Kevin Flynn is a guest contributor. The views expressed are theirs and do not necessarily reflect the views of Rho.
The Automated Clearing House (ACH) was established in the 1970s to facilitate funds transfer without using paper checks. It’s grown into an intrabank messaging service that processes over 30 billion payments yearly using the ACH system in the United States. This article will explain how that works and its importance to your small business. Some key takeaways are:
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An ACH debit is a type of ACH transaction that “pulls” money from one bank account and moves it to another using the ACH network. The network batches and sorts ACH requests six times a day. The Nacha regulates the process by setting rules and guidelines for banks to be part of the network.
For a transaction to be classified as an ACH debit, the transfer request must be to “pull” money from an account. “Pushing” money out of an account is an ACH credit, not a debit. That’s an important distinction because it changes the roles of the sender and the receiver. The payee initiates an ACH debit from a payer’s account. The payer initiates an ACH credit to a recipient’s account.
An ACH debit is an electronic funds transfer (EFT), not a wire transfer. The main difference is that the ACH network only operates inside the United States, while wire transfers can be sent internationally using the SWIFT network. The clearance times, limits, and fees also differ. ACH debits have a $1 million daily transaction limit.
Executing an ACH debit requires two parties. The transaction starts at the originating depository financial institution (ODFI). They process and batch requests to send to the ACH network, where they are sorted and bundled for delivery to the receiving depository financial institution (RDFI). The payee receives the funds when the ODFI and RDFI settle the transaction.
Credit and debit card transactions at FDIC-insured business and commercial banks are not ACH transactions. They’re electronic, but they operate on different networks. A credit or debit card can be used to withdraw funds at an ATM machine, purchase at a retail point of sale (POS) system, or pay for goods and services online.
Yes. eChecks are a form of an ACH debit. They’re initiated at an ODFI to send a payment to an RDFI over the ACH network. ACH checks are widely considered one of the most secure forms of payment because they’re FDIC-insured and regulated by the Federal Reserve. They are a common way to move funds in business banking.
The European Union uses the Single Union Payments Area (SEPA) for bank-to-bank transfers. It closely matches the ACH system used in the United States, but most SEPA transfers are free if a currency exchange is not required. The European Payments Council (EPC) regulates SEPA and monitors international payments between SEPA and non-SEPA countries.
Several traditional bank processes require ACH debits on the back end. These transactions start out as something different, like a paper check or POS retail transaction. They are converted into an ACH debit to facilitate the transfer of funds. Here are some examples:
An ARC is a conversion of a physical check into an ACH debit. A common example is initiating the ACH transfer using the routing and account numbers in a paper check received in the mail. Vendors and retailers that accept images of checks sent by mobile phone also use this process. Those images are converted to requests for ACH debits.
Taking a check at the counter can cause a dilemma for businesses that don’t use traditional banks. An ACH debit to secure the funds for those checks is called a back office conversion (BOC). This is frequently used by companies that have accounts with digital banks or online business banking platforms like Rho.
Corporate credit and debit entries are simple bank-to-bank transfers. The funds are debited from the account identified in the ACH request, and an ACH deposit is made to the receiving bank. Direct deposit payroll is an ACH credit example because funds are “pushed” from the company bank account. Receiving a payment would be an ACH debit because it’s a “pull.”
Your accounts payable department may be familiar with this one. POP converts a paper check received in person into an ACH transaction. The check is then voided and returned to the issuer. This eliminates the need for a trip to the bank, filling out deposit slips, waiting in line, etc. It’s a good example of converting an older, slower process into a modern one.
This can be confusing. A point-of-sale transaction using a debit card is not considered an ACH debit, but the transfer of funds from the credit card processor is typically done using the ACH network. There are several reasons this happens. ACH and EFT payments are generally more secure than other payment options, and processing companies prefer them.
Putting your utility bills or credit card payments on autopay creates ACH debits that pull from your personal bank account. Businesses may also do this with vendors and suppliers. It’s listed on the company’s accounts payable sheet as a “prearranged” payment or deposit. The receiving party typically requests a signed authorization to do this.
Some companies will accept a bank routing and account number over the phone as payment for goods or services. That information is used to create an ACH debit to move the money. The same process is used for internet-initiated entries. Entering your account information into an online payment form authorizes the ACH debit transaction.
ACH debit payments are processed in huge volumes on the ACH network. The security of ACH processing is what makes the payment system popular. It’s a safe way to make a direct payment into someone’s checking account without waiting several business days for a paper check to clear. Here are some of the security measures used to make that happen:
The ACH network has a built-in security protocol that requires the authentication of the payer’s account before the transaction can be authorized. Only after that can the funds be sent to the receiver’s account for disbursement. The authentication also includes verifying the sender’s bank by their routing number. The account number identifies the individual.
