ACH Payments: 5 Things You Should Know

The Automated Clearing House (ACH) is a financial network in the United States that facilitates electronic payments and money transfers. ACH payments, also referred to as “direct payments,” are a method of transferring funds from one bank account to another without the need for paper checks, credit card networks, wire transfers, or cash.

The amount of ACH payments are continually increasing

Even if you don’t understand the language, chances are you’re already familiar with ACH payments as a consumer. If you pay your bills online (rather than writing a check or entering a credit card number) or receive direct deposit from your employer, the ACH services for small business is most likely in use.

ACH payments are a popular alternative to paper checks and credit cards for businesses. ACH payment services are faster and more trustworthy than checks since they are electronic, which helps to automate and streamline accounting. In general, an ACH transfer is less expensive to complete than a credit card payment or a wire transfer. If you own a business that accepts recurring payments, you can save a lot of money.

ACH Payment Services and How They Work

Aside from the Automated Clearing House network (which connects all banks in the United States), ACH payments involve three other parties:

  • The bank that starts the transaction is known as the Originating Depository Financial Institution (ODFI).
  • The Receiving Depository Financial Institution (RDFI) is the banking institution that receives the ACH request, and the NACHA is the nonpartisan governmental agency in charge of managing and regulating the ACH network.

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So, how do ACH transactions work?

Take, for example, your automated monthly phone bill payments. You enter your checking account information (routing and account number) and sign a regular payment authorization when you sign up for autopay with your phone carrier.

When your phone company’s bank (the ODFI) receives your billing cycle, it sends a request to your bank (the RDFI) to transfer the money owed. The two banks then communicate to confirm that sufficient funds are available in your account to complete the transaction. The transaction is performed and the money is routed to your phone company’s bank account if you have adequate funds.

Are there any ACH payment penalty fees?

Regrettably, returned ACH payments may result in a penalty fee for your company. If you receive a reject code, it’s critical to resolve the problem as soon as possible to prevent incurring additional penalties on each subsequent payment period. It may be advantageous just accepting ACH payments from reputable clients to prevent the trouble of untangling ACH rejects.

If you’re thinking about setting up ACH billing for your company, there are a few things you should know before getting started. Here, we’ll go through the top 5 ACH billing facts to think about. 

1. Transaction fees for ACH billing are typically lower

If the processor charges a flat transaction fee, ACH transactions are usually less expensive for retailers than credit and debit card transactions.

The more you save, the larger your average ticket is.

Another advantage of ACH billing is that you won’t have to worry about non-qualified surcharges on transactions because the flat rate is the flat rate.

2. Different processing timeframes apply to ACH billing

A credit card transaction can take up to two days to process (depending on the card). Although ACH billing takes 3-5 days to process, most banks prefer ACH transactions to paper checks when disbursing cash. 

3. An ACH transaction differs from a debit card transaction

Although both ACH services for small business and debit card transactions are funded from the customer’s bank account, the processing methods are very different. Instead of swiping or keying in a debit card number, clients give you consent to debit their bank account by supplying you with a routing and account number.

Aside from the processing time and transaction cost differences, you’ll be working with a completely separate payment partner. 

4. ACH billing payments can still be returned for non-sufficient funds

Even if the transaction appears to be successful, ACH payments can return as NSF (non-sufficient funds). ACH payments can still return NSF unless they’re set up for check verification or check guarantee (both of which come with a high per transaction fee).

The system just checks to see if that account exists at that routing number while processing the transaction on the spot, not if there are funds available for the transaction amount.

5. Fees for ACH transactions will be deducted separately from other transaction fees

ACH transactions are processed through a separate merchant account and provider, which means that the transaction fees and/or gateway expenses will be deducted separately.