ACH Transactions: What Businesses Should Know
Almost 50 years later, automated clearing house transactions remain a critical part of every business’s payment infrastructure.
They enable faster expense payments for everything from insurance claims to emergency payrolls. For some businesses, particularly professional service providers, ACH transactions are the primary customer payment method.
Given the challenge of keeping up with changing payment preferences among consumers, it helps to know your options. Due to this, we’ll explain everything you need to know about ACH transactions.
In this post, you’ll learn what ACH transactions are, how they work, and how you can use them to your advantage.
What Are ACH Transactions?
An ACH transaction is an electronic transfer of money between accounts at different banks. With an ACH transaction, you can securely receive or send money between your bank and another. Businesses regularly use ACH transactions to simplify payroll with direct deposits, pay invoices, and accept customer payments.
How ACH Transactions Work
ACH stands for Automated Clearing House which is an electronic funds transfer system that banks use to process payments.
The process starts when a bank’s customer makes an ACH transfer. The customer enters the routing and account number of whomever they’re paying. The information associated with that transaction is then sent to the ACH network. On the network, the customer’s transaction is aggregated along with all the other ACH transactions.
Three times each business day, the ACH network processes its latest batch of ACH transactions. Whether you know it or not, you likely use ACH transactions regularly.
If you’ve ever deposited a check with your phone, received a direct deposit, or used IRS Direct Pay, you’ve used an ACH system.
The Pros and Cons of ACH Transactions
Pros of ACH Transactions:
1. Easy to set up
One of the big reasons more than 93 percent of U.S. workers get paid via direct deposit is ACH’s ease of use. With the right expertise and software you can automate your payroll using direct deposit. For other business transactions, ACH is even easier to use. To pay someone, all you need is a bank account with ACH and your payee’s account and routing number.
The ACH is federally regulated and managed by the National Automated Clearing House (NACHA). So as long as you work with payment processors and banks that use property security practices, ACH is very secure.
In most situations, ACH is the most affordable way to pay or get paid. In fact, with accounting software, any business owner can set up and automate rent payments via ACH. Once it’s set up, the typical cost for ACH payments is between $0.20 and $1.50 per transaction.
Cons of ACH Transactions:
Compared to a real-time option like a wire transfer, ACH transfers are slow. Delivery time with ACH can be same-day but if it’s available—which isn’t guaranteed—it will cost extra.
Typically, ACH transactions are processed and delivered within one or two business days. However, different banks may require the funds to be held for a period of time. Finally, since it’s closed on weekends, ACH can end up taking several days.
5. Incompatible for overseas transactions
Since ACH is primarily used in the United States, international ACH transactions are more complicated. Essentially, because different countries use systems other than ACH to process electronic payments between banks, ACH transactions don’t work across borders.
That said, international ACH transactions are possible—they’re just more expensive and complicated.
6. Fees, limits, and cutoff times
Depending on your business bank account, you’ll have a daily and monthly cap on the amount of money you move via ACH. Additionally, if you try to make a payment without enough money, you may incur an insufficient funds fee. Finally, ACH transactions aren’t processed on the weekend which is inconvenient if you need to send money on a Friday afternoon.
Final Note: ACH Transactions vs. Wire Transfers
ACH transactions and wire transfers appear quite similar. After all, they both involve moving money from one bank or financial institution to another. Unlike ACH transactions though, wire transfers don’t involve a clearinghouse. Instead, when you wire money, it goes directly to the recipient’s bank in real-time.
As a business owner, the important distinctions between ACH and wire transfers are cost, speed, and security. Wire transfers generally cost between $20 and $30 for the sender and $10 for the receiver. However, as mentioned, a wire transfer is completed in real-time.
Moreover, compared to ACH transactions, wire transfers are slightly less secure because they don’t include a clearinghouse.
In short, wire transfers are better reserved for large or urgent transactions. For predictable, high-volume transactions, like vendor invoices, payroll, or customer payments, ACH is the payment method of choice.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.