Open Banking
Financial Services
October 12, 2022
10 Min

What Is ACH and How Does It Work?


What are ACH Payments?

ACH payments are electronic money transfers that move money from bank to bank via the ACH network. Compared to other methods like card networks, wire transfers, physical checks, or cash, ACH payments are a more reliable way to send or receive money. 

To make ACH payments, you can use two types of accounts: savings or checking accounts. You can make those transfers in the United States, Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands. ACH payments are even used internationally, although it’s more common for international transactions to be sent using wire transfers. Both have their pros and cons, but ACH payments are especially popular because of how inexpensive and easy they are to set up and use. 

International transfers favor the wire since ACH payments can take a couple of days to move money and because not all banks offer the same services; Still, Nacha recently reported that 7.5 billion ACH payments were made just in the second quarter of 2022. ACH payments are gaining traction in the U.S. and other places worldwide, especially with online retailers who want to offer a more convenient and beneficial way to handle money transfers.

How Do ACH Payments Work?

The Automated Clearing House network processes fund transfers to and from different accounts, and there are generally two types of ACH transfers: the direct deposit versus the direct payment method. The distinction between the two has to do with whether the funds are being “pushed” into an account or “pulled” from one.

  • Direct deposits mean that you receive money. This kind of deposit is typically from a business or government entity to a consumer. This may include an employer who deposits your check directly into your checking account or government tax refunds.
  • Direct payments are when funds go out of your account and into a different one, which can be used by businesses and organizations—or even individuals. Whenever you pay a bill online with your bank account rather than mailing in a check, you’re using direct ACH payments. You use the same method to Venmo your friends, family, or business.

Receiving an ACH payment will show up in your bank account as an ACH credit; on the other side, paying someone using an ACH direct deposit will show up as an ACH debit, with who was paid and the amount they were paid. 

You can think of an ACH transaction as a data file that has specific information about the payment being processed. That file is first sent to the sender’s bank, also known as the Originating Depository Financial Institution (ODFI). Then the file is sent to the Clearing House, which regulates transactions happening in the ACH network. Then the request is finally sent to the recipient’s bank, or the Receiving Depository Financial Institution (RDFI). There, the funds are transferred to a specific account, like the recipient’s checking account. 

ACH payments or deposits can take 3-5 business days to be fully processed as they go from bank to bank. They are processed in batches, which are usually processed three times a day; this means ACH transactions aren’t instantaneous and will usually take a couple of days to show up in someone’s bank account.

Let’s say, for example, that you get paid every other Friday—your paycheck doesn’t typically hit your account until sometime the following week, like on a Tuesday. This doesn’t mean that your employer or payroll specialist didn’t “send out” your direct deposit on payday; it simply means that your ACH payment hasn’t been batched yet. Since the weekend doesn’t include business days, you see that money a couple of days into your next work week.

What is An Example of ACH Payments?

ACH payments are happening constantly around us, even when you don’t realize it. There are several ways ACH payments and deposits can be made, which we’ve outlined and included an example for each case.

Direct deposits

The most common types of direct deposits are for circumstances like:

  • Payroll processing/paychecks
  • Tax refunds
  • Interest payments
  • Annuity payments
  • Employer-reimbursed expenses

For example, once you file your taxes for the year, any tax refund that the government owes you will show up in your checking account (or whatever account you submit when you file). At the end of your filing, you can select the direct deposit method and provide both your bank’s routing number and your account number. Once the government has reviewed your tax forms and authenticated everything, they deposit your tax refund directly to your account. This digital deposit is processed by using the ACH network.

Direct payments

When paying someone else rather than receiving money, there are many potential scenarios. Consider ACH payments like:

  • Paying a bill online using your bank account
  • Setting up recurring payments (like your recurring phone bill)
  • Donating money to a charitable organization
  • Payment apps such as Venmo or Zelle to send funds to someone’s bank account

Let’s say you’re a university, and the new semester will start in a couple of weeks. With the deadline for tuition payments, students need to get their funds transferred as swiftly and securely as possible. Instead of sending a check to pay for their tuition in the mail (which takes some time to process, and you risk the check getting lost or stolen), students can make a direct payment online. By providing their banking information and authorizing their bank to transfer funds to their school, each student can make their tuition payments on time and with just a few clicks from the comfort of their home.

Benefits of ACH Payments

You may not even realize how often you benefit from ACH payments, which goes to show just how streamlined ACH payments have made transferring money. If your customers make payments online and enjoy the mostly hassle-free process, you’re likely using ACH methods to do so. Think about the many automated payments you make each month or year to year—ACH is woven into a lot of modern commerce. Here are some of the best advantages of ACH payments and deposits.

