What Is An ACH Payment And How Does It Work?

Every day, billions of dollars move silently through the U.S. financial system powered by a complex but elegant payment system called the Automated Clearing House – ACH. If you’ve ever signed up for online bill pay or received a paycheck directly deposited into your checking account, you’ve benefited from the ACH network.

Here are some interesting facts about the ACH system, how ACH payments work, and what it means for your everyday financial life.

What Is ACH?

The ACH network is a payments system organized and administered by Nacha, formerly the National Automated Clearing House Association, which was founded in 1974 to improve the U.S. payments system. It’s the means by which trillions of dollars move between bank accounts each year.

ACH plays an important part in how consumers manage their finances on a daily basis. Businesses can also use the ACH network to receive payments from customers, send payments to vendors and transfer money to and from accounts at different banks.

What Is an ACH Payment?

An ACH payment is an electronic payment made from one bank to another. An employer that uses direct deposit authorizes payments from its bank account to its employees’ bank accounts via the ACH network. You might schedule an ACH payment for your mortgage each month.

The ACH network is open for payment processing for more than 23 hours every business day, with payments settling four times a day. ACH payments can be credited the same day, the next day or within two days for speedy processing.

How Do ACH Payments Work?

ACH payments work by moving money from one bank to another electronically, without a physical exchange of currency. Two categories of transactions use ACH payments: direct payment and direct deposit.

Direct payment refers to the movement of money to make or receive payments. If you’re paying a credit card bill, donating to someone’s GoFundMe campaign or sending money to a friend via your bank’s mobile payment service, those transactions all fall under the ACH direct payment umbrella.

Direct deposit involves the transfer of payments from a business or government agency to a consumer. Your employer might offer direct deposit, and the government uses it to disburse Social Security benefits and federal tax refunds.

All ACH payments are routed and processed by the U.S. Federal Reserve or the Clearing House Payments Company, a private business owned by 24 of the world’s largest commercial banks.

The Clearing House’s ACH payments service, called the Electronic Payments Network, is responsible for approximately half of all U.S. commercial ACH payment volume. The U.S. Federal Reserve banks handle the other half of ACH transactions.

ACH payments are processed in batches daily—not in real time. This means ACH payments may need more time to transfer between accounts. But since March 2018, same-day ACH payments have become more widely available. And in 2021, the ACH network processed 604 million same-day ACH transfers.

Types of ACH

Transactions on the ACH network are categorized as either ACH credit or ACH debit transfers, depending on which way the money moves.

ACH Credit

An ACH credit means money is being “pushed” from one account to another. The payer in an ACH credit transaction authorizes their bank to move money from their account to someone else’s.

Examples of ACH credit transfers include:

• Payroll transfers, such as the direct deposit of paychecks
• Social Security benefit payments
• Income tax refunds

ACH Debit

ACH debit transactions pull money from one account and send it to another. ACH debits can be authorized manually or scheduled to take place automatically for recurring payments.

Examples of ACH debit transfers include:

• Mortgage payments
• Utility bills
• Credit card or loan payments

Benefits of ACH Payments

The ACH payment network offers benefits to businesses and consumers alike. For businesses, ACH payments make it faster and easier to collect payments from customers. There’s no need for customers to mail a check or pay with cash in person. And ACH payments are generally less costly for businesses to process compared to credit card payments.

For consumers, ACH payments offer a simpler process for paying bills. You can log in to your bank’s website, enter your biller’s details and schedule payments in minutes directly from your bank account. If you want to simplify things even further, you can schedule recurring ACH payments for your monthly bills.

Getting paid via direct deposit can be more convenient than being handed a paper check. With direct deposit, you know roughly when funds will hit your bank account and when they’ll be available. You don’t have to race to the bank before it closes to deposit a paper check or spend several days waiting for a mobile check deposit to clear.

Downsides to ACH Payments

While ACH is convenient, it’s not a perfect system for sending and receiving money. Unless you send same-day ACH payments, transactions can take a few business days to process. Also, daily cutoff times apply to ACH transactions, which can delay processing times.

Your bank may limit the dollar amount you can send via ACH or the number of transactions you’re allowed to complete each month. Most banks typically limit you to six withdrawals per month from a savings account, but your bank may impose other restrictions when sending money overseas through the ACH network.

ACH vs. Wire Transfer

In addition to ACH payments, it’s also possible to send money from one bank to another via a wire transfer. A wire transfer is an electronic payment sent through a wire network, such as the Federal Reserve Wire Network, SWIFT (the Society for Worldwide Interbank Financial Telecommunications) or CHIPS (the Clearing House Interbank Payments System).

Wire transfers can be sent domestically or internationally, and banks can charge fees for both types of transactions. International wire transfers are typically more expensive, and some banks allow for fee-free incoming domestic wire transfers. And wire transfers allow for the movement of funds from one bank account to another in under an hour, which can be useful if you need to move large amounts of money quickly.

Do ACH Payments Cost Consumers Money?

Unlike wire transfers, which often require you to pay a fee per transaction, there’s generally no fee to send or receive payments via ACH transfers. And in some ways, the ACH network helps consumers save money. Think of all the time and money you save by not having to go to the bank to deposit a paycheck. And when you use ACH for online bill payments, you avoid the need to buy stamps and envelopes.

Facts About ACH Transfers

• More than 93% of American workers get paid via direct deposit.
• The U.S. Air Force was the first employer in the country to offer a direct deposit payroll program.
• The Social Security Administration started testing direct deposit payments in 1975. Today, 99% of Social Security payments are made via ACH direct deposit.
• ACH payments by phone and internet were launched in 2001.
• In 2021, the ACH network processed 29.1 billion payments totaling more than $72.6 trillion.

Bottom Line

The ACH network is a remarkable technological system developed to make banking more efficient and secure. It benefits the lives of millions of people every day in ways we usually take for granted. The next time you get paid promptly via direct deposit or pay your utility bills online without having to write a check or lick an envelope, you can be thankful for the ACH payments network.

Frequently Asked Questions (FAQs)