ACH Payment

What is ACH Payment? A Complete Guide for Merchants

Knowing the ins and outs of how money flows in your business is one of the keys to growth. The devil is in the details, and small changes can have dramatic effects on your profits over the long term. 

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Understanding ACH payments is one of those details. Any business or merchant who conducts sales online or in any repeating capacity may benefit from supporting ACH, and today we’re going to cover the what, why, and how of ACH payments.

What Does ACH Payment Stand For?

ACH payments stem from what’s called the Automated Clearing House, and they function like checks without the paper. If you’ve ever been billed by monthly auto-drafts or use a direct deposit system of sorts, you’re already using ACH.

Here’s the official definition ACH:

“ACH is a computer-based clearing and settlement facility established to process the exchange of electronic transactions between participating depository institutions.”*

To dig deeper, let’s define the individual terms:

  • Automated – This just means there’s no manual process involved once ACH payments are set up. It’s a batch processing system that computers handle at the end of each day automatically.
  • Clearing house: The ACH network (the system in which ACH payments flow in and out of) uses two main clearing houses. These clearing houses are either the Federal Reserve or The Clearing House — acting as the liaison between all the financial institutions that use ACH.

Examples of ACH transactions:

  • Automatic bank drafts from SaaS services.
  • Direct deposits from your employer
  • Automatic bank drafts from utilities.
  • Bank transfers.

ACH has been proven over the years to be both a safe and reliable transaction type, with north of $40 trillion dollars moved a year. That’s across over 24 billion transactions and ends up representing a large portion of the total financial transactions conducted each year.

What Is Actually Going on Behind the Scenes?

ACH Payment - Behind the Scenes

ACH payments are easy to understand on the surface level, but what’s going on behind the scenes is actually quite complicated and fascinating. Here’s what exactly is going on via (the electronic payments association that governs ACH payments):

  1. “An Originator – whether that’s an individual, a corporation or another entity– initiates either a Direct Deposit or Direct Payment transaction using the ACH Network. ACH transactions can be either debit or credit payments and commonly include Direct Deposit of payroll, government and Social Security benefits, mortgage and bill payments, online banking payments, person-to-person (P2P) and business-to-business (B2B) payments, to name a few.
  2. Instead of using paper checks, ACH entries are entered and transmitted electronically, making transactions quicker, safer and easier.
  3. The Originating Depository Financial institution (ODFI) enters the ACH entry at the request of the Originator.
  4. The ODFI aggregates payments from customers and transmits them in batches at regular, predetermined intervals to an ACH Operator.
  5. ACH Operators (two central clearing facilities: The Federal Reserve or The Clearing House) receive batches of ACH entries from the ODFI.
  6. The ACH transactions are sorted and made available by the ACH Operator to the Receiving Depository Financial Institution (RDFI).
  7. The Receiver’s account is debited or credited by the RDFI, according to the type of ACH entry. Individuals, businesses and other entities can all be Receivers.
  8. Each ACH credit transaction settles in one to two business days, and each debit transaction settles in just one business day, as per the Rules.

How ACH Compares to Other Transaction Methods

Most business owners don’t need to know all the nitty-gritty, but here’s what you definitely need to know:

  • ACH processes transactions in batches instead of individually.
  • ACH has two transactions types: direct deposits and direct payments.
  • ACH funds aren’t a guarantee, so if the account is empty withdrawals will bounce just like a check.
  • Daily ACH transfer limits are capped at $25,000.
  • ACH doesn’t run on weekends.
  • ACH is specific to U.S. & Puerto Rico, so using ACH for international payments is usually not available.

How Long ACH Payments Take to Process

While the ACH payment processing time isn’t as fast as credit cards, transactions do move quickly. It usually takes a few days for a transaction to transfer, and that speed is increasing every year.

Why does ACH take longer than other transaction types?

While NACHA’s guidelines make sure credits are processed within 1-2 days and debits by the next day, the receiving bank usually takes a few more days to process the fees from the ACH network.

Good news is on the way, though! ACH payments typically batch only once at the end of the day, but NACHA is working on changing that frequency to three times a day in 2018.

Why Your Business Should Accept ACH Transactions

Well, the shortest and easiest reason to understand is:

ACH payment is the cheapest transaction method.

Yup! Hands down — excluding cash, of course!

You may have noticed that common non-cash transactions fall into four categories: Credit cards, debit cards, paper checks, and ACH.

ACH payments are dramatically cheaper than any other option!

Let me show you why that’s true:

Let’s take an item with a list price of $500 and calculate the approximate fees for each method. The numbers aren’t usually this clean across the board, but we can still illustrate the cost-saving potential of ACH this way.

Example fees for a $500 transaction:

  • Checks: $1.57*
  • Credit/Debit cards: $9.60 (1.9% x $500 + $0.10 transaction fee)
  • ACH payment fees: $0.26-$0.50 depending on the assumed risk for that transaction*.

See how much of a difference ACH can make? It’s dramatically cheaper than credit cards, debit cards, and checks. And this is just one example of one payment. If your business conducted one hundred of these in a month with ACH instead of credit cards, then you’d be saving over $900.

Ready to start saving money and work with a merchant services provider who has your back?

Have our team examine your last payment statement and let you know exactly how much you could save in processing fees!

