How Does ACH Processing Work?

By Payliance | 09/19/19

Automated Clearing House (ACH) payments occur electronically through the ACH network. A customer can give another party (an institution, company or other originator) authorization to debit directly from that customer’s bank account to make a payment. ACH credits occur when a payer initiates payments through the bank, which proceeds to deposit the funds electronically into the recipient’s bank account. With both credit and debit, the funds move electronically from one bank account to another, making ACH an inexpensive and convenient way to process payments.

It’s also a popular way to process payments. According to the Nacha.org website (the website of the administrator of the ACH Network), the value of ACH payments totaled $51.2 trillion in 2018 — almost a 10% increase over the year prior. Most people have used ACH payments, even if they aren’t familiar with that terminology.  Anyone enrolled in direct deposit to receive wages from their place of employment or who pays bills online directly from their checking accounts has utilized ACH payments.

Understanding the ACH Payments Flow

Payments via ACH require the organization requesting the payment to obtain bank account information for the other party in the transaction. This includes:

  • Routing number
  • Account number
  • Type of account (checking or savings)

 Since ACH involves bank-to-bank transfers, there are several types of transactions that can be handled in this manner: settlements for credit, debit, and ATM transactions, and direct deposit. Rather than going through debit or credit card networks, these payments are facilitated directly between the banks. They are often less expensive to process than credit card transactions and easier than paper checks; however, ACH payments are also a bit slower. There are two different types of ACH transactions: 

  • Debit transactions: money is pulled/debited from an account. This type of transaction can be used for recurring bill payments where the merchant owed pulls money from a customer’s account every month or for one-time payments.
  • Credit transactions: money is pushed/credited to an account.

 To better illustrate how ACH processing works, we can look at an example of a debit transaction where a customer chooses to pay a monthly utility bill through ACH. In this case, the Originator (the utility) works with its merchant bank (also called the Originating Depository Financial Institution  or “ODFI”) to initiate an ACH debit from the customer’s bank account (through the customer’s bank or Receiving Depository Financial Institution/”RDFI”). Data for the debit entry is sent from the ODFI to the RDFI through a clearinghouse (usually the Federal Reserve Bank) via a batch transfer.

 During this time, the ODFI also debits the customer’s account and posts a credit to the Originator’s account. At the same time, the ACH transaction is sent from the clearinghouse to the RDFI, which notes a debit on the customer’s account. These “holds” at the respective banks will remain as a pending transactions until settlement when all the banks are able to resolve the transactions. Until settlement, no money changes hands. If the funds are not able to be verified or if the transaction is unsuccessful for any other reason, the originator will be alerted to the failed transaction (known as a return) as well as the reason it wasn’t successful.

Click here to see an infographic of the ACH process. 

 

Benefits of ACH Processing

As electronic payments, ACH payments do not require the same physical resources as paper checks. There is no ink, envelopes, paper, or labor needed. Electronic transactions are also easier to track as each transaction creates an electronic record. There are several other key reasons that businesses opt to use ACH processing over other methods. These include:

 Ease of use: ACH payments are faster and more convenient than traditional paper checks. With paper checks, businesses must wait for customers to send the check, must wait for it to arrive in the mail, and then must deposit the check at the bank. Paper checks are also prone to human error and can be lost, damaged, or stolen, further delaying the payment process. Electronic ACH payments, however, are quick and reliable, and they do not require the recipient to interact with the bank and wait for additional time.

 Cheaper than credit cards: ACH payments are typically less expensive to process than credit card payments for most businesses. This can be especially true for recurring billing merchants as fees can add up over time. Automating recurring payments through ACH can lead to significant cost savings.

 Can be completed remotely: ACH payments can be accepted remotely just like credit cards. In cases where customers may not want to use credit cards, don’t have credit cards, or are not interested in submitting payment card information, ACH is an alternative.

 In addition to the benefits listed above, it can make sense to manage payments via ACH processing in the following scenarios: 

  • Recurring Payments — merchants that deal with recurring payments find it easy to automatically collect from customers that need to be billed on a regular basis. 
  • Mobile Payments — merchants can enable mobile ACH to make on-the-go payments quick, easy and secure. 
  • Online Payments — merchants can securely process ACH payments on their website and avoid costly credit card transaction fees.
  • Pay by Phone — merchants can accept ACH over the phone and allow customers to pay with their checking account.  

Benefits of Working with Payliance

Payliance helps merchants streamline operations while saving time and money. Our ACH processing capabilities makes it fast, easy and secure to process and control recurring and one-time payments and disbursements. Merchants love working with us because of our: 

  • Lower cost of payment acceptance — Process ACH as a one-time payment or recurring payments for less than the cost of processing credit cards.
  • Broad processing capabilities — Our ACH processing capabilities span multiple implementation models. 
  • Quick start up — Efficient API and gateway-based integrations allow you to get started quickly collecting and disbursing funds. 

Ready to get started with ACH payments for your business? We would love to help you get set up for payments success. Schedule a consultation with Payliance today to discuss the right payments solutions for your business.