The managing consultant Peter Drucker once wrote:
Efficiency is doing things right; effectiveness is doing the right things.
Automated Clearing House (ACH) payments reflect this principle. They are the secure and efficient engine driving many electronic money transfers in the United States.
In this blog, we'll delve into the fundamentals of ACH and demonstrate how it can make your financial transactions more efficient and effective.
What is the Automated Clearing House (ACH)?
The Automated Clearing House is a computing network for processing electronic transactions. It provides bank-to-bank money transfers. These are processed through the Automated Clearing House network, which is run by the US-based organization Nacha.
Financial institutions rely on it to compile transactions for processing, which it usually does for free and very quickly.
However, due to anti-fraud and money laundering precautions, some may sometimes take several days to complete. And when a bank account has insufficient funds, ACH transactions trigger a return notification.
ACH first began in the 1970s. Recent figures show that it moved transactions with a cumulative value of over $72.6 trillion in 2021, a 17% increase since the previous year. This includes consumer, government, merchant-to-merchant transactions and international payments.
How does an ACH payment work?
ACH payments (also known as ACH transfers or ACH transactions) are made through the ACH network rather than card networks such as Visa or Mastercard.
ACH payments are used for various kinds of transactions, including monthly deposits for routine payments and direct deposits. ACH direct deposits are transfers into an account (see below).
Merchants can enable consumers to pay bills via the ACH network by providing the consumer with an account number and bank routing number.
A variety of online payment services also transfer payments via ACH, such as credit unions' online bill payment services.
Two main types of ACH payments
1. ACH direct deposits
Direct deposits are electronic payments or transfers from a business, government, or other entity to a consumer via ACH transfers. In short, they are when consumers receive funds.
Examples of direct deposit ACH payments
- Payroll transfers
- Tax refund deposits
- Stimulus cheques
2. ACH direct payments
Direct payment refers to the transfer of funds to make a payment. It can be initiated by either an organization or an individual.
This is usually the type of transfer used for regular payments. Put plainly: when funds leave the consumer account, it's an ACH direct payment.
Examples of ACH direct payments
- Mortgage payments
- Utility payments
- Credit card payments
Benefits of ACH payments
1. Convenience
Making a payment by ACH transfer is quick and easy, i.e., convenient. It is more convenient, for instance, than writing and mailing a cheque.
They can clear and settle in as little as one business day. This improves cashflow for businesses and reduces wait times for buyers.
ACH payments can also be automated. So, recurring payments, such as payroll deposit or bulk payments, can be completed without being manually instigated. This reduces paperwork and other associated administrative tasks, too.
2. Efficiency
ACH payments are processed electronically, so transaction data is processed faster and more accurately than any mode of paper transaction (such as cash and cheques).
This reduces the risk of human error in transactions, which can come about from manual data entry mistakes, illegible handwriting or lost cheques.
3. Security
ACH transactions are highly secure. They abide by strict regulations and security protocols to protect sensitive data. Their rules also explicitly state what fraud measures parties must take, including the use of a ‘commercially reasonable fraudulent transaction detection system’.
4. Wide acceptance
ACH payments are widely accepted by businesses, government agencies and banks. This makes them a highly versatile payment option to transfer money.
5. Easy record-keeping
ACH payments generate electronic records. This makes it far easier for businesses and individuals to track and reconcile their transactions.
Drawbacks of ACH payments
1. (Relative) limited speed
Although ACH payments are fast, payment methods such as wire transfers or credit card payments tend to be even faster.
ACH payments can clear in as little as a day. However, they can take up to a few business days to complete, so they're not ideal for urgent transfers.
2. Potential transaction delays
ACH payments can be reversed or returned under certain circumstances, such as insufficient funds in the payee account or incorrect account information.
This can cause delays in the payment process and additional administrative work.
3. Limited international use
ACH payments are useful for domestic transactions within the Unites States. But elsewhere, they are not commonly available or particularly practical for international senders or recipients.
This means that businesses that operate internationally most likely won't use ACH payments.
4. Security challenges
ACH payments have high security standards, but like all payment methods, they have vulnerabilities. This means that their required protocols and regulations can be complex and require constant expert maintenance.
How much do ACH payments cost?
ACH payments are generally cost-effective, but there are still some fees associated with specific transactions. These fees can vary depending on several factors, including:
- The financial institution involved
- Type of ACH transaction
- Transaction volume
- Additional services
Do countries outside the US use ACH payments?
Whilst the term 'ACH' is specific to the United States, the system it describes (electronic funds transfers and clearing houses) is not.
Most countries have their own analogous systems. For example, the following countries have the following systems:
- Canada: Automated Clearing Settlement System (ACSS)
- United Kingdom: Bankers' Automated Clearing Services (BACS)
- Australia: Direct Entry (DE)
Conclusion
Automated Clearing House (ACH) payments are a vital cornerstone of modern financial transactions in the United States.
They typically offer convenient, quick, and often free bank-to-bank electronic money transfers. However, they may occasionally take a few days due to security measures against fraud and money laundering.
ACH payments encompass a wide range of financial transactions, from recurring monthly deposits to direct payments. This flexibility makes them a preferred choice for many businesses and individuals alike.
Direct deposits, such as payroll transfers and tax refunds, exemplify ACH's utility. And direct payments cover various expenses, including mortgages and credit card bills.
Convenience, speed, efficiency, security, and wide acceptance are central benefits of ACH payments. Additionally, they reduce errors, simplify record-keeping, and enhance cashflow for businesses. However, they are not suited for urgent or international transactions.
The cost of ACH payments can vary depending on factors such as transaction volume, service providers, transaction types, and additional services. Whilst they are generally cost-effective, it's essential to be aware of potential fees associated with specific transactions.
In the ever-evolving landscape of financial transactions, ACH remains a reliable and widely-used efficient and effective payment processing system.
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