ACH Payments: A 7-Step Guide to This Payment Processing Option

Updated on September 12, 2020
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If you’ve ever paid a friend on Venmo, purchased an item through PayPal, paid your cable bill online, or if your (former) employer deposited your wages directly into your bank account, then you’ve participated in an ACH payment as a consumer. But you might not have understood the intricacies of ACH payment processing, especially as it pertains to your small business.

These payments are electronic payments among banks. Accepting ACH deposits at your business essentially means that you’ll enable your customers to electronically transfer funds from their bank accounts into your business bank account. Put even more simply, these payments are an alternative to paying with cash, credit, debit, or checks.

Traditional banks, merchant account providers, all-in-one payment processors like Square or PayPal, dedicated ACH processing companies, and even certain accounting software companies might all be capable of handling ACH payment processing for businesses. ACH debits are certainly a mainstream method of payment, too—according to NACHA, the network moves $43 trillion each year.[1]

But should your business stake your claim in this massive network? Here’s what you need to know about ACH payments, and how the process works for small businesses that choose to handle ACH debits as a method of payment for their products or services.

What Is an ACH Payment?

An ACH payment is an electronic, automatic transfer of deposits between banks. “ACH” stands for Automated Clearing House, a U.S. financial network that manages and oversees these transactions. The payment network itself is regulated by the federal government and the National Automated Clearing House Association (NACHA).

Essentially, anytime you’ve made an online payment or been paid electronically, you’ve participated in an example of an ACH payment. But as a reminder, these are some of the more common scenarios in which these payments are at work:

  • An individual pays another individual electronically, via their bank, Venmo, PayPal, Zelle, or a similar platform.
  • A consumer pays their service providers (like cable and gas companies), either manually or through recurring payments.
  • An employer deposits payroll into employees’ bank accounts.
  • An individual moves funds between their own bank accounts.
  • An individual receives a tax refund via direct deposit (rather than a paper check).
  • Businesses transfer funds between themselves.

ACH Transactions: The 2 Versions

Though the term “ACH payment” is often used to encompass all ACH transactions, there are actually two types of these transactions that differ based on the directionality of the processing. Let’s learn the difference between ACH deposits and payments.

Direct ACH Deposit

In direct deposit transactions, consumers, businesses, or other entities can push money into other bank accounts, whether that’s between their own accounts, between individuals (via Venmo, for instance), to pay suppliers, or when employers deposit payroll in their employees’ bank accounts.

Direct ACH Payment

Direct payments work the other way around from direct deposits—rather than pushing money into accounts, in these scenarios, individuals, businesses, or other entities pull money from accounts. If you’ve set up recurring payments with your service providers, for instance, that company will automatically pull funds from your bank account on a monthly basis.

How ACH Payments Work: The 7 Steps

The transfer of funds via ACH payment processing is relatively simple, but there are a few major players involved. Here’s a step-by-step look at how these transactions occur:

1. ACH payment initiation

An originator (such as a bank, an individual, a business, or another entity) initiates an ACH transaction. That could be a direct payment or a direct deposit.

2. Originating Bank Submits Entry

The originator’s bank or payment processor—known as the Originating Depository Financial Institution (ODFI)—submits the ACH entry.

3. Originating Bank Sends Entry Batch

The ODFI sends their ACH entries in batches, according to their predetermined schedule, to an ACH Operator.

4. Operator Sorts Entries

The Operator within the network sorts through the batches of entries to determine whether they’re deposits or payments. 

5. Operator Sends Entries

After sorting through the batches of entries, the Operator transmits them to their respective Receiving Depository Financial Institutions (RDFI).

6. Receiving Bank Ensures Sufficient Funds

If the transaction is a deposit and involves pulling funds, then the receiving bank first needs to ensure that there are sufficient funds in the ODFI.

7. Receiving Bank Debits or Credits Originating Bank

Depending on whether the transaction is a deposit or a payment, the RDFI will debit or credit the receiver’s account. 

ach deposit

Are ACH Payments Safe?

ACH payments necessitate the exchange of sensitive banking information in order for them to work at all. For instance, to electronically pay your employees you need to know the name of the institution that holds their personal bank account, the type of account you’re depositing their wages into, the bank’s routing number, and your employee’s bank account number (you’ll probably need to obtain a voided check, too). And if you’ve set up recurring payments with your store’s utilities company, you’ll need to provide that company with the same information about your own business bank account.

