What is an ACH Payment? (2024)

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• ACH payments use the Automated Clearinghouse Network to move money between bank accounts.
• ACH payments take longer than wire transfers, but they cost significantly less money.
• ACH payments are useful for many situations, such as paying your bills or sending money to someone.

Moving money between people and companies has become an almost seamless process. You can transfer funds from your bank to a friend's checking account with the touch of a button. Monthly bills can be paid automatically without doing anything. And on payday, you can have your employer route the money straight to your account through direct deposit, eliminating the hassle of paper checks.

While all this may seem like one of the marvels of modern technology, you're actually using a decades-old system known as ACH payments. There are other means of moving money, like wire transfers, but ACH payments remain a crucial part of the financial system.

Introduction to ACH payments

Definition of ACH payments

ACH payments move money electronically among bank accounts through the Automated Clearing House Network in the United States. They can be used for international payments to and from U.S. accounts, but other countries also have separate transfer networks.

Companies use ACH payments to move money from business bank accounts into employees' personal accounts via direct deposit. Every day individuals also use ACH payments by transferring money from one bank or credit union account to another.

History and evolution of ACH

ACH payments are "part of a long-established, well-oiled machine that moves money from one bank account to another," says Ruby Walia, senior advisor for digital banking at Mobiquity, a digital consultancy. "For most people, it feels like that sort of happens invisibly, but it's a very essential pillar of the U.S. banking ecosystem."

The ACH Network is governed by the National Automated Clearing House Association or Nacha. Members include financial institutions and payment organizations that are involved with ACH transfers and the ACH network.

Nowadays, many payment systems you're used to, like Venmo and Zelle, use ACH payments to move money.

How ACH payments work

ACH network process

Nacha essentially maintains and operates what is analogous to a highway system, explains Walia. Then, to facilitate ACH payments, banks and credit unionstypically work with separate organizations known as payment processors that "act as the on-ramps and off-ramps to that highway system," he says.

ACH payments depend on payment processors sending batches of transactions as electronic files. The transactions are then cleared by one of two ACH operators, the Federal Reserve or the Electronic Payments Network before the money eventually gets credited to or debited from the relevant accounts.

Types of ACH transactions

ACH payments can be split into two main categories: direct deposit and direct payment.

With direct deposit transfers, payers can put money directly into recipient accounts. These transfers are ACH credits because the sender is pushing money into, or crediting, the recipient's account. For example, an employer can initiate a direct deposit transfer from its business bank account into an employee's bank account.

Direct deposits can also be used for other transactions like the government depositing Social Security payments into recipients' accounts.

In contrast to direct deposits, direct payments are ACH debit transactions where the recipient pulls money from the sender, though the sender gives permission for that to occur. For example, direct payments can be set up to automate bill payments.

If you give your banking details to your electricity provider to set up direct payments, then every month, that utility company can debit your account for whatever your monthly bill is.

Benefits of using ACH payments

Cost-effectiveness

ACH payments have different costs depending on the type of transfer and the parties involved, but the fees are generally much less expensive than wire transfer fees, which can go up to double digits.

For standard transfers, "Nacha charges a fraction of a penny per individual transaction. But the payment processors, companies like Stripe and Square, will charge a lot more," explains Walia. "They will charge as much as 50 cents per transaction (as a flat rate). In some cases, they charge a percentage of the amount being transferred."

Some of the best banks cover transfer fees for customers as part of their business models. In other cases, recipients pay.For example, "if your monthly gym membership costs $49.99, you'll pay $49.99. But the gym might only receive $49.49, because the payment processor and the bank took 50 cents off," explains Walia.

Efficiency and speed

ACH payment processing times can't keep up with something like wire transfers, which generally take less than a day. However, when comparing ACH payments versus traditional banking methods of transferring money, ACH payments are faster.

You can expect your ACH payment to go through within a few days of setting it up. In comparison, paper checks require you to get the check, find a time to give the check to its recipient, and then wait for the check to be deposited. Each of these steps adds to the time it takes for the transaction to complete.

They also require more action than ACH payments, which don't require anything from you once set up.

If you need your ACH payment to go through faster, you can set up a same-day ACH payment, but be warned: these come with higher fees, and your bank might also charge a fee.

Security features

ACH payments are much safer than manually transferring money through something like cash or checks. Whereas cash and checks are physical and can be lost or stolen, ACH payments are all digital. ACH payments are also handled by well-regulated institutions, such as Nacha and your bank. As such, the security features of ACH electronic payments are pretty similar to the security features your bank offers.

ACH payments can also be reversed under certain circ*mstances, unlike wire transfers. This means you're less likely to lose money if you make a mistake.

ACH payments for individuals

You can use ACH payments for several purposes, such as paying bills online and transferring money between banks. Even payment platforms like Venmo largely rely on ACH transfers behind the scenes, explains Walia.

For example, if you don't have enough money in your Venmo account to send money to your friend to split a dinner bill, you could still initiate a transfer through your linked bank account. Venmo would then essentially front the money into your friend's account. Meanwhile, an ACH payment would move the money from your linked bank account to Venmo.

Setting up ACH payments

The process you'll go through when setting up ACH payments will depend on who you're setting up the payment with and what you're using to set up the ACH payment.

If you're using something like Venmo, the process is pretty easy. You'll just need the Venmo account of the person you want to set up an ACH payment with. If you're going through your bank, you'll need more information, such as the other person's name, bank, bank account number, and routing number. If you contact your bank, it will be able to guide you through learning how to set up an ACH payment.

If you're setting up an ACH payment with, say, your work or your electric company, you'll likely need to provide them with your bank, bank account number, and routing number. If you have a check from your bank, it will frequently give you all the information you need to set up an ACH payment.

More about ACH payments

How long do ACH transfers take?

ACH transfers can take anywhere from a few hours to a few business days (or even longer), depending on factors like the type of ACH transfer and any holdups, like payment instruction errors.

Each ACH has to be cleared by the Federal Reserve or the Electronic Payments Network. This clearing generally occurs within certain settlement windows, as opposed to instantaneously, and depends on the Fed's system being open. That's why ACH transfers don't occur on weekends or holidays, though they can occur overnight.

Are there limits to ACH transfers?

Nacha puts a $1 million limit on how much money you can send in one ACH payment, but it's likely that the institution you're setting up your ACH transfer with will have much stricter limits.

For example, Zelle is a popular payment processing system that uses ACH transfers. It only lets you send $500 and receive $5,000 per week if you're not using it through your bank or credit union. Your bank or credit union will likely let you send more money than that in your ACH transfers through them.

Check with your bank or credit union to see what its limits are for ACH transfers.

ACH transfer FAQs