What are ACH Payments? | How do ACH Payments work? - Zoho Books (2024)

Over the past 40 years, ACH has grown to become one of thelargest, safest, and most efficient systems in the world of banking. Thenetworknowhandles$43 trillion worth of transactions every year.ACH transactionsare a cost-effective and quick way ofsettling payments, making them a preferred go-to option for many businesses.

As a businessowner, you’ve probablyheard of ACH payments, but might not be familiar with how they work.This article will guide you through the basics of ACH andhowit compares with other payment modes.

What are ACH payments?

ACH payments are a form of electronic bank transactionmade using a network called an Automated Clearing House(ACH).
Technically, the ACHnetwork is a system of computersthat communicate with each other to make and receive payments. Everytransaction consists of two computers: one at the sending end tosend arequestfor payment, and another at the receiving end toaccept the request.
Businesses in the US useACH paymentsfor paying bills, wages, mortgages,andloans, andformakingdirect deposits. Electronic payments made through the ACH network must follow guidelines provided bytheNational Automated Clearing House Association, or NACHA.

What are the different types ofACHtransactions?

There are two types of ACH transactions: direct deposit and direct payment.

Direct deposits areinitiated by the payer to send funds directly to a receivingaccount — for instance, to pay wagesto an employee.

Direct payments areinitiated by the recipient torequest funds —for instance,to automaticallycollect payment for recurring bills.

How do ACH transfers work?

An ACH transactionbasically 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 startingthe transaction, make sure you are allowed topullmoney from your customer’s bank account. Your customer can give you permission by filling out an authorization form with their bank.

Initiation

As theOriginator,you start by sendingdata files about the transaction toyourbank,which iscalled theODFI(Originating Depository Financial Institution). These files include the transaction type (debit orcredit), routing numbers, and bank account details.

Batching

YourODFI collects all transaction files sent to themand forwards them at regular intervals to anACH operator, eitherFedACH(Federal Reserve Banks’Automated Clearing House) ortheElectronic Payments Network (EPN).

Distribution

TheACH operator then sends the data files to your customer’s bank, which is called theRDFI(Receiving Depository Financial Institution).

Completion

TheRDFI in turnpulls the funds from your customer’s bank account.You willknow that the transaction has been completed when youreceive 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 theirlow transactioncostcompared to credit card and wire payments. Whereas credit card transactions cost around 2% of the paymentamount, andwire transactions cost$10-35each, ACH payments costunder $1, regardless of the amountpaid.

Reversible

Although wire transfers are quick, theyare irreversible.During a wire transfer, there is no way of verifyingthe senderorrecipient’s identity. Since these payments cannot be reversed, it’s easy to pull off awire transferscam using fake identities.With ACH, payments are reversible and users are authenticated to prevent fraud.

Secure

Every financial transaction comes witha concern about howsecure it is. This is becausepayment errors such as bounced checks, misused credit card information, wire transfers sent tothewrong recipients,andcash 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 youtospend less timeon each transaction. Once you and your customer set up a recurring payment, every transaction made after that is automated.
• Your customerdoesn’tneed to worry about missingapayment, because they are taken care of automatically.
• Likewise, you don’t need to chase late payments orremind customers to pay.

Better for retention

A common reason behind customer churn is payment failure.Payments made with ACHhave 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 thechances ofpayment failureandthereforecustomer churn.

The ACH network is a secure andeconomicalway for your business tosend and receivefunds, especially if you handle recurring payments.Its simplicity and ability to reduce customer churnmake 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.