As we mentioned, though, the ACH network is overseen and regulated by the federal government and NACHA, its own managing body. This organization enforces operating rules and guidelines that protect this sensitive information, and by which all participating bodies—including financial institutions, businesses, credit unions, industry providers, and government entities—need to abide.

If you plan on accepting ACH payments for your business, make sure that your payment processor (whether it’s a bank, a merchant account, a payment service provider, or a processor) is fully compliant with NACHA rules.

How Much ACH Payment Processing Time Should You Allow For?

Unlike wire transfers, which are processed in real time, ACH transactions are processed and settled in batches three times per day—and then only during standard business hours. So, if you accept ACH payments at your business, it may take a few days for the funds from that purchase to be delivered into your bank account.

That said, according to a new NACHA regulation, the vast majority of transactions that occur within the ACH network are eligible for same-day payment processing.[2] But it’s up to every individual financial institution or payment processor whether they want to offer their customers the option of expediting payments, and your bank or payment processor might charge an extra fee for this expedited service.

If immediate payment is a concern for you, check in with your payment processor about their same-day processing capabilities and rates.

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The Pros and Cons for Your Business

It’s pretty easy to accept ACH direct deposits at your business—you’ll just need to partner with a provider that can facilitate the process for you. As we mentioned, entities including your bank, merchant account providers, all-in-one payment processors, dedicated ACH processing companies, and some accounting software platforms can (or might be able to) handle ACH deposits.

But that doesn’t necessarily mean that processing ACH payments makes sense for every small business. Consider some of the major pros and cons of accepting bank-to-bank payments for your small business:

The Benefits

As you might expect, the benefits of these payments mostly revolve around convenience. Let’s see how they can make handling your business finances easier:

1. Lower Fees

Your processor will charge a processing fee, either as a flat rate or as a percentage of the transaction. But because these transactions don’t involve credit card networks and their attendant fees, processing fees are still lower for these transactions than they are for credit or debit card transactions.

2. Easy to Accept

Accepting these payments is a completely hands-off process, unlike accepting and then depositing cash and checks. And if you can set your customers up with recurring payments rather than billing through invoices (if that’s conducive to your business), then you won’t need to send them reminders or track down late payments.

Plus, just like credit cards, you can accept these payments from customers across the country. If you run an ecommerce website, it might be worth it to offer your customers the option of paying directly from their bank account in addition to paying with plastic.   

3. Easy to Track Income

Banks automatically create records of ACH transactions, so you can easily consult your transaction activity via your bank’s online portal. (Even better is if you use an accounting software that integrates with your bank account.)

The Drawbacks

For all their merits, though, ACH payments still come with a few imperfections. Take a look at the downsides of this payment processing before choosing to use it for your business:

1. Domestic Payments Only

Generally, ACH transfers only occur among U.S.-based bank accounts (though you can check with your processor about their international capabilities). You might not need to consider enabling ACH transactions if many of your customers live overseas.

2. Processing Limits

If your provider doesn’t enable same-day processing, then you might need to wait a couple of business days before your funds will be delivered into your bank account. Also remember that batches are processed during standard business hours, so if you receive payments outside those times—9-to-5 PT, Monday through Friday—then that process slows down considerably.

Are ACH Payments Right for Your Business?  

Accepting these payments is relatively simple—you just need to work with a provider with an ACH service that can handle the process for you. But deciding whether to take advantage of your provider’s ACH capabilities may not be such a simple process.

First, of course, you’ll need to consider the cost. Although ACH transaction fees are much lower than credit or debit card transaction fees, payment processors will still charge you for ACH payments. Typically, you’ll be charged less for more transactions, and more for fewer of these transactions. If you anticipate that only a few of your customers will take advantage of these payments, then the cost might outweigh the benefits.

A few other questions to consider: Would allowing bank-to-bank payments actually facilitate payments for your particular business, or are your products or services more easily paid for with credit or cash? And would your customers be willing to provide their bank information? Are they even interested in ACH transfers as a payment option? Ultimately, the best answer to the question of whether to accept these payments lies with your customers—as is the case for almost every other decision you’ll make as a small business owner.        

Article Sources:

  1. “What is ACH?
  2. “Same Day ACH: Moving Payments Faster (Phase 1)
Caroline Goldstein
Contributing Writer at Fundera

Caroline Goldstein

Caroline Goldstein is a contributing writer for Fundera.

Caroline is a freelance writer and editor, specializing in small business and finance. She has covered topics such as lending, credit cards, marketing, and starting a business for Fundera. Her work has appeared in JPMorgan Chase, Prevention, Refinery29, Bustle, Men’s Health, and more.

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