What Is ACH and How Does It Work?

Making payments electronically has become the norm, but what is an ACH payment exactly? 

ACH, or Automated Clearing House, is the nationwide electronic funds transfer system that allows money to move between bank accounts quickly and securely. In simpler terms, it’s what allows us to send money back and forth virtually without having to whip out our checkbooks or carry cash at all times.

These types of ACH transfers have soared in popularity for everything from direct deposit paychecks to online bill payments. In this guide, we'll explore how the ACH network facilitates these transactions, examine the key benefits driving ACH adoption, and review the regulations that govern these transactions.

What Is an ACH Payment?

An ACH payment is an electronic money transfer that moves money from one bank to another via the Automated Clearing House (ACH) network. Compared to other methods like card networks, wire transfers, paper checks, or cash, ACH payments are a more reliable way to send or receive money. 

To make ACH payments, you can use either savings or checking accounts to make transfers in the United States, Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands. While ACH payments can be made internationally, such transactions favor wire transfers over  ACH payments, as it can take a couple of days and not all banks and credit unions offer the same services. 

Still, the National Automated Clearing House Association (Nacha) recently reported that the ACH Network securely handled 31.5 billion payments valued at $80.1 trillion in 2023. Payment volume for the year was up 4.8% from 2022 while payment value grew 4.4%. ACH payments are gaining traction in the U.S. and other places worldwide, especially with online retailers who want to offer a more convenient and beneficial way to handle money transfers.

How Do ACH Payments Work?

The Automated Clearing House network processes fund transfers to and from different customer accounts, and there are generally two types of ACH transfers: the direct deposit and the direct payment method. 

• Direct deposits mean that you receive money. This kind of deposit, also known as direct debit or EFT, is typically from a business or government entity to a consumer. This may include an employer who deposits your check directly into your checking account or government tax refunds.
• Direct payments are when funds go out of your account and into a different one. Whenever you pay a bill online with your bank account rather than mailing in a check, you’re using ACH direct payments. Consumers often use this same method for electronic payments — like sending a Venmo payment to your friends, family, or business.

Receiving an ACH payment will show up in your bank account as an ACH credit. Paying someone using an ACH direct deposit will show up as an ACH debit, with who was paid and the amount. 

You can think of an ACH transaction as a data file that has specific information about the payment being processed. That file is first sent to the sender’s bank, also known as the Originating Depository Financial Institution (ODFI). Then the file is sent to the Clearing House, which regulates debit transactions happening in the ACH network. Finally, the request is sent to the recipient’s bank, or the Receiving Depository Financial Institution (RDFI), where the funds are transferred to a specific account, like the recipient’s checking account or savings account. 

How Long Does an ACH Payment Take?

ACH payments or deposits can take three to five business days to finish. They are processed in batches, usually three times a day; this means ACH transactions aren’t instantaneous as payment processing and bank transfers will usually take a couple of days before the proper transfer of funds show up in someone’s bank account. Additionally, transfers can be delayed even further if they’re sent after a bank’s daily cut off time.

Let’s say, for example, that you get paid every other Friday — your paycheck doesn’t typically hit your account until the following week, like on a Tuesday. This doesn’t mean that your employer or payroll specialist didn’t “send out” your direct deposit on payday; it simply means that your ACH payment hasn’t been batched yet. Since the weekend doesn’t include business days, you see that money a couple of days into your next work week.

What is an Example of an ACH Payment?

ACH payments are made constantly, even when we don’t realize it. An ACH payment is what allows us to pay our bills over the internet, send friends money for a quick meal, and donate to a cause we care about online. There are many instances of ACH payments all around us at all times, here are a few examples to help contextualize how ubiquitous it is. 

Direct Deposits

The most common types of direct deposits are:

• Payroll processing/paychecks
• Tax refunds
• Interest payments
• Annuity payments
• Employer-reimbursed expenses

For example, once you file your taxes for the year, any tax refund the government owes you will show up in your checking account (or whatever account you submit when you file). At the end of your filing, you can select the direct deposit method and provide both your bank’s routing number and your account number. Once the government has reviewed your tax forms and finished authentication, they deposit your tax refund directly to your account. This digital deposit is processed by using the ACH network.

Direct Payments

When paying someone else rather than receiving money, there are many potential scenarios. Consider ACH payments like:

• Paying a bill online using your bank account
• Setting up recurring payments (like your monthly phone payment)
• Donating money to a charitable organization
• Payment apps to send funds to someone’s bank account

Let’s say a university’s new semester is starting in a couple of weeks. Students need to get their tuition payment funds transferred as swiftly and securely as possible. Instead of sending a check to pay for their tuition in the mail (which takes time to process and is less secure), students can make a direct payment online. By providing their banking information and authorizing their bank to transfer funds to their school, each student can make their tuition payments on time with just a few clicks.

5 Benefits of ACH Payments

What is the point of an ACH payment? Is it really that different from making a money order or paying for things over the phone?

You may not even realize how often you benefit from ACH payments, which goes to show just how streamlined ACH payments have made transferring money. If your customers make payments online and enjoy the mostly hassle-free process, you’re likely using ACH methods to do so. 

Think about the many automated payments you make each month or year to year — ACH is woven into a lot of modern commerce. Here are some of the best advantages of ACH payments and deposits.

1. More Reliable and Direct

The first benefit most consumers and businesses notice with ACH transactions is how easy and simple they are. Instead of writing a check every time you need to pay your babysitter or running to the bank to get that cash you owe your friend, you can send money right from your phone. Businesses can use this online payment method, too, which makes receiving or sending money easier and more secure.

Automated payments are also made through ACH methods, and ACH allows you to determine when you get paid or when you make a transfer too. For example, you can decide the transfer date, how frequently those payments are made, and customize the amount. This helps eliminate the risk of late payments and optimizes business cash flow.

