Mohammad Khan Yusufzai is Masters in Management, specializing in Economics, Finance and Marketing, with corporate & lectureship exp.
You have already used ACH payment and transfers. How?
For starters, you must have paid your bills online, or you have received your paychecks directly into your checking account. These are just two examples of how ACH works. Billions of U.S. dollars are moving daily, in a complicated but graceful manner through Automated Clearance House.
According to Nacha,(previously known as National Automated Clearing House Association is the organization responsible for these transfers and payments.) In 2020, the ACH Network processed 26.8 billion payments, marking the sixth consecutive year in which it added more than 1 billion new payments. The total value of these payments exceeded $61.9 trillion.
What is ACH?
Automated Clearance House(ACH) is a system in the United States for conducting financial transactions electronically.
Simply put, it is a way to transfer money online. It processes transfer requests in batches, typically 3 in a single business day.
Automated Clearing House (ACH) Transfers and Payments
ACH transfers are direct bank-to-bank money transfers that are processed electronically through the ACH network.
A.C.H. transfer is the more common name of A.C.H. payment.
Two U.S organizations made A.C.H. transfers possible for you:
The Clearing House and
the US Federal Reserve.
The Clearing House is owned by the largest commercial banks in the United States. As its name suggests, it is responsible for the clearing part of payment systems, such as wire transfers, A.C.H., and Real-Time Payments using the RTP network.
The Clearance House, uses EPN or Electronic Payment Network, to efficiently handle A.C.H. transfers. It alone is responsible for successfully conducting half of the US commercial A.C.H. operations.
The US Federal Reserve banks handle the rest of the ACH transfers.
How much do ACH Payments Cost?
ACH debit payments such as Payroll Direct Transfer and Bill payments are typically free. However, Bank might charge you extra for the early settlement of a bill.
ACH credit transfers, incur a fee of around $3-$5 for sending them to an account of a different bank.
There are no fees to receive A.C.H. funds. Some platforms such as Online Check Writer offer ACH transactions free.
Person-to-person payments that you initiate through third-party apps, such as PayPal, can cost a small fee, depending on the platform and payment method.
How Long it Takes to Process Your Payment
Usually, the settlement of A.C.H. transactions can take more than one business day.
In contrast to the real-time processing of wire transfers, A.C.H. transfers are processed only seven times a day by the bank.
Banks also offer to clear the credit request on the same day or the next business day. In contrast, Banks have to process debit transactions by the next day.
These timelines are based on rules from the NACHA for the convenience of the customers and the public.
Your bank might also hold the payment for some time. So the overall time to clear transfers and for the funds to reflect on the account varies from bank to bank.
Nacha also has provided for the same-day settlement of the A.C.H. transfer, without any additional fee. But it depends on your bank if it charges extra for clearing them on the same day.
What are the Types Of ACH Transactions?
Direct Deposit and Direct Payment (ACH)
Deposits initiated by the payer are Direct Deposits. The most common examples are your employer electronically transferring your salary into your checking or saving account, Social security transfers from the government, and tax returns.
Direct payments, on the other hand, are requested by the business and approved by you. automatic payment of recurring phone bills is an example of direct deposit where you authorize telecom operator to get money against monthly bill directly from your account.
ACH credit transfers (push payments) and ACH debit transfers (pull payments)
A credit transfer is one where the funds are pushed into the bank account. For instance, you are paying your phone bill online. Here, you are pushing the funds into the bank account of your telephone service provider from your account.
On the contrary, a debit transfer involves pulling funds from the bank account. Let's say you agree on paying your recurring insurance bills automatically. Here, you are authenticating your Insurer to pull money directly from your bank account and deposit it into the insurance company account. This is a type of A.C.H. debit transfer.
Same-Day ACH Transfer
Nacha has adopted a new rule to introduce same-day ACH in a phased manner. This provision will allow a same-day settlement of ACH transactions, affecting the existing transfers. All types of payments are eligible for same-day ACH processing, except, for transactions exceeding $25,000 and international transactions.
How do ACH Transactions Work?
Let's try to understand the A.C.H. process with the help of an example:
Let's say You gave your bank details such as account number and routing number to your employer company.
While giving salaries, the company will send an A.C.H. request to its bank.
Bank will then process the request and convert it into a file containing details such as:
Payee Bank details and the amount and payor bank details.
This file will go to either the federal bank or The Clearing House for processing in batches.
Your Bank will receive the file and after processing it, credit your account with the salary.
All other A.C.H. transfers follow the same process for transferring money between the banks.
What are the Differences Between Wire Transfers and ACH?
While both of them are types of electronic payment, Wire transfers allow making international payments. Meanwhile, A.C.H. transfers offer only to move money within the US. Other important distinctions between the two are
ACH Vs Wire
|Parameters||ACH Transfer||Wire Transfer|
2-3 Business Days
Bank Transfer only
Bank transfer, Debit&Credit Cards
Free or minimal processing fee
Never Free. Fees always Charged
Very Difficult to Reverse
This is the first part of the article on A.C.H . Hope I have cleared some ambiguity around the Automated Clearing House transfers. In the next part of the article I will try to answer remaining questions such as why you should use ACH transfers and how it fares against the prevailing and the new payment options. Happy Reading!!
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2021 Mohammad Khan Yusufzai