What are ACH Payments?

What do ACH payments mean?

To start with, ACH is an acronym which stands for Automated Clearing House. Typically, this is a payment service which controls and transcends over other electronic payments transactions. From a practical standpoint, you could be a merchant dealing with customers who pay for goods and services via paperless transactions.

Say, for instance, loan repayment, or making direct payments to all the employees on your payroll. Automatic bank drafts and transfers equally use this method.

ACH payments are highly regarded as faultless and reliable in a number of limitless and diverse transactions. ACH is more of an electronic funds transfer (EFT) between one financial institution to another which serves as a better alternative over other methods.

Correspondingly, it's a channel to transfer money from one bank account to another, either via wire transfer, credit cards, or in other instances, cash. As a means to clear electronic payments, ACH is considered as a secure and fast medium to clear pending transactions in banking institutions in contrast to paper checks. With the latter, you might need to bear with the sluggish pace of the mailing services.

So where exactly are ACH payments predominantly used?

Let's have a look.

Primarily, ACH is a needful preference for individuals who need to pay their bills electronically. In the same effect, it's a method which comes in handy if you want to collect single or recurring payments from customers.

If you see this term reflecting on your bank statements henceforth, it shouldn't sound strange anymore now that you've got the glimpse of what it means.

Both debit and credit transactions on ACH are pretty much straightforward. Bearing that fact that all transactions are electronic, the customer must issue a formal consent as a procedure to initiate the payment.

Before anything else, this authorization must be given to the originating institution or corporation in order to debit a certain amount of money. Depending on the nature of your transactions, you might be required to sign an official authorization form. As another option, you can give your assent via a phone conversation to the requisite authorities.

The ACH payments transactions are, however, not as instantaneous as those made via credit and debit cards directly while shopping for goods and services. The authorization process is not verified in real-time.

As of now, there are two major versions of ACH payments.

  • Direct ACH Deposit– With direct ACH deposit transactions, business entities, consumers, or other establishments can send money to their bank accounts or to their suppliers via secure ACH payment processors like Dwolla, Venmo or PayPal. Another instance is when they want to settle their payroll by sending money to their employees' bank accounts.
  • Direct ACH Payment– This is the complete opposite of the above term. Instead of sending money to other accounts, individuals and business entities draw funds from other accounts. Take, for instance, your Netflix subscription. The company automatically pulls money from your bank account once the preceding plan expires.

On the face of it, the basic meaning of what ACH is makes perfect sense to any layman. The fact is, there are lots of weighty terminologies in the financial markets that you need to contemplate.

So here's a brief directory of terms used in the ACH payments process;

Clearing House

In banking, this is the financial institution which approves payment transactions. Ordinarily, the ACH network uses two clearinghouses; the Federal Reserve and the Clearing House which acts as an intermediary between all financial establishments that use the ACH model.

Automated

Simply put, it means that all payments are processed automatically. In other words, there are no manual entries involved. The computers take the wheel once you sign up for the ACH payments transactions.

NACHA

Formerly known as the National Automated Clearinghouse Association, it's a body which governs all transactions being carried out by the ACH network. Since there are billions worth of transactions taking place; from B2B payments, electronic bill payments, and much more, this body regulates all the transactions via a preset legal framework.

This legal body exercises its supervisory powers over banking institutions, merchants account providers, and all other stakeholders in the financial markets.

ODFI 

Well, the acronym stands for Originating Depository Financial Institution which is mostly mentioned in banking transactions. What it does is it acts as an intermediary between the Federal Reserve infrastructure or the ACH system, and the originator of a particular transaction. It has legal powers to check whether all transactions made via the ACH payments system comply with the rules and regulations of practice.

Customarily, the financial institutions(originators) that have been granted the warrant to make depositories at the Reserve are generally recognized as members of the ACH system. These banks always commence all transactions while acting for the sake of their clients. If you dig deeper, you'll realize that OFDI's mode of operation has rigorous security standards which are a notch higher than those of the checks system.

Originator

This phrase has multibranched meanings in the banking industry. It's most commonly used to mean a mortgage banker who works with or liaises with the bank that has a mortgage facility to finance the borrowers perspective purchase.

