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ACH Payments – The Ultimate Guide

Centuries ago, companies traded goods and services, a simple but not always efficient system. Then the Industrial Revolution ushered in new methods to work smarter and produce faster; the Information Age further transformed the business world with accounting software systems and electronic payment technologies. These electronic payment systems were largely created to meet supplier demands for expedited payments. Several payment types were generated, but one reigns supreme: Automated Clearing House (ACH) payments.

What is an ACH Payment?

ACH (Automated Clearing House) transactions are payments that are electronically transferred from one verified bank account to another. ACH payments are widely used as a B2B payment method because they are speedy, paperless, secure transactions that save time and money. ACH payments are widely used between businesses and consumers for ease and efficiency. For consumers, ACH payments are commonly direct deposits or automatic withdrawals from a bank account for bill payment.

How Does ACH Payment Processing Work?

How do ACH payments work? After the sender provides all information needed for payment, the Originating Depository Financial Institution (ODFI) enters the payment into a system on your behalf. The payment is then put in a batch with other payments waiting to be processed by the ACH Operator. Next, the ACH transactions are sorted and sent to the Receiving Depository Financial Institution (RDFI). Lastly, the RDFI sends the debit or credit transaction to the receiver or the vendor’s verified account.

ACH takes the manual process of writing, mailing, and depositing a check out of your hands and electronically delegates those duties to other trusted organizations. Think about a typical case in the B2B world. Your company receives an invoice from a vendor. You then send a direct payment using the ACH process to pay the vendor electronically. This payment may be scheduled for withdrawal from your company’s account ahead of time or may be recurring to reduce late fees and errors. The vendor will see the funds in their account instead of receiving a printed check.

Comparing Common B2B Payment Methods

Both ACH transfers and wire transfers move payments from bank to bank, but there are several fundamental differences. Wire transfers are instantaneous, whereas ACH can take a few days. But the speed of a wire comes at a cost, $10 – $30 per transaction. ACH is typically very inexpensive or free. ACH allows businesses to send and receive secure payments, while wires only enable you to send payments with less protection.

As organizations take advantage of the significant benefits of digital payments, they’re shying away from wire transactions and trusting ACH more. In fact, PayStream Advisors reports that only 16 percent of surveyed companies use a wire transfer as their primary payment method, while ACH payments account for 30 percent. Despite ACH and ePayment advances, shockingly, the primary payment method is still by check, at 49%.

ACH Payments vs. Checks

The preferred payment method always boils down to the supplier’s choice. Often, businesses rely on dozens of suppliers, which can lead to juggling multiple payment methods. Two of the most widely used payment methods are ACH and checks, but which is better for both parties involved?

Think of checks as being the manual method of ACH payments. Your business is responsible for writing and mailing the check, while your supplier is left with the burden of going to the bank to deposit it. It often costs anywhere from $4 – $20 to process a paper check. On the other hand, the cost of ACH payments can vary–depending on credit versus debit, banks, and delivery speed. On average, most businesses spend as much as $3 to process a single ACH payment.

There isn’t much difference in ACH payment processing time from checks. Most banks take two business days to deposit the check funds into the account. Most ACH payments take one to three business days to process. ACH users also benefit from improved security and reduced fraud risks with the ability to only send funds from one verified account to another. When checks are mailed from one user to another, there’s the risk of fraud. Think about the number of times the check is touched from the moment of its writing to postage, delivery, and deposit.

For obvious reasons, many companies prefer ACH payments, but those that stick to paper checks have their reasons. Suppliers that prefer checks like the idea of an internal paper trail for budgeting and auditing, but between estimating postage delivery and the vendor’s deposit lag time, it’s nearly impossible to forecast or report spend accurately.

ACH vs. Virtual Credit Cards

Businesses also use credit cards for quick and easy payments. Yes, both ACH and credit cards are electronic fund transfers (EFTs) that make sending and receiving of funds safe and speedy without paper, but the big difference between credit cards and ACH payments is the availability of funds. If your business is paying a vendor using a credit card, they’re getting money allotted by the bank or credit card network. Your company is responsible for paying those funds to avoid credit issues. On the other hand, ACH payments are made by funds that are readily available in your bank account. Some organizations prefer ACH transactions because of less expensive payment processing fees and heightened security.

Most businesses use both ACH and credit cards to pay suppliers depending on the vendor’s preference. However, if the ACH transaction is declined, the notice of the rejection is not as fast as a card transaction that rejects the transfer immediately. This lag time could cause late payments and miscommunication. Keep in mind the fraud risks associated with credit cards include leaked card information, internal fraud, and the possibility of misplacing the card.

