In 2019, the digital payments system known as Automated Clearing House, or ACH, processed nearly 25 billion transactions worth more than $55 trillion. Homeowners pay bills, companies deposit wages, and online shoppers make their purchases through this single financial network.
But what is an ACH payment, exactly? And how can companies take advantage of this system to benefit employees, customers, and the bottom line? Here’s a quick-start guide to ACH, a far-reaching payments system that you may already use more often than you realize.
ACH payments are financial transactions that move through the ACH Network
The ACH Network provides the infrastructure for direct account-to-account payments through its electronic network. Online payments move through one of two ACH programs: Direct Deposit and Direct Payment.
The U.S. government uses ACH Direct Deposit to send federal paychecks, Social Security payouts, and tax refunds to recipient bank accounts. The private sector also relies on this program to simplify payroll. More than 80 percent of all employees in the U.S. are paid through ACH Direct Deposit.
Direct Payment uses the ACH Network to send money on a recurring or one-time basis. Online bill paying services move through ACH Direct Payment. Consumers often set up recurring Direct Payment transactions through agreements with utility companies and other billers.
Businesses collect payments through Direct Payment, too. All it takes is an ACH-ready payment gateway integrated with your website or accounting software that links to the ACH Network.
Why should companies accept ACH payments?
ACH payments are accepted by virtually every company online for one simple reason: to save money. ACH transaction fees are usually much lower than fees charged by payment card providers.
Matt McKenna, owner of digital branding/design company Delt, says that ACH savings can be significant. “We recently switched all our clients from credit card payments to ACH payments, and we will be saving around $400 per month in credit card processing fees,” McKenna says.
ACH payments are also remarkably secure. According to a recent Federal Reserve study, ACH transactions had the lowest rate of fraud of the payment methods studied, both online and off.
Who operates ACH?
The ACH system involves three major players:
- Nacha. The governing body of the ACH system, Nacha defines what the ACH Network does, and how, by writing and enforcing the rules that govern the network. Nacha also sponsors conferences, offers webinars, and publishes educational material about payments.
- The Federal Reserve System. Federal Reserve Banks are one of the two entities that process ACH payments. Every day, Reserve Banks receive, sort, and verify ACH payment batches from payment-originating banks, then send the requested funds to payment-receiving banks and debit payment-originating accounts.
- The Clearing House. Federal Reserve Banks handle about half of the commercial ACH payments that crisscross the nation and, in some cases, the globe. The other half is processed by the Clearing House, a 160-plus-year-old payments company owned by major commercial banks. The Clearing House operates the Electronic Payments Network (EPN), which is devoted solely to processing ACH Network transactions. Unlike the Federal Reserve, the EPN handles private-sector transactions only.
Ongoing innovation in the ACH Network
Thanks to work from all three of the above-listed organizations, ACH payment processing is speeding up considerably. For years, a payment on the ACH Network could take two business days or more to clear. But Same Day ACH processing began rolling out in stages in 2016 and is in widespread use today.
As of March 20, 2020, ACH payment batches that total less than $100,000 will be eligible for Same Day processing. And on March 19, 2021, payment files sent by 4:45 p.m. ET will be processed that day. In combination with low fees and dependable security, this quicker processing will make ACH payments an even bigger player in today’s online financial ecosystem.