In other instances, an originator is best described as the financial institution which figuratively, reserves the right to facilitate the mortgage by selling it to another party, which in turn, negotiates the terms with the borrower. It's worth noting that an Originator can either be an individual (private real estate developer/ sole proprietor) or corporation.

RFDI

This stands for Receiving Financial Depository Institution. It's the receiving bank which personally credits the account holder's account. The receiver, in this context, will be the employee or biller.

So how do ACH Payments work?

If the biller has a website, the Originator may need to login in (via a username and password), to complete the customer authentication process. It's the first baby step to initiate a debit transaction from your account through the ACH network. Goes without saying that, the electronic transmission of payments is a safe, quick and secure way to transfer funds to another account holder.

This takes effect once the Originating Depository Financial Institution(ODFI)  has absolute consent from the Originator. In absence of a request, the ACH payment can't be authorized. As standard practice, ACH transactions usually mature within one or two business days

Let's use a real illustration.

PayPal serves best as a perfect example to use in this context. As a customer, you'll definitely need to first, review a bill sent to you.  So let's assume you've correctly filled the billing information. Once payment has been scheduled to be settled on a specific date, the merchant's website uses the Payflow gateway and sends precise information to PayPal.

From this end, PayPal processes the data and creates an exact scheduled payment date as authorized by the customer. As a result, PayPal sorts the ACH payment information and uses an encrypted(end-to-end) backed connection to forward the same to ODFI for scrutiny. The catch is this information is sent strictly on the specific date which a customer specifies.

Once the ODFI processes all the details, it electronically forwards it to the Federal Reserve. The ACH network shares this request to the customer's bank.

So this is where money changes hands…

The Federal Reserve moves on to credit the ODFI with the deliberated amount and on the client's agreed date.  The amount is the same as that which the ACH system deposits in the form of a debit transaction. The OFDI will then debit this exact amount as per the authorization terms sent to through the ACH system from the client's credit or debit card account.

Back to our illustration.

PayPal will then have a right to expedite a subordinate transaction to the merchant's, biller's or retailer's account; whichever relates to you best. This transaction credits the biller's account with the invoiced amount if the preset payment date has matured. The customer will receive comprehensive banks statement on a periodic basis(monthly) which shows the date, time and the nature of each ACH initiated transaction.

The same goes for merchants who use PayPal as a billing platform. PayPal's dashboard shows concise and accurate reports of each previous payments from customers.  In the same manner, the ODFI keeps track of all the payments.

Which are the mainstream ACH Payment Processors?

Well, of course, PayPal will make it to our shortlist. Not that this is some affiliate hype, so to speak. The deal is, with this ACH processor, you'll not face any major shortfalls. It's an all-inclusive tool which is fast yet has low processing fees. Since I'm about to list down a few of its equivalent, I believe it will even out all corners.

With such kind of software, you can easily do these other tasks in an oversimplified manner;

  • You can choose your preferred payment method. Be it ACH transactions, International wire transfers, credit, and debit cards, you name it.
  • For merchants, the pleasing news is that, from this single point, you can pick your most suitable method to get paid by customers.
  • It's mobile-friendly. It's strikingly responsive on both iOS and Android devices.
  • It routinely follows the accounting rules by sorting your funds by ‘Payables' and ‘Receivables', accordingly.

So what are the alternatives?

Bill.Com

For those who don't know, Bill is an equally impressive payment processor which is automated to carry out all transactions via the ACH system. It helps you send invoices or make a payment on time. The best part about this particular ACH oriented system is that it integrates with accounting apps like Quickbooks, Xero, Sage Intacct, and Oracle, just to name a few. Most of it all, everything is entirely paperless. Really saves you on time.

Skrill

Skrill has the same rates as those of PayPal. You can add your bank account on your Skrill account, subject to the pre-authorized debits and ACH's terms and conditions. It's pretty easy to set up your account here.

This software helps you make bank transfers in the amount which you dictate via the ACH system. Making an electronic transfer is quite feasible since your Skrill account is in sync with your credit or debit card details. Same as Bill, this ACH payment processor is quite proficient and up to the task.