Enterprises are also considering the value of virtual credit cards (VCCs) versus ACH payments. VCCs are electronic credit cards created to make a one-time payment. The card information is different from any other card connected to the account with random credit card details which protect all account details for the transaction. After the purchase is made, the VCC can no longer be used.

ACH and VCC both provide the security other payment methods do not. However, VCCs require a few extra manual steps to make payments. For most VCCs, every payment requires a new card, while ACH transactions can be set up as recurring between suppliers for convenience by your bank or ACH service provider.

ACH Payment Processing Fees & Fines

How much does it cost to make an ACH payment? The fees your business pays for ACH transactions are set by the third-party or bank that processes the payment. Fees may be a percentage of the payment or a predetermined rate. Some costs range from just a few pennies to upwards of a dollar. Recurring and one-time payment fees may also vary. NACHA sets their own guidelines and fees for banks and third-party processors for payments.

Be careful of returned ACH payments. Returned transactions could put your finance department at risk for additional fees and fines. ACH payments may be returned for numerous reasons including insufficient funds or incorrect account information.

What are the Difference Between ACH Debit and ACH Credit

The simplest way to distinguish ACH debits and credits – debits deduct and credits deposit.

ACH debit transactions give other parties the authority to withdraw payments from your account, while ACH credit transactions deposit money into your account from another party. A common example of ACH debit is a utility taking an electricity bill payment from your account on a specified date. There’s no action required on your behalf because you’ve given them the authorization to do so. But beware. If the payment total is not in the correct ACH account to withdraw from, there may be fees due to the declined transaction.

ACH credit transactions are as simple as direct depositing a check into your business’ account. Think about your paycheck directly deposited into your account. Or, in the B2B world, imagine a company paying your business for a service and sending it from their account to yours. The funds will appear in the account in one to two days, but it’s essential to verify the account information to ensure the funds are deposited in the right place.

What are the Benefits of ACH Payments?

The number one reason why businesses use ACH payments is ease. There’s less worry about juggling account information or writing and mailing checks. Companies love the convenience of sending payments directly from their bank account to their vendor’s verified account without extra work.

In fact, according to US Bank, survey respondents scored ACH and EFT payments as excellent, above credit cards, for critical payment factors including the availability of an accurate and transparent audit trail of transactions and security and protection from fraud or theft. Businesses also enjoy the benefit of prompt payment and convenience for transaction partners.

In addition to efficiency and convenience, there are three additional benefits of ACH payments.

  1. ACH payment processing speed On average, ACH payment processing can take one business day to process a debit transaction and one to two days for credit transactions. However, to keep up with the recent advancements in digital wallets and payments, same-day delivery was recently launched.
  2. Improved payment security. When your organization enrolls in electronic payments with the bank or third-party service, there’s less worry about sharing account information for every transaction. There’s also less worry about the countless touchpoints of processing the payment with paper checks. Once the ACH or electronic payments are initiated, they’re safely sent without disputes or delays.
  3. Reduced payment errors and delays. With controlled ACH payments, there’s less worry about manual mistakes that waste valuable time and money. Your team will have more time to focus on other essential tasks, instead of juggling various payment methods and writing checks.

What are the Dangers of ACH Fraud?

Even though ACH payments are known for having greater payment security than checks, attackers still target businesses by requesting ACH payments. PYMNTS recently shared that 41 percent of surveyed respondents fell victim to fraud through both debit and credit ACH transactions.

It doesn’t take much for fraudsters to find your company’s account information. ACH fraud includes any unauthorized ACH transactions from the sender’s bank account using only the sender’s bank information including account number and routing number. With this information, the fraudster has the power to disburse funds to their fraudulent accounts.

There are two common attacks against ACH payments:

  1. Business Email Compromise (BEC)
  2. Account Takeover

Both fraudulent attacks attempt to steal money and make unauthorized transactions. It’s important to know the difference, signs to watch for, and how the NACHA helps reduce security risks.

Account Takeovers steal account information to take money from your bank account electronically. Although banks provide security protection and fraud prevention, Not every bank or account—consumer or business—offers the same amount of security and stability. Fraudsters often disguise themselves by creating websites that mimic legitimate websites. These sites are filled with viruses that tap into account and security information. Sometimes these attacks start with the request for simple information such as a phone number or email. Once the fraudster gets the bits and pieces of information needed, the account information can be used for ACH and other electronic payments.

