ACH Payments: What is it, How it Works,
Types & Benefits of ACH Transfers
Over the past 40 years, ACH has grown to become one of the largest,
safest, and most efficient systems in the world of banking.
The network now handles $43 trillion worth of transactions every
year. ACH transactions are a cost-effective and quick way of settling
payments, making them a preferred go-to option for many businesses.
As a business owner, you’ve probably heard of ACH payments, but might
not be familiar with how they work. This article will guide you through the
basics of ACH and how it compares with other payment modes.
What are ACH payments?
ACH payments are a form of electronic bank transaction made using a
network called an Automated Clearing House (ACH).
Technically, the ACH network is a system of computers that communicate
with each other to make and receive payments. Every transaction
consists of two computers: one at the sending end to send a request for
payment, and another at the receiving end to accept the request.
Businesses in the US use ACH payments for paying bills, wages,
mortgages, and loans, and for making direct deposits. Electronic
payments made through the ACH network must follow guidelines
provided by the National Automated Clearing House Association, or
NACHA.
What are the different types
of ACH transactions?
There are two types of ACH transactions: direct deposit and direct
payment.
Direct deposits are initiated by the payer to send funds directly to a
receiving account — for instance, to pay wages to an employee.
Direct payments are initiated by the recipient to request funds — for
instance, to automatically collect payment for recurring bills.
How do ACH transfers work?
An ACH transaction basically consists of a data file containing information
about the desired payment. Processing a transaction consists of sending
that file to the originator’s bank, then to the clearing house, and finally to
the recipient’s bank, where the funds are transferred to the receiving
account.
Let’s look at how to initiate an ACH direct payment — for instance, to bill
a customer.
Setup:- Before starting the transaction, make sure you are allowed
to pull money from your customer’s bank account. Your customer can
give you permission by filling out an authorization form with their bank.
Initiation:- As the Originator, you start by sending data files about
the transaction to your bank, which is called the ODFI (Originating
Depository Financial Institution). These files include the transaction type
(debit or credit), routing numbers, and bank account details.
Batching:- Your ODFI collects all transaction files sent to them and
forwards them at regular intervals to an ACH operator,
either FedACH (Federal Reserve Banks’ Automated Clearing House)
or the Electronic Payments Network (EPN).
Distribution:- The ACH operator then sends the data files to your
customer’s bank, which is called the RDFI (Receiving Depository Financial
Institution).
Completion:- The RDFI in turn pulls the funds from your customer’s
bank account. You will know that the transaction has been completed
when you receive your payment.
What are the benefits of ACH payments over other payment methods
Generally speaking, ACH payments are more efficient than card, wire
transfer, check, or cash payments. Because ACH transactions pass
through a single clearing house without a lot of intermediate steps, they
offer lower transaction costs, better security, and more convenience than
other payment methods.
Inexpensive:- ACH payments are known for their low
transaction cost compared to credit card and wire payments. Whereas
credit card transactions cost around 2% of the payment amount, and wire
transactions cost $10-35 each, ACH payments cost under $1, regardless
of the amount paid.
Reversible:- Although wire transfers are quick, they are
irreversible. During a wire transfer, there is no way of verifying the
sender or recipient’s identity. Since these payments cannot be reversed,
it’s easy to pull off a wire transfer scam using fake identities. With ACH,
payments are reversible and users are authenticated to prevent fraud.
Secure:- Every financial transaction comes with a concern about
how secure it is. This is because payment errors such as bounced checks,
misused credit card information, wire transfers sent to the wrong
recipients, and cash theft can do serious damage to your business.
ACH provides secure payments by allowing direct transactions between
two parties with no mediator in the middle.
Unlike with other electronic payment methods, you can set up a recurring
payment without asking your customer to provide their bank account
information every time. By sending private information less frequently,
ACH reduces the chances of fraud of erroneous payments.
Repeatable
ACH and recurring payments go well together. Here are a few reasons
why:
Recurring ACH payments allow you to spend less time on each
transaction. Once you and your customer set up a recurring payment,
every transaction made after that is automated.
Your customer doesn’t need to worry about missing a payment,
because they are taken care of automatically.
Likewise, you don’t need to chase late payments or remind customers
to pay.
Better for retention
A common reason behind customer churn is payment failure. Payments
made with ACH have lower failure rates than those made with credit
cards, because credit cards have the possibility of expiring. Since ACH
payments are made directly from bank account to bank account, they
reduce the chances of payment failure and therefore customer churn.
The ACH network is a secure and economical way for your business
to send and receive funds, especially if you handle recurring
payments. Its simplicity and ability to reduce customer churn make it an
appealing alternative to conventional payment methods like cash, check,
card, and wire transfer. If you want your business to have the best
possible footing, then switching to ACH payments is a good move.