2. High Consumer Retention

Debit and credit cards can decline or expire, whereas bank accounts are evergreen. It’s highly  unlikely that a payment cannot be extracted from a bank account — as long as the funds are there, the bank account is open, and the account is locatable, money can easily directly transfer. This adds far more security to consumers, who don’t have to worry that their card will be rejected or expire and make them late on recurring or automated bill payments. 

3. Cheap or Free

For both the consumer and the merchant, the most notable benefit of ACH is how affordable it is to implement and use – ACH is actually cheaper to accept than card payments. 

Card networks can charge 1.3–3.5% as a standard fee for processing payments. On average, the cost for processing ACH payments is $0.29 per transaction, though it ranges from $0.25 to $0.75. This amount will vary depending on whether you access funds directly or use a third-party payment processor. The larger your transaction volumes, the less you tend to pay for transactions, so bigger companies especially benefit from ACH payment methods.

4. Automation Integration

Because ACH payments can be automated, businesses find that the administrative duties of processing payments and bills can be significantly cut down, especially when ACH tools are integrated with accounting software. This gives more time back to employers and business owners.

5. Easy to Implement

Another great element of ACH transactions is how easy it is for businesses to switch to this payment system rather than relying solely on cards. Consumers can make online payments without having to finish a big “to-do list”; all a business needs from their customers is the account holder's name, the routing number, the ABA number, the account number, and the amount being transferred.

Are There Drawbacks to Using ACH Payments?

Like most forms of payment, there are some limitations when using ACH payments. ACH transfers are easy to implement, but sometimes there are caps on how many transactions you can initiate. And, as previously mentioned, international ACH transfers aren’t quite as practical. It’s also possible you may have to pay extra fees, or there may be delays in sending or receiving funds across borders.

Despite these constraints, ACH transfers are still more popular than ever. A wire transfer, for example, is usually a same-day transaction that costs more, but same-day ACH transfers are gaining traction. Some banks may create limits on transfer destinations, like not allowing international transfers. But the right bank will offer greater and more affordable flexibility. Nacha is discovering and implementing better tools and improving the ACH process, and with the right banking service, you can enjoy a seamless ecommerce experience.

Regulations Governing ACH Transfers

ACH payments are regulated by a comprehensive set of rules and laws to ensure security, consistency, and proper oversight. The primary governing body is Nacha, which develops the Nacha Operating Rules for the use of ACH payments. 

The Operating Rules provide a legal framework for every ACH transfer. They define the roles and responsibilities of all parties involved, including originating and receiving financial institutions. The Rules also dictate standards for data security, authorization requirements, formatting for payment information, and more.

While Nacha oversees the ACH payments network policies and practices, the Federal Reserve plays a central role as well, influencing and enforcing regulations around fees, funds availability, risk management, and auditing of the ACH system. 

Beyond these core governing bodies, a number of other federal laws and regulations also come into play with ACH use, such as:

• The Electronic Fund Transfer Act
• Regulation E rules on electronic transfers  
• Rules around the BSA and anti-money laundering programs
• FFIEC information security standards

Financial institutions and any companies originating ACH transfers must ensure full compliance with all applicable Nacha, Federal Reserve, and other regulatory requirements. This governance provides standardization, security, and efficiency to the entire ACH network.

Collectively, the Nacha Operating Rules, Federal Reserve policies, and other regulations create a comprehensive legal infrastructure that allows both small businesses and consumers alike to use ACH transfers with confidence.

How Open Banking Combats Risks and Fraud Associated With ACH

According to Nacha, 2023 marked the 11th consecutive year in which ACH Network value has increased by more than $1 trillion. 

Same Day ACH volume increased 22.3% and 41.2% in value, to 853.4 million payments worth $2.4 trillion. Since its inception in September 2016, Same Day ACH volume has surpassed 3 billion payments and $6 trillion. However, with increased ACH volume and value comes increased risk. 

According to the Federal Trade Commission, people reported losing $10 billion to scams in 2023. That’s $1 billion more than 2022 and the highest ever in losses reported to the FTC, even though the number of fraud reports (2.6 million) was about the same as last year. In 2023, consumers reported losing more money to bank transfers and cryptocurrency than all other methods combined. 

Although ACH fraud is still relatively rare, merchants should take care to implement safeguards if offering ACH payments. 

ACH payments are particularly susceptible due to the manual input of accounting and routing numbers. This leads to many common fraud schemes: insider threats, data breaches, check-kiting scams, and more. The risks associated with ACH have historically made many merchants shy away from using the payment option. 

Additionally, unlike wire transfers, ACH transactions can be recalled — and the returns process can be complicated. Lastly, with ACH payments running in batch transfers at night, payments can take longer to appear in the receiving account. 

Trustly’s Open Banking technology helps merchants leverage all of the benefits of ACH payments without the risk. Broad connectivity combined with machine learning effectively guarantees payments in real time, eliminating the risks of ACH returns. Plus, Trustly leverages user-permissioned financial data to perform multi-factor authentication on behalf of the consumer, helping protect against fraud and human error. 

Ready to Harness the Power of ACH Payments? 

ACH transfers have become a staple of the modern financial system, allowing consumers and businesses alike to move money around easily. Plus, with clear benefits like reliability, low costs, automation capabilities, and ease of use, ACH adoption will likely continue growing. 

And while understanding the regulatory oversight of ACH is important, innovations like Open Banking are further enhancing these types of payments by increasing their security and the speed at which these ACH transfers are handled. 

Download our free e-book to learn more about how Open Banking is transforming ACH into modern payments that are fast, frictionless, and cost-effective.