How to Reduce The Risk of A Corporate Account Takeover

A few suggestions include enabling firewalls and malware protection. Also, be aware of Wi-Fi access and security, especially for public logins. Most importantly, if any link or letter seems suspicious, always reach out to your bank for verification before taking any further action.

With BEC, fraudsters identify patterns in account activity, then use the information to mimic a business or manager and send emails that often contain viruses. These emails urgently demand payments with instructions that seem legitimate. Once your organization is caught in the fraudster’s trap with payments, the [6] account is at risk for more unauthorized transactions.

How to Avoid BEC Attacks Against ACH payments

Always be cautious of every email. A few best practices include:

  1. Refuse to provide any information without verification from the proper parties (bank, vendor, or colleague). Don’t respond to the email for confirmation. Instead, call or make an appearance in person.
  2. Speak with your IT department to determine the best email software and security measures. Developing best practices around email communication is critical. Instead of replying to a suspicious BEC, forward the email and select a known email address from your address book or trusted company directory.
  3. Consider registering domains similar to that of your business. Fraudsters try to align with your business closely. Any email addresses, subdomains, or branding that closely resemble your company should be considered.

The Top 3 Precautionary Measures Against BEC Attacks

Here are a few best practices for organizations to follow to avoid any other ACH scams that may arise:

  1. Routinely check all accounts that can make ACH payments to determine if they’re used regularly or not. Review bank statements and account transactions regularly for suspicious activity and unauthorized charges.
  2. Verify that all changes are authorized, including your vendor’s account information and payment changes. Assuming your vendor gave the ‘OK’ can put both parties at risk.
  3. AFP recommends reconciling accounts daily. ACH accounts used for payment should include Positive Pay, while those that don’t disburse payment should stop all ACH debits.

ACH Rejections & Reversal Codes

The biggest problem companies face is rejected or returned ACH transactions. Common reasons include insufficient funds, closed accounts, or invalid account information. But these aren’t the only reasons for an ACH rejection. Here is a list of at least two dozen rejection codes for a failed ACH transaction.

Here are a few of the most common ACH rejection codes businesses encounter:

  • R01 – Insufficient funds have resulted in being able to make the requested transaction.
  • R02 – The ACH account is inactive and unable to process the request.
  • R04 – The account number is invalid, which could merely mean a mis-entered account number or the account information does not match.
  • R07 – The request for payment has been canceled by the initiator, and the funds should be returned.
  • R24 – A duplicate payment entry has been identified.

The best way to handle an ACH transaction rejection is to start by researching with the code. For codes such as R02 (bank account is closed) or R04 (bank account number is invalid), it may be as simple as asking vendors to send new account information or relying on the bank to do so on your behalf. However, the simplest solution to handling ACH transaction returns is to implement an ePayment solution with a supportive network on your behalf. For example, the AvidPay Network team works directly with your vendors to verify accepted payment methods and account information, so you don’t have to. Handing any potential ACH payment problems off to a trusted team saves your company time and money while ensuring secure transactions.

To learn more about ACH return codes and reasons, check out the Return Reason Code Guide explaining ACH rejection reasons, codes, reminders, and helpful details to avoid rejection.

Why Businesses Fear ACH Rejection Code – R01

The biggest concern businesses face with ACH payments is having funds readily available. With checks, your company can write and mail a check without worrying about funds being withdrawn immediately. Between postage, delivery, and the deposit date your business has floating time before funds are withdrawn. With ACH transactions, once the payment is initiated, the funds are immediately withdrawn to begin the ACH payment process. Not having enough money or an accounting error can cost your business fees. Or even worse, your company could overdraft an account if enough money is not available at the time of the transactions.

Organizations often run into the ACH payment problem of transaction rejection code R01 because ACH transactions are not immediate. Initiating an ACH payment is only a request until it has been sent by the RDFI. This process can take anywhere from a few hours to a few business days.

If your company isn’t keeping a close eye on withdrawals and other ACH transactions, funds could run low and your organization won’t have the money to pay the vendor when the RDFI attempts to send the payment from your account to the supplier. Shortage of funds for the ACH transaction leads to late payments and poor vendor relationships since rejections are not instant.

As a best practice, always keep a close eye on the account’s transactions to ensure all funds are available for all recent and upcoming transactions. To reduce these worries and strengthen the ACH Network, use Same-Day ACH to minimize waiting and insufficient funds.

Getting Started with ACH Payments

Initiating ACH payments requires a few simple steps from your business. Start by finding an ACH provider. Most companies trust a bank or third-party provider to process all payments including ACH transactions. The bank or third-party payment processor will handle the rest by obtaining all account information and communicating with your vendor to obtain account details and contact information to manage payments on your behalf.

