How to Process ACH Payments

Jan 14, 2022

If you’ve been a merchant for a while, you’ve heard of ACH payments.

You might already know that ACH payments move money between bank accounts in the U.S.

As a merchant, your business can benefit greatly by setting up ACH payments. This is especially advised if you offer any kind of recurring transaction, like a monthly subscription plan.

But how do you process ACH payments?

To learn if you should accept ACH payments and how to process them, read on.

Table of Contents

What are ACH Payments?

ACH is an acronym for Automated Clearing House.

The ACH network is used to move money electronically between bank accounts in the U.S. 

It is overseen by the Federal government, as well as by an organization called Nacha. Before that name, it was known as NACHA – National Automated Clearing House Association.

This network has been around since the 1970s. According to Nacha, it has moved a truly ridiculous amount of money —  over 26 billion payments were made in 2020 alone, valued at $61.9 trillion dollars.

What are ACH Transfers?

ACH transfers happen when you move money electronically between different banks, over the Automated Clearing House network.

Many kinds of payments move through the ACH network.  These include:

  • Bill Payments
  • Paycheck Deposits (also known as Direct Deposits)
  • Government Benefit Program Deposits
  • Person-to-Person Payments
  • Business-to-Business Payments

ACH Merchants can use transfers to pay suppliers or fabricators. Consumers use them to pay recurring bills, such as a mortgage or utility bills. 

Many social payment programs also use the ACH network. Zelle does this, as well as third-party apps like Venmo and Snapcash.

Two Types of ACH Payments

ACH payments can be processed in one of two ways:

  • ACH credits are used to move money from your bank account to a different account. You can think of this as “pushing” money at the other bank account, or sending it to it. 
  • ACH debits are used to move money from a different account into your account. You can think of this as “pulling” money from the other bank account. 

Of course, “debit” and “credit” are going to have different meanings, depending on which side of the transaction you’re standing on.  But both of these methods can be used by anyone. 

Keep in mind that neither of them will work without proper authorization!

So — how does ACH transaction processing work?

How Does ACH Payment Processing Work?

Banks typically process them as batch payments

This means that several times a day, they will collect all the ACH payments that need to be made.  Then the bank will send them all off together.

When you request an ACH payment, a basic five-step process takes place:

  • Authorization: Anyone wanting to make an ACH transfer first has to authorize the payment from their bank account. This can be done on a website, or by filling out a form with the relevant information — most importantly, the bank account number and the routing number of the bank holding that account.
  • Initiation: Payment details are sent to the account holder’s bank — also known as the ACH provider. In the industry, this is sometimes referred to as the ODFI, the Originating Depository Financial Institution.
  • Batching: The ODFI collects this ACH payment with all the other ACH payments requested in that time period. 
  • Requesting: The ODFI sends the request for payment to the other party’s bank. This second bank is sometimes referred to as the RDFI, or Receiving Depository Financial Institution.
  • Processing: The second bank verifies there is enough money in the account in order to make the payment. If so, the payment is processed.  If not, an error message is sent to the ODFI.

Alternatives to ACH Payment Processing

Of course, you already know about credit cards and debit cards. But there are a few alternatives to ACH processing, some of which are very similar.

  • ACH and Wire Transfers: Transferring money by wire tends to be expensive. The sender is charged to originate the payment, and the receiver is often charged to get the money. However, transfers by wire are not batched up like ACH payments are. Instead, they take place in real-time.
  • ACH and eCheck: Virtual checks are sometimes called eChecks. These payments are processed through the ACH network, usually on a one-time basis. 
  • ACH and EFT: EFT stands for Electronic Funds Transfer. EFT is a blanket term that covers digital payments, including, ACH, eChecks, wire transfers, and so on. Thus, ACH is a specific type of EFT.

Do ACH Payments Process Immediately?

As a merchant, you’re likely already familiar with the time it takes to process credit and debit cards;  generally about 2-3 days.

