What is an Automated Clearing House (ACH)?

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Almost everyone has had some form of ACH payment deposited in or withdrawn from their banking account. Despite this, few of us truly understand what automated clearing house transactions mean and how they function in the real world. ACH transacted approximately 23 billion electronic transfers in 2018. This number is only expected to rise in the future.

With this in mind, what exactly is ACH? Today we will review how ACH networks transfer funds electronically, how ACH payments impact small businesses and answer a few commonly asked questions about automated clearing house and automated clearing networks.

Automated Clearing House (ACH) Definition

Automated Clearing House (ACH) Definition

It is important to understand that ACH is not a generic term. Unlike credit card transactions, debit card transactions, or even bank wires, ACH refers to a form of Electronic Funds Transfers (EFT) controlled by a specific organization. The Automated Clearing House Network is owned and operated by the National Automated Clearing House Association, now known simply as NACHA.

NACHA is a non-profit organization that developed ACH transactions initially as a form of direct deposit. Direct deposit payments continue to be the most common form of ACH transactions in the United States.

Most individuals and organizations send and receive more ACH transfers than they likely realize. ACH handles direct deposit, social security distributions, mortgage payments, paying your credit card bill, and many other everyday electronic funds transfers.

How ACH Networks Move Funds Electronically

From the perspective of a small business, ACH transfers are either considered ACH debits or ACH credits. There are several steps that take place behind the scenes which facilitate ACH transfers from beginning to end. At a high level, these steps include:

  • The transaction must be created/requested: this frequently includes a recurring payment, but may also be manually input. The user must identify his or her bank information and where the funds are being sent.

  • ACH then classifies each debit or credit as either a Direct Deposit or a Direct Payment.

  • Direct deposits are used to pay employees, for employee reimbursements, paying employee benefits, interest payments, tax refunds, and/or annuities.

  • ACH direct payments are either requested as a push or pull between two banks or credit unions.

  • ACH transfers settle by the next day in the majority of cases. Note that NACHA guidelines dictate that all ACH transfers must settle within 1-2 days.

Why Should I Consider Using ACH Electronic Transfers?

Why Should I Consider Using ACH Electronic Transfers?

There are several reasons why small businesses should consider utilizing ACH transfers for paying bills, paying salaries, or even transferring funds, including:

ACH is a safe and secure method of electronic funds transfer. Accepting ACH transfers is great for small businesses as it is similar to accepting any other form of EFT with low costs and high security. ACH transfers can be made remotely over long distances.

ACH is often less expensive than processing credit cards. Credit card processing fees can add up in a hurry. ACH is a great option for collecting regularly scheduled payments and other electronic transfers.

ACH transfers are fast and easy. As we discussed in the previous section, one of the primary benefits of using ACH EFTs is that they are extremely efficient. That is why so many employers around the country rely on ACH for crucial functions such as paying their employees and wiring funds to the IRS for tax purposes.

Automated Clearing House (ACH) FAQs

Automated Clearing House (ACH) FAQs

What are Automated Clearing Systems?

An automated clearing system is a more general term for what ACH does. Remember that ACH is an American version of a service that exists in various forms around the globe.

Why do I have an ACH Credit or ACH Debit on my Statement?

There are many, many reasons why “ACH Credit” or “ACH Debit” would potentially show up on your bank statement. Frequent reasons include electronic transfers for goods and services, moving money between various bank accounts, receiving direct deposit, auto-paying bills like utilities, and so forth. There is no reason to be alarmed when you see this verbiage, as ACH is used millions of times each day around the country.

Does it cost money to accept or send ACH transfers?

The ACH Network charges an annual fee plus an additional transactional rate. These payments are made to NACHA. These fees are intended to cover administrative costs of ACH transactions. Remember, NACHA is a nonprofit, and its mission is to provide secure EFT services without charging more than necessary.

True Merchant Offers Merchant Service Solutions for Small Businesses

Whether you are looking to start a new business, expand your business, or just make a change in merchant service providers, True Merchant has you covered. The payment processing professionals at True Merchant take pride in working with our clients to deliver tailor made solutions for businesses of all sizes. We provide hardware, software, security solutions, and help businesses process all manner of payments including ACH transfers.

To learn more about how we can help your organization grow, please contact us directly or feel free to explore our products and services. A member of our team will be happy to walk you through exactly what we do and find out how we can be of service to you today!