When you wake up in the morning and see that the salary was deposited automatically to your bank account, that’s ACH payment. ACH is an electronic fund transfer system that enables credit transfers and direct debits. If you want to know more about this process, read on. 

It is estimated that more than 23 billion electronic payments were made via ACH in 2018. In fact, ACH is regarded as one of the largest and safest methods of money transfer across the globe. 

When you pay a bill payment online and save the hassle of writing and mailing a check or set your mortgage and various other recurring payments to send on the day of the month you select automatically, that’s also known as ACH payment processing.

ACH is an electronic fund transfer system that enables payments in the United States.

If you want to know more about this process, read on.

What is ACH

ACH is basically a network that makes electronic payments possible in USA. Earlier, financial institutions used to take a lot of time sorting and process paper cheques, and despite the best efforts, employees simply could not keep up with the massive volume of checks. Hence, out of necessity, banks that were part of the American Bankers Association put their heads together to find a more efficient way to make transactions possible and keep track of them.

This, in 1974, the NACHA (National Automated Clearing House Association) was born in the United States. From floppy disks and magnetic tapes, the technology gradually grew more sophisticated, and the network spread to encompass the entire USA. In 1994, the Federal Reserve mandated that all payments between banks be made electronically.

Now, it is the default system of electronic payments –, especially for low value domestic transactions. It is becoming increasingly popular for (peer to peer) payments.

What is ACH Payment Processing

ACH or automated clearing house is one of the electronic networks for financial transactions, mainly domestic low-value payments.

The ACH transfer is one of the ways used for moving money between accounts at different banks electronically. It helps you to send or receive money conveniently as well as securely.

ACH Payment full form: Automated Clearing House

You might be using ACH transfers without even realizing it, if you have paid via direct deposit, then that’s also the form of ACH transfer.

An ACH is a computer-based clearing house as well as settlement facility that is established to process the exchange of electronic payments between participating financial institutions. 

Most of the ACH payments support the following types:

  • Credit transfer: This includes the non-immediate transfer of funds between the accounts at different financial institutions for payments by retail customers as well as non-urgent business to business payments.

and

  • Direct debit payment: of consumer bills like utilities, loans, insurance premiums, mortgages and also other regular payments.

The ACH transactions are not the same as debit cards payments, eChecks or wire transfers. It is vital to understand that not all electronic payments are ACH payments. For example, debit, as well as credit card payments, are electronic, but this does not mean that they are ACH transactions. ACH is only specific to bank account transfers.

ACH Meaning in Banking

In order to understand what type of payments ACH supports, we must first understand how it operates. ACH facilitates direct bank-to-bank payments. In other words, it uses the customer’s bank account and login information to access their funds. Then the funds are accordingly linked to debit or credit accounts to facilitate the necessary transaction.

How Does ACH Payment Processing Work

Automated clearing house payments are one of the electronic payments that are made with the help of ACH network. Funds move from one bank account to another with the help of an intermediary which routes funds to the final destination.

The types of transfers include external funds transfers, bill payments, person-to-person payments as well as direct deposits from employers and government benefit programs, while it also comprises business-to-business payments.

ACH payments are one of the electronic payments that are created when the customer provides an originating institution, corporation or other originator permission.

Customers who select ACH payment must first sanction you to debit their bank account for the amount due. The authorization must first comply with the requirements of the ACH operating rules as well as must be either signed and written or electronically displayed.

Therefore, an ACH operator helps to give information to the network participants within the settlement network. The recent rule changes have enabled most debit, as well as credit transactions made through ACH, should be cleared on the same business day. 

  1. This involves several parties: The originator- the party initiating the transaction. For example, you are the originator when you try to send money to your friend.
  2. The originator’s partner bank. Also known as the Originating Depository Financial Institution (ODFI). In this case, it is the bank where you have an account from where you will make the payment. 
  3. An ACH operator, which receives the payment from the ODFI. This may be the Federal Reserve in the USA.
  4. The receiver’s partner institution. This is the bank or institution that processes the transaction on behalf of the recipient. Also called the Receiving Depository Financial Institution (RDFI).
  5. The recipient. This is the person whose bank account will get credited with the money you sent. 

Types of ACH transfers

Most of the ACH payments support the following types:

  1. Credit transfer: This includes the non-immediate transfer of funds between accounts at different financial institutions. For example, payments made by retail customers as well as non-urgent business to business payments. It helps you to push money online to accounts at different banks, either accounts you own or friends as well as family member’s accounts. 
  2. Direct debit payment: These include consumer bills like utilities, loans, insurance premiums, mortgages and also other regular payments. When you set up a recurring bill payment, the company you are paying has the authority to draw what is owed from your account each month.   

Therefore, in ACH payment, a consumer pays their service providers such as cable and gas companies either manually or with the help of recurring payments.