ACH is great for subscription billing

ACH is particularly effective if your business invoices on a monthly basis or offers recurring services (think lawn services, SaaS, etc.) Your revenue predictions will be more accurate, you save money on transaction fees, and you don’t have to waste hours tracking down payments each month.

And, it’s a lot harder to dispute ACH transactions. There are only three reasons an ACH payment can be disputed by a customer:

  • The amount charged was different
  • The payment authorization came earlier than the customer expected
  • The payment was never authorized.

This reduces payment headaches (imagine dealing with fewer chargeback cases!), and this gets increasingly more important the more you charge for your products/services and the more transactions you conduct.

ACH gets preferred funding

Financial institutions always process electronic payments first, which means your payment will come through faster than physical checks. The typical timeline for ACH payment transactions is: processing within one day and transfer within 3-5 days. Chances are this will speed up in the next few years, too.

ACH is secure

You’re probably a little familiar with the importance of customer security from learning about PCI compliance, and with so many high-profile breaches occurring lately coupled with the rise in cyberfraud, it’s more important than ever to take extra precautions when handling financial data.  

ACH requires the same information that a check does, but it’s all communicated through encryption and doesn’t exchange hands like a physical check does.

The burden is on you to protect your consumer’s data, and the fines and lawsuits that can arise from breaches can be business-crippling. Make sure that your merchant services provider has tight security measures in place to reduce the risk of information leaks. NACHA pays close attention to ACH security, and they’ve released rules you and your payment processor need to follow to be compliant.

Any transfer of sensitive information without encryption is a no-go, and you need to make sure all of your web forms and transaction processes aren’t vulnerable to attacks.

ACH reduces paper waste

Supporting ACH reduces the need for paper checks, and this reduces paper waste while saving you time and money.

Why ACH Is Better for Customers

Why ACH Payments Are Better for Customers

The benefits aren’t just on the business side. ACH payments can be much more convenient for consumers when paying for certain types of services, retainers, and subscriptions.

Benefits include:

  • Individuals get paid quickly and reliably without suffering costly fees.
  • Customers don’t have to worry about paying every month for service, saving them time and headaches.
  • Setting up accounts means consumers can purchase without having to enter their information every time.
  • They don’t have to keep up with a bunch of paper bills and checks.

How to Set Up ACH for Your Business

Most payment processing services like Tidal Commerce support ACH payments. The process isn’t difficult — all it takes is a bit of paperwork, and most merchant services systems set that up with you from the get go.

It’s worth checking to see if you’re already set up to accept ACH payments! Call your merchant services provider and see what they have to say. If they confirm you’re already using it, ask them how they recommend incorporating more ACH payments into your business. And even if your provider does support ACH, it’s always worth looking into various payment providers that offer merchant services. You’d be surprised at the variability between pricing, support, and the tech MSPs provide to help your business.

Take what you’re paying in processing fees on average now (total as a percent), and compare that to other merchant service providers online. As shown in our ACH examples, a small change can make a big difference!
At Tidal, we love to work with smart, driven businesses with an eye for growth. If you’d like to see how much you could save by introducing ACH or switching service providers, go here to have our team review your payment statements for free.

What to Ask of Customers When Accepting ACH Payments

While setting up ACH isn’t as easy as accepting a credit card, the benefits often outweigh the inconvenience. When setting up an ACH payment system with your customer or client, you’ll need:

  1. First Name
  2. Last Name
  3. The type of banking account
  4. Bank Account Number
  5. Routing Number

That’s it! Some processors may require additional information, but that’s all you’ll need to ask of your customers.

Why Do Some ACH Payments Bounce or Fail?

When an ACH payment fails, you’ll get a specific code for why it did and when from your bank. Here are the most common of those codes:

R01 – Insufficient funds.

The customer just doesn’t have enough money in the associated account. At this point you should notify the customer and establish that service will be discontinued unless the issue is resolved OR procure a different account for payment.

R02 – Bank account closed.

R02 fires when the account you had ACH payments set up with no longer exists or is closed. This is common when consumers just change banks and don’t update their payment information. Just reach back out and ask them to update their information.

R03 – No bank account/unable to locate account.

This usually occurs before the ACH relationship is set up — the system can’t find the account the user is referencing with their information.

R29 – Reject

This code fires when the customer’s banks has a preventative measure against ACH payments. You’ll need them to deliver your ACH originator ID to their bank and ask them to enable ACH payment privileges.

R29 could also open you up to penalties tied to rejected ACH payments. Make sure you resolve any issues as quickly as possible and only establish ACH relationships with customers you can count on.

ACH payments are an obvious choice for many businesses — they’re cheaper, more secure, and getting faster by the day. And since it’s more convenient for customers as well, signing up customers is easy and comfortable if you sell subscriptions or recurring services. Just make sure you use a good processor who respects NACHA and keeps up with their changing rules!

Tidal Commerce loves to work amazing business owners. We work with retail, healthcare, professional services, eCommerce, nonprofits — you name it. And as long as you want to grow your business and appreciate transparency and honesty, then you’ll fit right in.

Think you’re in that camp and want to use ACH payments in your own business?


Let’s get in touch.

*Statistics & quotes found in this blog are via BottomLine, Wikipedia, & NACHA.

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