Stripe

This payment processor has huge setups tagged alongside it. With the likes of Lyft, WooCommerce, Xero, and Shopify syncing to this processor, Stripe is basically, a suitable ACH alternative to incorporate in your future transactions.

Stripe gives its users access to a user-friendly dashboard where they can link their bank accounts to ACH payments. It has terms and services which are up to the task in securing any authorization request.

ACH Payments Vs Credit & Debit Cards Vs Paper Checks Vs Wire Transfer

Based on facts, the ACH is more resilient and well built to optimize your financial transactions. It's a pre-eminent channel which surpasses both credit and debit cards' security while transmitting all the authorization updates via the OFDI. Since it sort of liaises with a recognized legal framework, it has a capacity to handle bulk transactions.

For this reason, it's processing fees will unquestionably, be lower as compared to credit cards. With debit cards, they similarly draw money from the checking accounts in the same manner as the ACH system, however, since they operate on the card network, they charge the same fees as credit cards.

With the wire-transfer option, here comes the difference.

Practically, wire transfer is a type of ETF which is used for small volume payments. Their processing time is always in real-time, unlike ACH which sorts the transactions in different tiers then later sends them for processing via the respective scheduled time. Wire transfer does the processing per individual transaction.

What are the Cons of ACH payments?

More often than not, people go for ACH since it's sort of convenient in a number of ways. There are justifiable grounds why consumers and businesses, alike, should use the ACH system. Some of its benefits are;

  • It has a quicker processing time
  • Lower processing fees. For vendors who accept credit and debit cards from customers, ACH can save you some bucks.
  • It's an ideal channel for recurring bills. This brings a new breed of flexibility. No more cutting checks to pay your dues every now and then. You can automate your transactions to get everything handled at the click of a button. Otherwise stated, It's ideal for consumers who need to automate their payments so that they don't skip their due dates.
  • For customers, it gives them an automated billing platform. A merchant who offers subscription-based services can use an ACH processor such as Dwolla or Chargebee.
  • It's a pretty solid alternative to checks and credit card transactions.
  • All transactions are paperless. This elevates the security for both customers and merchants.ACH payments are direct and don't include any third parties.  The deal-breaker about checks, in particular, is that they're prone to signature forgery. Credit cards, on the other hand, can be stolen. The bright side with ACH payment processing is that it carries out and end-to-end authentication process before a  transaction between two parties is approved. As a security measure, the customer is prompted to confirm the amount and details of the merchant receiving the payment.
  • Fends off all sorts of human errors and discrepancies.
  • This system is flexible for corporations and business entities with remote workers or a large pool of employees.
  • Banks put more focus on recognizing ACH payments over paper checks.
  • It's ideal for consumers who can't have access to credit cards.

And the Cons?

  • Your bank account credentials are open to companies
  • The learning curve for big corporations is a bit blurry
  • For business owners, you must set precautionary measures to avoid any form of fraud

Is ACH Payments a perfect solution for me?

If you run a business which accepts payments from customers globally, you might need to work with an automated solution. The ACH payments method will suit your needs so long as you're inclined to the most applicable Merchant account. By that, I mean one which comes with low rates and has stringent security measures.

Ordinarily, most prevalent service providers charge a flat rate which lies anywhere between $0.20 to $1.50 per transaction. In other instances, the payment processors charge a percentage fee of between 0.5 to 1.5%. Going by these rates, you'll definitely know where to place your stakes.

For merchants with high-risk transactions, the rates could consequently go beyond the average. I'd make this my preference if I have reccuring billing customers or expenses alike. If your business is that of a customer base which doesn't put much faith in credit and debit cards, then look no further. ACH is the right channel to process all transactions by virtue of its high-end security technique.

As a matter of fact, banks often prefer this as the safest and most indomitable method to move large amounts of money and at the same time, create protection for both merchants and customers while making all sorts of settlements.

To all customers, the best part of it all is that ACH payments are absolutely free and fairly budget-friendly for merchants. Most imperatively, it's a channel which tremendously reduces the chances of your transactions from being exposed to fraudulent attempts.

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