How much time does it take to process ACH payments, though?

ACH payment processing usually takes a bit more time than regular debit and credit card processingThese payments are usually finalized within 3-5 business days.

ACH Payments are Processed in “Batches”

One caveat with ACH payments is that the time of day you initiate the transfer matters. 

Banks collect ACH payments together and send them off in “batches”, which happens three to seven times in any given business day. (The number of times this takes place depends on the bank involved.)

Say a bank sends ACH batches off at 9 am, 12 pm, and 4 pm. If you get your ACH payment in before 9 am, it’ll go out with that batch. If you initiate it at 4:30 pm, though, it will go into the next day’s first batch.

This is important if you’re using ACH to pay bills that have due dates and cutoff times.

It’s a good idea to check with your bank to see when their ACH batches process. That way you won’t be caught not knowing.

Nacha started advocating for same-day ACH payments in 2019. Still not widely available, many banks charge extra fees to make same-day ACH transfers — or they might make this service available only to certain clients.

More About ACH Timing

Financial organizations have a choice as to how fast they process ACH transactions. They can be processed and dispatched the same business day, or in 1-2 business days.

ACH transactions that are debits, though, must be processed no later than the next business day.

These guidelines are based on rules established by Nacha. 

Keep in mind that although the ACH network might move the money quickly, it’s up to the individual banks whether they’re going to charge you for expedited 1-day service, or if they want to place a hold on the funds.

How Much Does it Cost to Process ACH Payments?

ACH payments might take longer to process than credit cards, but they also cost less.

ACH transaction fees are minimal. Flat fees are common in the realm of ACH processing, so expect to pay between 20¢ and $1.50 for them. 

Sometimes ACH processors will charge a percentage (as with credit cards), but when they do, it’s usually between 0.5% and 1.5%.

Credit cards that are swiped, on the other hand, are charged 1.5% and up.

Processing ACH payments makes great business sense, especially if you work with large-ticket items.

Another Benefit of Processing ACH Payments

We’ve learned that ACH payments are cheaper than credit cards, even though they tend to be a bit slower.

For the merchant, there’s another benefit to taking ACH payments, and that is that ACH payments provide a more predictable revenue stream.

This is because recurring payments are easy with ACH.

If your customer sets up a recurring payment with a credit or debit card, that’s great. But the thing about payment cards is that they expire — meaning that if your customer doesn’t catch it, their recurring payments to you will stop at some point.

ACH information doesn’t have an expiration date. So whereas expiring cards will eventually lead to churn, or customers involuntarily leaving you, ACH payments won’t. 

Churn is also known as the attrition rate.

How to Start Processing ACH Payments

Before you start accepting ACH payments, there is a little bit of setting up to do. Follow these steps:

Find an ACH Processor

Your first step is to find a provider that will process the ACH payments for you.

In case you already have a payment service provider, check to see if they will process ACH for you.  It’s a good idea to have just one entity processing all your payments, as having several different payment processors can quickly lead to headaches.

Banks also typically offer ACH processing, although not for free. 

Or you can check with the provider of your financial services software (such as QuickBooks).  And many payment service providers also offer ACH processing.

Easy Pay Direct will process ACH payments for you — for only 65¢ each!

Set Up Processes and Tools to Process ACH

Next, you’ll have to assemble all the procedures and software you’ll use to accept ACH payments.

The particulars of this step in the process will be different, depending on who your ACH provider is.  The following are pretty standard, though:

  • ACH Forms, which your customers will use to give you their banking information. Be sure to keep them secure, and destroy them after they’ve been entered!
  • An eCommerce website, which your customers can use as a self-service tool to enter their banking details themselves.
  • A virtual terminal, which you’ll use to enter your customer’s banking details.

Accepting ACH Payments is simple when you choose Easy Pay Direct as your payment services provider! 

We charge a flat fee of 65¢ to process all of your ACH transactions.

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