ACH Payments: What Are They and How Do They Work?

ACH stands for Automated Clearing House, which is a network used for electronically moving money between bank accounts across the U.S. The association responsible for these transfers is Nacha, formerly the National Automated Clearing House Association, and may also be referred to as the ACH Network.

The ACH system processes payments automatically, which means there is no need to manually handle payments like with paper checks or cash. ACH processes large volumes of credit and debit transactions in batches, every day. 

In simple terms, an ACH transfer is an electronic movement of funds from one bank account to another. In an ACH payment transaction, you have one person or entity who’s sending a payment and another receiving it. This payment is processed through the ACH Network. 

Processing this type of payment requires certain details about where the money is coming from and where it’s going, including:

• Bank account number and routing information for the person or business sending the payment
• Bank account number and routing information for the person or business receiving the payment
• Name on the account and name of the bank
• Amount to be sent

If one piece of the puzzle is missing, an ACH transaction can’t be processed.

There are two ways to make an ACH transfer: debit and credit. 

An ACH debit transaction involves the withdrawal of money from a bank account. An ACH credit transaction happens when money is deposited into a bank account. 

In either type of transaction, you have:

• The person or business sending funds
• The person or business receiving funds
• Both the sender and the recipient’s banks
• The ACH operator that processes electronic debits and credits

If you’re initiating an ACH payment, the direction money is moving determines whether it’s a debit or credit. 

Here are some examples of ACH credit and ACH debit transactions.

ACH payments can sometimes be called “push” or “pull” transactions, depending on which way money is moving. 

Example: You schedule your credit card bill to be paid electronically from your bank account:

ACH debit = when money is pulled from your account to pay the bill. 

ACH credit = when the money you sent is pushed to the credit card company’s bank account. 

It works in reverse when you’re receiving a payment. So, if you set up direct deposit with your employer, you’d receive an ACH credit, or push transaction, once the money hits your account. Your employer would pull the money from its bank account to pay you, resulting in an ACH debit. 

There are two main categories of ACH transactions: direct deposit and direct payments.

An ACH direct deposit is any kind of deposit payment made from a business or government to a consumer. This includes paychecks, employer-reimbursed expenses, government benefits, tax and other refunds, and annuities and interest payments.

The second type ACH transaction is an ACH direct payment. Direct payments are made by individuals, businesses, and other organizations to send money. Common examples of an ACH direct payment would be if you’re paying a bill online with your bank account, or sending money via an online or mobile system like Zelle or Pay Anyone to send money to friends and family.

In general, if you are receiving money, then it’s an ACH direct deposit. If you are sending money, then you are making an ACH direct payment.

In general, ACH payments are convenient and simple to process. (It’s a lot simpler to schedule an ACH payment than write a paper check!) And, since they’re electronic with a digital paper trail, they’re also easy to track.

In terms of why businesses may prefer ACH payments, here are some of the pros:

• Speed. Compared to a paper check, ACH payments can offer a much shorter processing time, allowing businesses to get paid faster. 
• Fees. Accepting credit card payments can be expensive when it involves paying processing fees. ACH payments can be a lower-cost alternative. 
• Bookkeeping. Keeping track of ACH payments may be easier than trying to keep tabs on paper checks or even cash payments. 

On the consumer side, here are some of the best reasons to use ACH payments:

• Convenience. ACH payments can be easy to set up if you need to pay bills or you want to get paid via direct deposit. You can automate recurring ACH debits or credits, simplifying the way you manage your money. 
• Avoid debt. ACH payments are deducted from your bank account, so you’re not creating debt the way you could if you pay with a credit card. 
• Cost. Scheduling ACH payments can be fee-friendly if your bank offers free online bill pay.

Do ACH Payments Have Any Disadvantages?

While the benefits generally outweigh any disadvantages, it’s still important to understand what the cons of ACH payments might be.

For businesses, here are some of the cons of ACH payments:

• Fewer fraud protections. Because business accounts tend to have fewer protections than consumer accounts, businesses must be very vigilant against fraud attempts associated with ACH transfers.
• Location limitations. The ACH network is only available in the U.S., which means if you need to send money to employees outside of the U.S., you’ll have to use an “ACH-like” network in that country.

Here are some of the disadvantages for the consumer:

• Security. You hand over information about your bank account, including your account number, which gives companies and other parties direct access to your account.
• Time. ACH transfers are automatic, but they’re not instantaneous — they may not reach your bank account for 3 – 5 business days.
• Overdraft. Setting up auto payments means funds are deducted from your account automatically, whether or not you have the appropriate funds, which can result in overdraft fees if you don’t have enough money in your account.

ACH payments aren’t processed instantly. There’s a bit of a wait between the time money is debited from one bank account and credited to another. 

Typically, this waiting period is 3 – 5 days. This allows enough time for money to be pulled from one account, processed through the ACH operator, then forwarded to the receiving bank. 

Virtually every type of ACH payment is eligible for same-day processing but, at this point, it’s optional, rather than required. In other words, businesses that send payments via ACH can choose whether to allow for same-day processing. Doing so can make it easier to deliver speedy payments, but it may mean paying higher fees, which is why not all businesses use it. 

As mentioned, sending ACH payments — whether they’re processed same-day or on the traditional timeline — requires a fee. This fee is typically paid by businesses that process payments over the ACH network. 

The types of fees involved can depend on the payments processor the business uses. For example, businesses may pay:

• Account fees
• ACH debit fees, per transaction
• ACH credit fees, per transaction
• Discount fees for certain types of transactions

A typical cost is around $0.29 per ACH transaction, but this is more of an average than an industry standard. 

Whether or not you pay any fees for ACH payments depends on how they’re processed. For example, if you’re sending money from your bank account to pay a bill, your bank may not charge anything for this service. On the other hand, if you’re using a person-to-person payment app to send money via ACH, the app might charge a small processing fee.

ACH payments aren’t the only way to send and receive money electronically. A wire transfer is the movement of money from one bank account to another over a processing network, such as Society for Worldwide Interbank Financial Telecommunication (SWIFT) or Fedwire. Domestic wire transfers involve transfers of money between banks within the same country. International wire transfers involve the movement of money between banks in different countries. 

ACH payments and wire transfers may sound similar, but there are some important differences between them. 

Whether it makes sense to use ACH payments vs. wire transfers may depend on how quickly you need to send or receive money. If you can wait a few days and don’t want to pay a fee, ACH payments can get the job done. On the other hand, if you need to send or receive money right away then it may be worth paying the fee for a wire transfer. 

Most likely, you use ACH payments far more than you think. A simple way to start taking advantage of ACH payment benefits is to set up direct deposit for your paycheck, tax refund, and/or stimulus check. You can even go ahead and enroll in direct deposit with Chime today and start getting paid up to two days early¹.