How ACH Works
The ACH system consists of computers working together to process payments automatically. There’s no need to manually handle payments (on your part or the biller’s). ACH is a “batch” processing system that handles millions of payments at the end of the day. The network uses two central “clearing houses.” All requests run through either the Federal Reserve or the Clearing House. This allows for efficient matching and processing among numerous financial institutions. References to ACH transfers can mean several things, depending on where you see it.
ACH Transfers on Bank Statements
On statements or in your transaction history, ACH means that an electronic payment has been made to or from your account using your checking account information. Common examples of ACH transfers appear below. For an ACH transfer to move funds to or from your account, you must authorize those transfers and provide your bank account and routing numbers.
ACH Transfers on Your Bills
When viewing a bill, ACH means you have the option to pay your bills electronically. Other terms include eChecks, EFT, or AutoPay. Instead of writing a check or entering a credit card number every time you pay, you can provide your checking account details and pay directly from your account. In some cases, you control when the payment takes place (the funds only move when you request a payment). In other cases, your biller automatically pulls funds from your account when your bill is due, so you need to be sure you have funds available in your account.
What Does ACH Do for Consumers?
If you’re an individual, you may enjoy several benefits of using ACH to transfer funds.
Get paid by your employer quickly, safely, and reliably. You avoid the hassle of waiting for your paycheck to arrive or depositing the check at your bank.Automate your payments, so you never forget to pay (and your payments arrive on time).Make purchases online without using a check or credit card. You pay quickly and avoid credit card processing fees.Minimize the number of pieces of paper floating around with your bank account information. This helps reduce the chances of fraud in your accounts.
The main drawback for consumers is that setting up ACH provides businesses with direct access to your checking account. They take the money to pay your bills whether you’re ready to pay or not. If you’re short on funds, you might prefer to pay a different way. Alternatively, you might want to prioritize certain payments when you have limited funds, paying only the most urgent bills first. For more details on how consumers use ACH, read about setting up ACH debit.
What Does ACH Do for Businesses?
If you run a business, you benefit from:
A low-cost, non-labor-intensive way to transfer moneyPaying employees without the need to print checks or pay postageReceiving customer payments easily, quickly, and regularly—no more cashProcessing fees that are lower than credit card swipe feesGetting paid by vendors—or paying suppliers—in a way that’s safe and easy to track (there’s an instant electronic record of every transaction)
Businesses face the same problem as consumers: There’s a direct link to your checking account, and any errors or unexpected withdrawals can cause problems. What’s more, businesses can face the issue of customers reversing charges and taking back payments. That being said, it’s harder to reverse an ACH payment than it is to reverse a credit card payment. Finally, businesses may need to purchase software or invest time and resources into transitioning to ACH transfers. However, they’ll most likely recoup those costs easily over the long run. For more details on how businesses use ACH, read about ACH processing.
Examples of ACH Transactions
You probably have more experience with ACH than you realize. Individuals and businesses use ACH for everyday transactions such as:
Direct deposit of your wages (from your employer to your bank account) Automatic payment of recurring bills such as energy bills, insurance premiums, and Homeowners Association (HOA) dues. When you provide a voided check to your biller, you’re setting up ACH. Payments from businesses to vendors and suppliers Transferring money from your brick-and-mortar bank to your online bank
ACH vs. Wire Transfers
Pros and Cons of ACH Transactions
Pros Explained
Get paid faster: You can get paid faster with ACH payments. You won’t have to wait for a check to clear.Convenient: You can automate bill payments to avoid late fees and missed payments, make online purchases without having to use a credit card or check, and minimize paper records with sensitive banking information.
Cons Explained
Direct access: Companies have direct access to your bank account. You must be careful who you share your banking information with.Overdraft fees: Auto payments are deducted whether or not you have the funds in your account, which can trigger overdraft fees.
Types of ACH Transfers
Currently, ACH transactions don’t happen in real-time. Instead, banks use “batch processing” to process the entire day’s worth of requests at once. As a result, you don’t get paid immediately after your employer authorizes payment. Instead, the transaction takes one or two business days to move through the system. There are plans to speed up ACH payments, and same-day payments have already begun for selected transactions. ACH transactions occur in two forms:
