Financial Management, Open Banking, Payments

What Is ACH? 6 Fundamentals to Get You Started

Serenie Gagon
May 21, 2021

Automated Clearing House (ACH) transfers may feel like one of those invisible processes that go largely unnoticed yet have become essential to everyday life, especially in business. When you received your last paycheck through direct deposit to your bank account, that was made possible through an ACH transfer. When you paid your utility bill directly from your checking account, you likely used an ACH transfer. 

If you’re already passively benefiting from ACH transfers, imagine the positive outcomes that could come from actively leveraging the ACH network. Here are six fundamentals to get you started. 

What Is ACH?

“ACH” stands for “Automated Clearing House,” which is a payment network built by the National Automated Clearing House Association (Nacha). An ACH payment is an electronic bank-to-bank payment enabled through the ACH network, rather than through a card network. ACH payments are also frequently called ACH “transfers” or ACH “transactions.” The ACH network is used in the United States, but there are also International ACH Transactions (IAT).

Banks and other financial institutions use the ACH network to aggregate transactions for batch processing. In a given year, the ACH network processes around 25 billion transactions, likely including your paychecks and monthly bill payments. There are three types of transactions:

1. Direct Deposits: These transactions are any electronic transfer made from a business or government entity to a consumer. Direct deposit transactions may include: 
   • Paychecks and other employee expense reimbursements, bonuses, and commissions
   • Social security payments and other government benefits
   • Pension/401(k) disbursements
   • Annuities
   • Tax refunds
   • Interest payments
2. Split Deposit: This transaction enables deposits to be split into different accounts. For example, an employee could have a percentage of their paycheck deposited into a savings account while the rest is put in checking.
3. Direct Payments: If you’re sending money through the ACH network, then you’re making a direct payment. Payment solutions can enable any consumer to make these kinds of payments with their bank account:
   • Charity donations
   • Bill payments
   • Tuition payments
   • Send money through social payment apps
   • Send money to friends and family
   • Make ACH-enabled purchases

How Do ACH Transfers Work?

The ACH transfer happens in two key steps: initiating the payment and receiving the payment. Before you can initiate the transfer as the payment originator, a customer must first give the business approval to initiate the transfer. This approval usually happens by signing an ACH authorization form or through verbal agreement. During this initiation process, the customer can set up one-time payments, recurring payments, split deposits, and so on.

Once the customer has authorized the transfer, your bank account will “pull” the payment from the customer’s bank account. If your customer has insufficient funds, then the payment can “bounce” just like a paper check. 

“Pulling” money from an account is known as an ACH debit transaction. An ACH credit transaction, on the other hand, allows you to “push” money from one bank account to another.

What Are The Benefits Of Accepting ACH Transfers?

More and more businesses are leveraging ACH transfers in their business transactions. That increasing adoption has likely come as more businesses realize the benefits of ACH transfers for both them and their customers:

• Low cost: ACH transfers tend to be a cost-effective method of moving money. We’ll cover more on costs below.
• Open and inclusive: As long as you have a bank account, you can pay and receive money through the ACH network. No need to worry about having a credit or debit card.
• Fast and easy: ACH transfers are much faster than delivering checks through snail mail, and you don’t have to worry about losing payments in the mail or dealing with paper check deposits.
• Better customer experience: Since ACH transfers can be customized for recurring purchases, customers don’t have to worry about receiving and paying a bill, which reduces friction between them and your business. ACH transactions are also easier than customers filling out a check, which may additionally increase the chances of converting prospects.

What Are The Costs Of ACH Transfers?

ACH transfers will save your business much more than processing fees or wire transfers (which we’ll get to in more detail shortly). The median cost per transfer is $0.29, but that number can rise or fall depending on:

• The average transaction size
• Volume of transactions you submit
• Whether or not a bank uses same-day ACH
• Size of the bank
• Other incidental or bank fees

What’s The Difference Between ACH Transfers and Wire Transfers?

In many instances, ACH transfers have replaced more traditional wire transfers. But that doesn’t mean that wire transfers have completely lost their utility. For example, wire transfers happen in real time, which means they can process within minutes or hours, where ACH transfers could take a few days. However, wire transfers cost more, typically between $20 and $30 for the customer, and the recipient frequently has to pay a fee as well. 

The bottom line: wire transfers are likely better for large-sum, international, or time-sensitive transactions, where ACH transfers are more appropriate for smaller, more frequent transactions that can stand to take a little longer to process.

How Does Finicity Enable ACH Transfers?

What does all of this have to do with Finicity? On March 19, Nacha implemented a new WEB Debit Rule that requires account validation with the first use of an account number, or following changes to the account number. The purpose of the rule is to reduce the chances of fraud. 

In order to help businesses satisfy Nacha’s new operating rule, Finicity delivers an instant account validation solution as part of our Finicity Pay solution set. In fact, Finicity is a Preferred Partner of Nacha for using instant account validation to mitigate fraud and maximize the accuracy of payment transactions by providing account and routing numbers, account owner and balance checks to make ACH payments even simpler. The speed and security of our open-banking-powered validation solutions also empower consumers with a streamlined, easy, digital-first experience.

ACH transfers are an innovative way for both businesses and consumers to move money while also cutting costs and saving time. Learn more about how Finicity is enabling secure and less risky ACH transfers.