Everything About ACH Payments
ACH payments have become increasingly popular in recent years, moving more than $72 trillion in the United States in 2022 alone, representing a 5% increase from the previous year. In India, 3.7% of all electronic payments are through ACH, too. Innovations such as same-day ACH have made ACH transfers more accessible and convenient to users.
Let’s understand what ACH entails, how it operates and how you can make informed decisions about payment methods!
What is ACH Payment?
Automated Clearing House, or the ACH network, is an interconnected computer system that communicates with each other to help transfer or receive payments. ACH payments do not restrict themselves to transferring person-to-person money, but individuals can use the ACH network to:
- Pay bills online
- Pay salaries to employees
- Tax refunds or tax payment
- Mortgages and loans
The transactions executed through ACH must follow the guidelines set by the National Automated Clearing House, or NACH.
ACH transfers involve three entities
- The ACH operator: can either be the Electronic Payments Network (EPN), run by a collective of 24 large banks, called The Clearing House, or FedACH, run by the Federal Reserve banks.
- ODFI (Originating Depository Financial Institution): the bank or financial institution through which an individual initiates the ACH transfer.
- RDFI (Receiving Depository Financial Institution): the bank or financial institution that receives the initiated payment.
The Clearing House works as the central authority to clear ACH transfers between the two participating financial institutions.
Businesses, such as IT services exporters, use ACH transfers similar to BACS and SEPA because of their low transaction cost, reduced errors and frauds, efficient payables management, and automated recordkeeping.
Types of ACH Transactions
Consumer ACH Payments
- Direct Deposits: Direct deposits happen when an entity, such as an employer, initiates an ACH transaction to directly deposit funds into the bank account of the receiver, such as an employee.
- Recurring Payments: ACH payments can be used to execute recurring payments, where the funds are automatically deducted at a specific time as and when requested by the EDFI.
Business ACH Payments
- Vendor Payments: Vendor payments are payments made by a business to a service provider, such as a supplier. ACH payment method can be used to send or receive vendor payments.
- Payroll Processing: Payroll processing refers to the systematic and organized procedure of calculating and disbursing employee payments for the work completed. Employers can use the ACH network to process payroll for their employees.
ACH Money Transfers
- ACH Debit: ACH debits are requests to ‘pull’ money from the other party's account, which the requestor doesn’t control. Once pulled, the money is deposited into the requestor’s account.
- ACH Credits: ACH credits are requests to ‘push’ money from the requestor’s account. Once pushed, the money is credited to another party's account, such as an employee.
ACH Transfer Cost and Settlement Timelines
What is the cost of ACH transfer?
ACH transfer costs vary from one payment platform to another. Banks may charge a transaction cost as per their policies.
- Stripe charges a 2.9% + 30¢ fee for each ACH transfer
- Dwolla charges 25¢ per transfer
- PayPal charges $0.25 per transaction + 1% of the amount (1% fee is waived for account balances above $500)
What is the timeline of ACH settlement?
ACH transfer or settlement may take anywhere from a few hours to multiple business days, depending on the type of transfer and the time of payment initiation. Same-day ACH, which may require a higher fee, ensures the settlement on the same day. Standard ACH settles the payments anywhere between 1 and 3 business days.
ODFIs settle regular ACH payments at 8:30 AM on the following business day after initiating debit requests and settle credit requests at 8:30 AM on the following second business day.
Documents needed for ACH
Phone-based or online ACH transactions only require basic details like:
- Routing number
- Account number
How Does an ACH Transfer Work?
ACH involves certain steps to complete the money transfer, irrespective of the type of ACH payments involved. These steps are:
- Authorization: The ACH payments begin when a party initiates an ACH payment through the ODFI (Originating Depository Financial Institution). An individual, a business, or a government agency can initiate ACH transfers.
- ODFI Entry Submission and Transferring Batch: After the initiation, ODFI submits the payment entry and sends ACH entries in batches to ACH operators (EPN or FedACH). The entries are typically sent 3 times a day to the ACH operators.
- ACH Operator Sorts and Sends Entries: ACH operators sort the entries sent in batches into deposits and payments. The payments are further sorted into debit and credit payments. Later, the operator sends them to the Receiving Depository Financial Institution (RDFI).
- RDFI’s Entry Verification: After receiving the entries from the ACH operator, the RDFI verifies the sent entries. If the global transaction requires a debit of funds from the ODFI’s account, the RDFI first checks for sufficient funds.
- RDFI’s Debit or Credit: Once the entries and funds are verified, the RDFI makes the debit or credit to the originating bank account that initiated the ACH payment. Once the transaction is completed, both parties receive confirmation.
ACH vs. Other Payment Methods
ACH transfers differ from other payment methods such as eChecks, Debit cards, and wire transfers. eChecks transactions are one-time payments and do not include recurring payments like ACH. Debit and credit card transactions rely on payment processing networks such as Visa or Mastercard for payment completion, unlike ACH transfers that utilize the ACH networks to complete payments.
ACH payment method also differs from wire transfers as ACH transfers rely on a third party (the clearing house) to complete the transfers. In contrast, wire transfers transfer money electronically between two parties without a clearing house.
Pros and Cons of ACH Transfers
Like any other payment platform or payment method, ACH transfers also have advantages and disadvantages. These are:
- Automation: Streamlining repetitive processes (payroll and recurring bills), and enhancing convenience.
- Faster Global Transactions: While they may not be as immediate as wire transfers, ACH transactions are generally quicker than physical check processing.
- Cost-Effective: Typically more cost-effective compared to traditional payment methods, such as checks or wire transfers.
- Processing Time: While faster than traditional methods, ACH transfers may take a few business days. This delay can be a disadvantage when immediate fund transfers are required.
- Transaction Limits: Some financial institutions may impose transaction limits per transaction or per day, which hampers large businesses.
- Banking Timing Dependence: ACH transfers are subject to banking hours and business days. Transactions initiated outside regular banking hours or on weekends will experience delays.
The Bottom Line
While the total cost of executing ACH payments varies, ACH transfers are a more cost-effective way for entities to complete domestic and global payments than traditional payment methods.
ACH transfers may be completed on the same day, but generally take 1-3 business days for high-value transactions. Hence, it is important to analyze the nature of the transaction and the urgency before choosing ACH transfers as the default payment method.
Among numerous payment platforms that allow for ACH transfers, Skydo is the one that comes with numerous features. By opening a virtual currency account, an entity from the US can send an ACH payment to the virtual account in India at a lower cost than Swift.
Q1. Is ACH payment used in India?
Ans: ACH payments are primarily US-based. However, you can get money through ACH even without having a US-based bank account. Use third-party payment service providers like Skydo to use virtual accounts and receive payments from the US.
Q2. How long does an ACH transfer take?
Ans: ACH transfers typically take 1-3 business days to complete. Factors such as bank processing times, weekends, and holidays can influence the duration. Some transfers may be expedited for a fee, offering quicker delivery.
Q3. Are ACH and SWIFT the same?
Ans: ACH and SWIFT are two types of payments you can make. ACH works for making payments within the U.S., while SWIFT is for making payments internationally. Both payment methods put money into your vendor's account in their local currency. But they're not exactly the same.