payments. Consumers authorize utilities, phone companies and others to withdraw funds directly from their bank accounts to pay bills.

How do ACH payments work?

ACH payments are entirely electronic and work either as a direct deposit or a direct payment — a credit or a debit, respectively.

The two sides of ACH payments are the originator and the receiver. Consumers and businesses can be on both sides, as can banks and credit unions.

The originator — a business, for example — initiates an ACH debit through the business’s bank after the receiver — say, a consumer — authorizes and gives instructions for the debit. The originator’s bank sends digital payment files to the ACH network, which passes those files to the receiving bank. That bank then debits the consumer’s account as instructed.

ACH credits and debits are also called push and pull payments. Push payments send money, and pull payments collect it. Most payment networks can only push or pull, but the ACH network can do both as needed.

Types of ACH payments

The two types of ACH transfers are ACH credits and ACH debits. Here’s more about both types.

ACH credit

An ACH credit is also known as a push transaction. This means that the person making the payment pushes the money from their account to another account via the ACH network.

Paychecks are often deposited as ACH credits, or direct deposits. Other examples of ACH credits are government benefits, refunds, or withdrawals from payment apps such as Venmo.

ACH debit

An ACH debit pulls funds in, allowing a withdrawal. ACH debits are often used for recurring payments, such as utility bills and subscription services. You can also use ACH for a one-time payment.

How to make an ACH payment

Whether you want to pay a bill or receive your paycheck as a direct deposit, the ACH payment process is similar.

In either case, you’ll be on the receiver side. The business that will be debiting your account or making a direct deposit into it will be on the originator side.

Here’s what you’ll need for the ACH payment:

• The name of the bank or credit union receiving the money
• The routing number of the bank or credit union
• The person or company’s bank account number
• The type of account — checking or savings

ACH payment vs. wire transfer

An ACH payment and a wire transfer are both ways of electronically transferring money, but each works differently and varies in speed and cost. Knowing the differences between the two can be helpful if you get a choice between them — though you ultimately may not.

What are ACH payment processing times?

Nacha estimates that 80% of ACH payments settle in one banking day or less. However, the two types of ACH payments — ACH debits and ACH credits — often have different processing times.

ACH credits make up a little less than 50% of ACH payments, according to Nacha, and most settle in one business day. Debits account for a little more than 50% of ACH payments, and those are settled either the same day or the next business day.

Many ACH payments are credited the same day, but you’re not guaranteed to receive your money the same day. A weekend or a holiday, for example, may delay the credit.

Many banks and credit unions offer same-day ACH payments. This allows your transactions to post on the same day they’re authorized for an additional fee.

How much are ACH transfer fees?

ACH transfers are typically free for most consumers but may cost just a few dollars if there is a charge. You may pay extra to make a same-day transfer.

Banks often charge their business customers for the use of various ACH payment services, such as direct debits as a payment method.

Pros and cons of ACH payments

ACH payments have advantages and disadvantages compared with other methods of making payments and getting paid. Here are a few:

Pros:

• Automated payments. ACH payments can easily be paid automatically on regular intervals through payment processors or online banking platforms.
• Lower cost than wires — or none at all. You’ll typically pay a small fee, if you have to pay at all. If you own a business, you’ll pay a small processing fee for each ACH payment.
• Secure transactions. ACH payments are safer than checks, which can get lost or fall into the wrong hands. Plus, ACH payments are subject to regulations that protect consumers from unauthorized debits.

Cons:

• Transaction limits. Banks may place limits on the number of transfers you can make each month. Check with your bank about restrictions.
• Risk of overdrafts. Make sure you have enough money in your account if you’ve set up automatic ACH payments to avoid triggering overdraft and late fees. 
• Processing delays. A payment may be delayed by a holiday or weekend. Further, ACH might not be fast enough for certain situations, including sending money overseas.