The ACH Network is at the centre of commerce in the U.S., which helps to move not only money but also the information from one bank to another using Direct Deposit and Direct Payment.

Instead of utilizing paper to carry important transaction information like with checks, ACH Network transactions are transferred electronically, which allows for faster processing times as well as cost savings.

What ACH Payment is not

The ACH transactions are not the same as debit cards payments, eChecks or wire transfers. It is vital to understand that not all electronic payments are ACH payments. For example, debit, as well as credit card payments, are electronic, but this does not mean that they are ACH transactions. ACH is only specific to bank account transfers.

Therefore, in ACH payment, a consumer pays their service providers such as cable and gas companies either manually or with the help of recurring payments. 

The ACH Network is at the centre of commerce in the U.S., which helps to move not only money but also the information from one bank to another using Direct Deposit and Direct Payment.

Instead of utilizing paper to carry important transaction information like with checks, ACH Network transactions are transferred electronically, which allows for faster processing times as well as cost savings.

What is ACH Mandate?

ACH payments are made possible when the customer provides an originating institution, corporation or other originator permission to transfer funds to or from their accounts.

Customers who select ACH payment must first sanction their partner bank or the relevant institution to debit their bank account for the amount due. The authorization must first comply with the requirements of the ACH operating rules as well as must be either signed and written or electronically displayed.

Therefore, an ACH operator helps to give information to the network participants within the settlement network. Recent rules enable most debit, as well as credit transactions made through ACH, should be cleared on the same business day. 

Benefits of ACH Payments

Simple to handle

When customers pay by check, businesses often need to wait for the mail to arrive and then they need to deposit the check with a bank. There are times when payments get lost sometimes and entering those payments into a recordkeeping system is labour-intensive.

Electronic payments arrive quickly and reliably, which removes the need to forward checks to the bank as well as wait for few days to find out which checks bounced.

Less expensive than plastic

Businesses that receive the payments by credit card often cost less to process an ACH transfer that it costs to take a credit card payment. ACH will not provide you with a real-time approve or deny response like a credit card terminal would do.

Long-distance payments

Businesses can accept payments by ACH remotely, and the same is true with credit cards also. ACH can provide a solution, when your customers do not have credit cards or when they prefer not to give their card information regularly.

ACH in India

In India, ACH is better understood as “Electronic Clearing Service” or ECS. As the RBI puts it, “Electronic Clearing System (ECS), both for Credit and Debit operations, functions from 46 places (15 managed by Reserve Bank and the rest by the State Bank of India and one by State Bank of Indore). The ECS is the Indian version of the Automated Clearing Houses (ACH) for catering to bulk payments.”

Different banks levy different charges for different types of accounts. The charges and the rules are also updated frequently. In most cases, banks charge a fixed amount for the first time you make an ECS payment as a fee for activating the facility; along with GST.

If you have an account in any bank in India, talk to your branch to stay updated on the issue.

Reasons why consumers like to make payments with ACH

Businesses are not the only ones who benefit from ACH payments.

Easy payments

There is no need for consumers to write checks and reorder checks when they run out and get checks in the mail on time. No charges go onto their credit cards because the funds come straight from their bank account.

Autopilot

If the customers are using automatic ACH payments, then there is no need for them to keep an eye out for bills or take any action when payments are due. Everything runs on autopilot, for better or worse.

Benefits of shifting to ACH Payment Processing

If you are a business owner or entrepreneur and want to maximize profit as well as minimize expenses, then a custom ACH processing solution for your business is a perfect solution. ACH payments are one of the excellent ways to:

  • It helps to reduce costs mainly when compared to check as well as edit card processing.
  • It also helps to increase the payment speed, flexibility as well as convenience.
  • ACH payment also helps you to add payment options for your customers.
  • It helps in collecting payments in a highly secure manner.

Remember, many customers are also partial to ACH. They may not want to give out their credit card information, or may not have credit cards. Moreover, ACH is also very convenient because there is no need for consumers to write checks. If the customers are using automatic ACH payments, then there is no need for them to keep an eye out for bills or take any action when payments are due. Everything runs on autopilot, for better or worse.

Adapting the Right Payment Option for Your Online Business

It is always better to have multiple options for your customers if you have an eCommerce or online business. Remember, customers love convenience. ACH is a very convenient payment option for them, so you must consider making it available for them. The easier you make it for them to shop with you, the more they will come back. 

So, make the right choice for your business and your customers.

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Author Avinash Chandra

Branding, Integrated & Digital Marketing Wizard and Founder of BrandLoom Consulting (A $1m startup). I help companies generate more revenue through digital marketing. I have successfully led Business and Marketing operations of several Large & Small; American, European, Chinese & Indian Brands and Startups. In totality, I have worked with over 100 Brands during my 17 years of professional career with a proven track record of Building Sustainable & Profitable Businesses.

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