ACH Account Validation

To have an active ACH account and abide by all of the rules, your ACH account must be validated. There are several ways to verify ACH accounts–including manual and digital to meet your organization’s payment process best. Your business should weigh the pros and cons of each and implement a procedure that bests fit your internal needs and compliance standards.

  • Manual – Companies manually verify account information using checks and internal procedures.
  • ACH Validation Test – Your business is able to verify the ACH account with the help of the ACH Network. You can send a prenote – transaction amounting to nothing – to a bank for them to confirm the account information.
  • Micro-Deposits – Think of this as a simple test. Your company can deposit or withdraw a small amount from the account. The receiver will verify the transaction.
  • Validation Services – Use a service or system to access account information and identification. Check with a third party or bank for these services.
  • Customer Sign-in – Companies and consumers log in to a service to verify information and identity. Companies should ensure they are using an online service and process that they trust to reduce security risks.

Why ACH is the Preferred Payment Method of Businesses

Most businesses prefer sending suppliers ACH payments for several reasons:

  • The next best alternative to paper checks. Most everyone dreads the long, tedious process of handling paper checks. Writing, mailing, and hoping for a safe delivery are just a few of the stressful steps of sending checks to vendors. With ACH payments, organizations enjoy the ease and efficiency of digitizing the paper check experience. Neither buyers or suppliers have to worry about making trips to the bank or waiting for the mail to manage payments.
  • Simplicity, ease, and efficiency. Unfortunately, paper materials have a habit of getting lost in the shuffle. Whether it’s a matter of getting lost in the mail or hiding under a pile of papers on your desk, businesses face the fear and risk of security with paper-based payment processes and checks. With ACH payments, companies can set recurring payments without paper—saving time, money and risk of late payments.
  • Cost and time savings. It’s a given that organizations are able to save time and money with ACH payments thanks to eliminating payment processing costs such as printing, stamps, and envelopes. With ACH payment processing, sending payments electronically is faster without delays.
  • Improved security. The biggest benefit of ACH payments is security. ACH payments can only be sent from one verified ACH account to another. Every business that makes ACH transactions must follow rules to protects users, payments, data, and account information.
  • Easier tracking and trails. With ACH payments, enterprises also benefit from an electronic trail of all payments and payment processing information available at any time. Companies have more visibility and real-time reporting with electronic payments. There’s also the benefit of improved audit trails. You’ll be able to provide your auditor with up-to-date account statements and statuses.

The Promising Future of ACH Payments

As technology evolves and consumers demand more from businesses, more secure and faster payment processes are emerging. In September 2016, Same-Day ACH credit transactions launched. Same-Day ACH payment processing is designed to expedite ACH payments with faster payment processing.

Most ACH payments are handled the next day. With Same-Day ACH, transactions submitted before 10:30 A.M. (ET) will be processed by 1:00 P.M., and those sent at 2:45 P.M. will be complete by 5:00 P.M., drastically reducing ACH payment processing time.

66.7% of financial institutions are already making Same-Day ACH (SDA) funds available by 5:00 p.m. local time
according to a recent study.

Last year, financial institutions immediately took advantage of the chance for faster payments. In 2017, 43% offered SDA for credit. The study predicts this year, it will jump to 75%. Half of the financial institutions are planning to offer SDA debit for account transfers. Companies are also taking advantage of the expedited payment offer as the study shows 11% of SDA credit use is from “B2B payments where the payment is initiated by the paying of business.” B2B accounts for 28% of SDA debits, with Same-Day entry fee at $.052 per transaction.

Since the second quarter of 2016, ACH increased volume by 5.8% in the second quarter of 2017.

According to the AFP survey, over half of the companies surveyed (57%) are using Same-Day ACH payment processing for last minute bills. Thirty-eight percent are using it for emergency payroll.

ACH Same-Day payment processing has its perks for the Accounts Payable department with 24% using Same-Day payments to get the last minute discounts that are available–whether those are deals on goods and services or early bill payment perks.

Other ACH updates include the ISO 20022 Validator Tool. The new tool focuses on improving various parts of the ACH process including correcting errors, downloading updated files, and verifying changes.

The Progression of Paper-Free Payment Processes

The accounts payable process has evolved from piles of paper and headaches to a simple, streamlined digital solution. Ready to learn more? We’re happy to answer any questions or concerns. Learn more about how businesses are using ACH payments and payment automation to pay faster, safer, and better than before.