What are ACH payments & how do they work?

You will learn;

What is ACH?

ACH (Automated Clearing House) is a network used for electronically moving money between bank accounts across the United States. It's run by an organization called Nacha (previously NACHA - National Automated Clearing House Association). It may also be referred to as the ACH network or ACH scheme.

ACH Key Points:

  • Payment processing via the ACH network has existed since the 1970s. 
  • ACH transferred over $61.9 trillion worth of funds in 2020, a year-on-year increase of almost 11 percent. 
  • Transaction types include government, consumer, and business-to-business transactions, as well as international payments.

What is an ACH payment?

An ACH payment is a type of electronic bank-to-bank payment in the US. These Payments go through the ACH network rather than through card networks such as Visa or Mastercard.

An ACH payment is also commonly referred to as an ACH transfer or ACH transaction.

ACH Network Key Points:

  • The ACH network is a US payments network only - ACH payments can't be made in the UK, Eurozone, or anywhere outside the United States. 
  • The ACH network is a bank-to-bank network, so you cannot process ACH payments from debit cards or credit cards.

ACH Categories

There are two main categories of ACH payments:

  • Direct Deposits
  • Direct Payments

Direct Deposit covers all kinds of deposit payments from businesses or the government to a consumer, including;

  • payroll
  • employee expense reimbursement
  • government benefits
  • tax and other refunds
  • annuities 
  • interest payments

Direct payment covers the use of funds for making payments, either by individuals or organizations. Direct payment ACH transactions are the primary focus of this guide and are variously referred to as; 

  • ACH payment
  • ACH transfer
  • ACH transaction

Types of ACH transfers

There are two main types of ACH transfers;

  • ACH credits 
  • ACH debits

They primarily differ according to the method of transfer between accounts;

  • ACH credits push the funds into an account, 
  • ACH debits pull the funds out of an account

Learn more about the difference between ACH Debit & Credit

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You can also automate your payment collection and bank reconciliation, reducing time spent on financial admin and relieving the stress of chasing late payments.

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Benefits of ACH Payments

Using the US bank-to-bank infrastructure to process payments brings significant benefits for companies and organizations needing to take payments on an ongoing basis. Notably:

  • Low cost - Since an ACH payment is bank-to-bank and not routed through relatively expensive card networks, it is cheaper to transfer funds electronically.
  • High customer retention - Credit and debit cards expire, leading to an unnecessary loss of customers. As ACH transactions are sourced directly from bank accounts, it significantly reduces the risk of involuntary loss of customers.
  • Open to anyone - Anyone with a US bank account can pay via the ACH scheme, including both businesses and consumers.

Are ACH payments right for my business?

There are several questions you need to answer to establish whether accepting ACH payments is right for your business: 

  • Does your business currently take recurring payments?
  • Does a significant proportion of your customers currently pay by paper checks?
  • Does a significant proportion of your customers currently pay by credit card?
  • Do the fees for ACH processing save you money compared to credit card fees?
  • Would you be able to convert your credit-card-using customers to pay by ACH instead?
  • Are any members of your customer base, or potential customer base, uncomfortable with making online payments via credit card?
  • Is your business currently ineligible to accept credit and debit cards (for example, by being in a high-risk business category)?

If you answer 'yes' to any of these questions, your business is likely to benefit from accepting ACH payments.

How long does an ACH payment take to process?

The time of day you submit the ACH file to your bank significantly impacts when the funds become available. As a result, ACH transactions may take more than three working days to appear in your bank account. 

Learn more about ACH Payment Timings

Cost of ACH payments

The median internal cost for processing ACH payments is $0.29 per transaction.

However, the total cost associated with accepting ACH payments varies depending on several factors. Access our complete guide to ACH fees.

Alternatively, learn more about collecting ACH payments through GoCardless here.

Wire transfer vs. ACH transfer

Speed comparison The wire network processes transactions in real-time, so wire transfers are usually delivered quickly - within minutes or hours. An ACH payment, on the other hand, can take several days to settle.

Cost comparison Sending a wire transfer within the US is expensive, costing the payer an average $25 per transaction (and fees can be even higher for international transfers). On top of that, some financial institutions may also charge the recipient a fee to receive the funds.

Which is better? Because of their high cost and speed, wire transfers are best for large or time-sensitive transfers, either within the US or abroad. However, lower fees mean an ACH payment offers a significant advantage over a wire transfer when time sensitivity isn't an issue. 

Key takeaways

  • ACH payments are a type of electronic bank-to-bank payment in the US.
  • ACH payments differ from card payments like those made via Visa or Mastercard.
  • ACH Direct Payments are often preferable because they're low cost, accessible to many American consumers, and help businesses retain their customers.
  • ACH Direct Payments are worth considering by any business taking recurring payments.
  • Accepting ACH debit payments with GoCardless puts you in control of getting paid, eliminating the stress of late payments while saving you time and money.