Banks protect their servers with intrusion detection systems and firewalls. The ACH network has transaction monitoring systems to flag suspicious activity and prevent fraud. This is particularly important for paychecks and government agency checks like social security benefits, many of which are sent via the ACH network. This security protocol helps ensure people get paid.
Encryption technology has improved dramatically in the 21st century. The ACH network encrypts the debit or credit transaction and the sender's identity. Payment methods that originate from mobile payment apps may not offer that. Keep that in mind when making bill payments. Some electronic payments don’t go through the ACH network.
ACH security protocols make it difficult to alter data in transmission, but the network still uses data integrity checks at both ends to guarantee accuracy. Part of this is done at the beginning of the authentication process. The data is then checked again before the transaction is settled. Any evidence of a data breach could delay payment.
The ACH network has a backup system that kicks in if there’s a system failure, natural disaster, or cyber attack. Disaster recovery plans are also in place to ensure that the system continues to operate even under the most extreme circumstances. If you want to learn more, Nacha offers several training programs, including an Accredited ACH Professional certification.
Most ACH debits clear in 1-3 business days, but Nacha has offered same-day ACH since 2016. That could be an option if you have a due date you need to make. Other benefits of ACH debits include lower fees, fewer errors, and enhanced security. Here’s a more detailed list:
Credit card processing and wire transfer fees are significantly more expensive than ACH debits. Small businesses looking to save money should consider this when setting up online bill payments.
SaaS businesses that rely on subscription payments have learned the value of offering their customers an ACH debit option. The system is smooth and efficient, and redundancies and backup systems are in place to ensure you get paid.
The ACH network's built-in automation and safety protocols reduce the likelihood of human processing errors in payments. ACH data analytics are also simpler to track than a manual checkbook or bookkeeping ledger updated by a human each time a payment is made.
We’ve already discussed the ACH network's security protocols. The system is simply safer for small business owners who cannot afford to miss payments. ACH also protects sensitive client financial information, which is critical for achieving business longevity.
When you use the ACH network, workflows are simplified. Much of the process is automated, and the rest is streamlined to eliminate wasteful or redundant efforts. Processing 30 billion payments yearly requires efficiency, and the ACH network has that.
You can secure valuable analytics from ACH that will help you grow and scale your business. One example of this is the amount of recurring revenue you bring in. That number can be used to set the value of your business for potential buyers or investors.
The ACH network can boost your business customer service rating by simply paying people when they expect it.
No payment system is perfect, but ACH debit is better than most. The challenges with it are typically due to user error or fraud. There are systems in place to prevent both, but your business may still run into one or more of the following problems:
The ACH debit cannot be processed if the bank account or routing number is wrong. This is most often a simple mistake. The numbers could be transcribed wrong when transferred between parties or entered incorrectly on the keyboard.
Debit request returns can happen due to insufficient funds, old account information, account closures, etc. Consider these a normal cost of doing business and factor them into a waste or return calculation.
ACH debits aren’t the only way to transfer money electronically. Several other options could be a good fit for your business. Here’s a list of some of them:
If you need a fast turnaround, wire transfers are a same-day alternative to ACH debits. They can also be sent internationally using the SWIFT network.
Visa and Mastercard are payment networks that process a significant portion of electronic funds transfers. Their debit and credit cards are recognized worldwide.
This is a common option for processing recurring subscriptions and monthly bill payments. SEPA is a direct debit system.
Stripe, Square, and PayPal are all examples of online payment services. eCommerce and service businesses often use these services to process payments for goods and services.
Apple Pay and Google Pay are two common examples of mobile payment options. As contactless technology has improved, they've become increasingly popular.
An ACH payment can be either a debit or a credit. A direct debit is a specific transaction that authorizes the withdrawal of funds from a payer’s bank account.
POS systems debit bank accounts for card transactions at a physical terminal. ACH debits the bank account directly at the account holder’s request.
Direct deposit is one of the most well-known examples of an ACH payment.
ACH is only available inside the United States. Payers are required to give full access to their bank accounts. Despite strong security protocols, fraud and identity theft can still happen.
Yes. ACH is considered one of the safest forms of electronic payment.
ACH transfers over $10,000 must be reported using IRS Form 8300.
If you’re looking for the easiest way to send ACH payments with zero fees, then check out Rho. With Rho’s platform, you can enjoy a seamless business banking platform backed by 24/7 customer support and no ACH fees.
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Rho is a fintech company, not a bank. Checking and card services provided by Webster Bank, N.A., member FDIC; savings account services provided by American Deposit Management Co. and its partner banks.
Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.
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