Amy Hardison White

A Beginner's Guide to ACH Payments

Electronic payments have become ingrained in modern life. We take them for granted, even though we might not understand all of their inner workings.

If you’ve received your salary via direct deposit or made mortgage payments via electronic funds transfer (EFT), you’re using the network known as the Automated Clearing House, or ACH. The ACH network enables countless financial transactions in the United States. Depending on your business, it may be a cost effective way to pay your employees and gather payments from customers.

According to NACHA, the Electronic Payments Association and regulatory body of ACH, ACH uses batch processing of payments between participating institutions to facilitate the transfer of more than $41 trillion per year. The ACH network can be employed for both credit and debit transfers, so businesses can use it to both pay employees and vendors and to collect payments from customers.

The ACH network and its governing body, NACHA, were established in 1974 as a means to set consistent operating standards among a growing number of member institutions. Rules were initially approved to facilitate direct deposit as the first of many ACH transaction formats.

By 1978, NACHA and the ACH network had effectively implemented procedures to allow fund transfers between any two financial institutions in the United States. In the decades since, ACH has expanded its reach to account for phone, online and international transactions. ACH has also decreased the payment processing time over the years. Same day ACH payments are set to launch on September 23, 2016.

Here’s how the ACH network functions: for any given transaction, there’s an originator of the transaction. This is the person or entity who decides to make a transaction happen. An originator can be an individual, a business, or a government organization. The originator will initiate the transaction through an originating depository financial institution (OFDI), which is generally the originator’s bank.

The OFDI then batches all transactions together at daily intervals and submits them to the Federal Reserve or other clearing house for sorting and delivery to the intended recipients. In the simplest terms, the ACH network functions similar to the post office. Mail is picked up at certain times of the day and sorted at the post office, for later delivery to its final destination.

Though ACH has been around for more than 40 years and transmits trillions of dollars each year, small businesses have been slow to adopt ACH as a payment method. A 2012 study conducted by NACHA and FIS, the leading provider of global transaction processing services, found that 46% of U.S. paper checks (excluding checks written by the government) are associated with a small business. Two-thirds of participating small businesses also reported that they do not offer direct deposit to employees.

Why are small businesses not making the move to use the ACH network? According to the study, the reasons vary:

  • 46 percent of respondents believe they have too few employees for direct deposit.
  • 28 percent of respondents state employees favor cash or paper check payments.
  • 26 percent of respondents say they have not been approached about using direct deposit.
  • 21 percent of respondents think direct deposit is too expensive.

As a small business owner, you may have some of the same feelings or perceptions as the survey respondents. So why should consider enabling ACH payments for your business? Here are a few benefits to consider:

  • Fees associated with ACH are lower than other online payment options.While credit card processors and services like Stripe and Paypal take a percentage of payment charged of around 3 percent, ACH charges flat fees that can be less than $1 per transaction.

    Think about that $1 - it more than covers the cost of the stamp, the envelope, and the paper the check is printed on. Not to mention the time your staff spends processing payroll, and leaving work to deposit checks at the bank. And the higher your customer payments are, the more potential you have for savings. For direct deposit, banks have a similar flat per transaction fee.

  • Using ACH payments provides higher levels of protection. NACHA guidelines state that ACH users may dispute charges for only three reasons: the account holder did not approve the charge, the business charged the fee earlier than the approval date, and the charge amount is not the same as the one the account holder approved.

    Unlike credit card processors, ACH users cannot reverse a charge because a product was not delivered or was not what they were expecting. Given these guidelines, merchants enjoy a greater degree of fraud protection when using ACH. In addition, ACH transactions are securely delivered from one bank to another, with the risk of a paper check that can be lost, stolen, or falsified.

  • With the launch of same-day payments, ACH continues to close the gap on credit card processing times. Historically, credit card payments take between two and three days to process, and ACH payments can take up to three (and sometimes even five) days. Same-day ACH payments, which is releasing in September 2016, will give ACH the shorter processing time. (It is important to note that same-day ACH payments may not be available to all users in September 2016.)

  • The tools you are already using are set up to work with ACH payments.U.S. banks are members of the ACH network. Many of them waive fees for customers who use direct deposit - a huge benefit to employees. And most online invoicing, e-commerce and similar tools are configured for a variety of options, including ACH, credit cards, PayPal, Stripe, and so on. So you don’t have to do a lot of heavy lifting to get ACH configured - the infrastructure is already in place.

There are a variety of benefits, but is also important to consider the following before setting up ACH:

  • Look into the specific fees your bank charges for ACH. Some banks may have a one-time setup fee for direct deposit, while others may only incur flat transaction fees. Make yourself aware of the costs before making the transition. This payment calculator from NACHA may help you weigh the costs.

  • There may be daily or monthly transfer limits. If you are dealing in large transactions, check these limits first to make sure ACH can sustain your business’s needs.

  • Cut-off times may impact when your account receives (or delivers) funds. For example, transactions initiated after a certain time on Friday may not appear until Monday. These cut-off times may change with the adoption of same-day ACH payments.

The ACH network and its governing body, NACHA, have been operating and innovating on fund transfer practices for over 40 years. Though paper checks are still a highly trusted method in small businesses, there are numerous reasons to consider ACH payments. Not only can you save time and money on processing and mailing paper checks, you can also receive extra protection and plug into the tools you already use. Review your bank’s fees and your business’s needs to determine if ACH is a fit for you.