More Reliable and Direct

The first benefit most consumers and businesses notice with ACH transactions is how easy and simple they are. Instead of writing a check every time you need to pay your babysitter or running to the bank to get that cash you owe your friend, you can send money right from your phone—and that’s on an individual basis. Businesses can use this online payment method, too, which makes receiving or sending money easier and more secure.

Automated payments are also made through ACH methods, and ACH allows you to determine when you get paid or when you make a transfer, too. For example, you can decide what the transfer date should be, how frequently those payments are made, and customize the amount. This helps eliminate the risk of late payments and optimizes business cash flow.

High consumer retention

Cards can be declined or expire, whereas bank accounts cannot be lost or expire. It’s far more unlikely that a payment cannot be extracted from an account—as long as the funds are there, the bank account is open, and the account is locatable, money can easily be directly transferred. This adds far more security to consumers, who don’t have to worry that their card will be rejected or expire and make them late on your recurring or automated bill payments. Because of the low payment failure rate, consumers enjoy greater security and continue to use such a reliable payment method.

Cheap or free

For both the consumer and the merchant, the most notable benefit of ACH is how affordable it is to implement and use—ACH is actually cheaper than card payments. Card networks can charge 1.3%-3.5% as a standard fee for processing payments. On average, the cost for processing ACH payments is $0.29 per transaction, though it ranges from $0.25 to $0.75. This amount will vary depending on whether you access funds directly or use a third-party payment processor. The larger your transaction volumes, the less you tend to pay for transactions, so bigger companies especially benefit from ACH payment methods.

A Third-Party payment Processor (TPPP) may include certain fees: flat fees and percentage fees per transaction, monthly fees, batch fees, return fees, and chargeback fees are all potential costs businesses should consider when using a TPPP.

Automation integration

Because ACH payments can be automated, businesses find that the administrative duties of processing payments and bills can be significantly cut down, especially when ACH tools are integrated with accounting software. This gives more time back to employers and business owners and others greater peace of mind.

Easy to implement

Another great element of ACH transactions is how easy it is for businesses to switch to this payment system rather than relying on cards. Consumers can make online payments without a big to-do; all a business needs from their customers is the account holder's name, the routing number, the ABA number, the account number, and the amount being transferred.

Are There Drawbacks of Using ACH Payments?

Of course, like most forms of payment, there are some limitations. ACH transfers are easy to implement, but sometimes there are caps on how many transactions you can initiate. As previously mentioned, international ACH transfers aren’t quite as practical. It’s also possible you may have to pay extra fees, or there may be delays in sending or receiving funds across borders.

Despite these constraints, ACH transfers are still more popular and used than ever.  A wire transfer, for example, is usually a same-day transaction that costs more, but same-day ACH transfers are gaining more traction. Some banks may create limits on transfer destinations, like not allowing international transfers—but the right bank will offer greater and more affordable flexibility. Nacha is discovering and implementing better tools and improving the ACH process, and with the right banking service, you can enjoy a seamless e-commerce experience.

How Open Banking Combats the Risks & Fraud Associated with ACH

According to Nacha, in Q2 2022, same-day ACH value increased over Q2 2021. However, with increased ACH volume and value comes increased risk. According to the Federal Trade Commission, bank fraud relating to debit cards, electronic funds transfers, and ACH grew by 8% in 2022. Although ACH fraud is still relatively rare, merchants should take care to implement safeguards if offering ACH payments. 

ACH payments are particularly susceptible due to the manual input of accounting and routing numbers. This leads to many common fraud schemes: insider threats, data breaches, check-kiting scams, and more. The risks associated with ACH have historically made many merchants shy away from using the payment option. Additionally, unlike wire transfers, ACH transactions can be recalled—and the returns process can be complicated. Lastly, with ACH payments running in batch transfers at night, payments can take longer to appear in the receiving account. 

Trustly’s Open Banking technology bolsters the already robust ACH system. Broad connectivity combined with machine learning effectively guarantees payments in real time, eliminating the risks of ACH returns. Secondly, Trustly leverages user-permissioned financial data to perform multi-factor authentication on behalf of the consumer. This helps protect against fraud and human error. 

Open Banking technology can help merchants leverage all of the benefits of ACH payments without the risk. Trustly does this by removing friction, increasing ease, improving cash flow, and using advanced machine learning and data analytics to employ best-in-class risk management and fraud prevention measures. 

Ready to Harness the Power of ACH? 

Speak with a payments expert about how you can optimize ACH with Open Banking and reduce processing costs, combat risk and fraud, and improve the consumer experience. 


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