What Are ACH Payments?

ACH, or Automatic Clearing House, is a network that is accessed millions of times throughout the day without our being aware. You may see the term when making payments, but you may still not know what really goes on behind the scenes.

The Facts

ACH is a national clearing house network for batch processing electronic fund transfers. ACH payments include direct deposit of payroll, tax payments and refunds, e-checks and many other processes that take place everyday behind our purchases. The ACH network operates in the United States and is governed by the Federal Reserve and NACHA (National Automated Clearing House Association)-The Electronic Payment Association.

Pros and Cons

The advantages to accepting ACH payments are lower transaction costs, faster processing than paper checks and as another option for your clients. Disadvantages would be the possibility for fraud, insufficient funds and closed accounts. Plus, payments do not go through immediately like they do with credit card processing.

Definitions

If you know a few terms, it will help you decipher the fine print associated with ACH payments.

The "originator" is the individual, corporation or other entity that initiates an ACH payment. The "receiver" is the individual, corporation or other entity that has authorized an originator to initiate a credit or debit entry to a transaction account held at an RDFI.

The "Originating Depository Financial Institution," or ODFI, is the participating financial institution that originates ACH entries at the request of and by (ODFI) agreement with its customers. The "Receiving Depository Financial Institution," or RDFI, or is the financial institution qualified to receive ACH entries.

How It Works

ACH functions as the middle man in the electronic transfer process, moving money out from the customers' bank account and into the business' bank account.

The payer, which can be an individual or a business, starts the transaction by making a payment using the ACH option provided by the biller.

The biller sends this request with your authorization to deduct the funds to ACH.

ACH requests the funds from your bank account which then sends the money to ACH.

ACH then sends the funds to the biller's bank for deposit.

Considerations

While everything appears to happen right away, there is a potential for delay in the transaction. The ACH network operates on the same days as the bank so requests made after business hours, on the weekends or over holidays will take an extra day or two to process or clear. Unlike credit cards, there is also a chance that a business can run into an issue of insufficient funds, along with cases of fraud or closed accounts.