What is ACH?

What Is ACH: How ACH Payments Work & Why the Market Is Growing

In your career as a finance pro, you’ve probably been affected in some way by a profound and pervasive phenomenon known as ACH payments.

But what is ACH exactly? And why is it so important to your company now and going forward?

We’re going to answer these questions for you here.

Table of Contents

What does ACH stand for?

Let’s get started by telling you ACH stands for Automated Clearing House, an electronic financial transaction network.

What is ACH?

ACH consists of an online network for automatically processing and routing U.S.-based financial transactions between banks. You can think of this network as America’s financial superhighway. Anyone in the U.S. with a bank checking account can use ACH.

This network moves money through United States banks and credit unions, the ACH network and U.S. Federal Reserve System, the central bank of the U.S. ACH processes recurring digital payments such as employer payroll checks, government social security payments, and consumers’ monthly bills.

Each transaction goes through ACH “pit stops”

Each transaction sent from one bank directed towards another makes a “pit stop” in the ACH or Federal Reserve where transactions are processed and examined for fraud and accuracy. Then, if approved, they’re routed to the receiving bank.

By using this network, your company avoids the costs, security vulnerabilities and time-consuming hassles of paperwork such as writing and mailing paper checks. Furthermore, by taking care of recurring bills, ACH also unburdens your business businesses from having to remember to pay bills every month.

The National Automated Clearing House Association (Nacha) leads overall management, administration and governance of the ACH network.

ACH payments infographic

Infographic: 4Q 2020 ACH Network Volume Totals

Nacha details the recent incredible growth of the ACH market in this infographic. Click the image to download.

ACH payments vs. ACH deposits

You’ll come across two types of ACH payments: direct deposits and direct payments.

When your company automatically deposits your paycheck into your personal checking account, the transaction passes through the ACH network. When your company receives a tax refund from the internal revenue service, that’s an ACH transaction. Both qualify as direct deposits.

Alternatively, when your company gives its business checking account information to its bank to automatically pay a monthly office utility bill, that’s a direct payment.

When consumers pay their household bills electronically, those are also considered direct payments.

ACH payments made in batches

To improve efficiencies, banks and credit unions send ACH payments in batches. For a company of 100 employees, for instance, it would consolidate (i.e. batch) all 100 paychecks and send them to each employees’ individual bank account.

“Whether you know it as direct deposit, direct pay or electronic check, ACH is at your service handling everything from Social Security and salaries to mortgage and credit card payments and more,” according to the Nacha. “Just set it and forget it — no more worrying about getting payments in on time.”

What is an ACH transfer?

An ACH transfer occurs when funds travel from one bank account to another. During this transition, the funds go through the ACH network to validate the accuracy of the transaction, examine for fraud and then move onward to the bank receiving the funds.

There are two types of transfers: ACH credits and ACH debits. A credit happens for when funds come into your business or personal bank account; a debit occurs when funds are pulled out of your business or personal account.

A few examples crystallize these concepts. When your company automatically deposits your paycheck in your personal checking account every two weeks, that’s an ACH credit. When your utility company automatically withdraws a monthly fee from your business checking account, that’s an ACH debit.

“You may be using ACH transfers without even realizing it,” an article by Investopedia points out. “If you’re paid via direct deposit, for example, that’s a form of ACH transfer. Paying bills online through your bank account is another. You can also use ACH transfers to make single or recurring deposits into an individual retirement account, a taxable brokerage account or a college savings account.”

How long do ACH transfers take?

When you explore the question of how long ACH transfers take, you’ll come across a variety of estimates. Some reports say three-to-five days, others five-to-seven.

But that’s misinformation, according to an article by Nacha titled “Payment Myth Busting.”

“Do you think ACH payments take 3-5 days to process? They don’t,” the report says. “That’s a myth. Or do you think if payday is on a Friday, you won’t get your money until Monday (or later if Monday is a holiday)? That’s another myth.”

The modern ACH network, the article notes, makes it possible for users to process and pay ACH credits on either the same day, next day or two days. If they prefer, employers can pay direct deposits in one-to-two days. That way they can deliver funds to workers efficiently in their bank accounts by 9 a.m. on paydays.

When paydays happen on a weekend or holiday, payments are made the Friday before and bill payments get collected on the next business day. In both cases the interests of the employee and consumer take priority.

ACH payments arrive faster than paper checks

All this is to say ACH payments move quickly from sender to receiver – especially compared with alternatives such as paper checks.

Speed is one big reason why 94 percent of American workers use direct deposit, according to a 2020 survey by the American Payroll Association, enabling fast access to their money on payday.

How big is the ACH network?

Launched in 1974, the ACH network continues to grow – but that’s an understatement. During the first quarter of 2021, the network processed 7.1 billion payments – up 11.2 percent from the same period of last year, according to NACHA. The value of those payments — a cool $17.3 trillion – was nearly a 19 percent rise from a year earlier.

Recently, ACH payment growth has been especially dazzling. In March 2021, ACH transaction volume hit 2.7 billion payments – the largest monthly volume since the ACH network went live 47 years ago.

A key growth driver has been the flexibility to make same-day payments using the ACH network, a service turned on in 2016. In the fourth quarter of 2020, same-day ACH had 96.7 million payments – a growth rate of 35.7 percent compared with the fourth quarter of 2019, according to Nacha.

How ACH works?

The way ACH works for paying your employees starts with you sharing some information with your bank:

  • your company’s name as well as checking account and routing numbers;
  • whether it’s a credit or debit transaction;
  • payment date (such as the first of each month);
  • the amount to be deposited for each employee for each pay period;
  • specify that yours is a business account (rather than a personal account).

To find out more on how to set up ACH transfers, click here.

Final thoughts

Now that you know more about how ACH works, how widely it’s used and how fast payments are made — you may want to consider how ACH transactions could be important to your business. Here are a few benefits to keep in mind:

  1. Reduce paper use and costs — It starts with reducing your use of paper. Because ACH is an all-electronic system, it dramatically cuts the amount of paper you use to make and receive payments. You’ll shave your costs of paper checks, paper invoices, envelopes, stamps and postage.
  2. More secure transactions — ACH payments will keep your company’s financial transactions more secure. Fraudsters will find it more difficult to steal information from your electronic financial transactions than from paper checks.
  3. Pay employees faster and more reliably — By using ACH you’ll be able to pay your employees faster, easier and more reliably than paper checks. That’s bound to make them happier. Paid employees tend to be more productive and dedicated.
  4. No need to remember all your recurring monthly payments — Your company won’t need to remember every month each payment that needs to be made, on which day and for how much. ACH handles all that once you share that information once. You’ll be able to focus more of your attention on exciting new market opportunities.
  5. From a recurring payment standpoint, ACH benefits extend even further. Suppose you run a workout gym business. You’ll have lots of monthly customer transactions and associated fees to pay for each one. By accepting ACH payments, you’ll decrease the fees you have to pay per transaction. That will improve your overall bottom line.

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