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How Does ACH Payment Processing Work?

ACH payments are a popular means of transferring funds, especially for small businesses. But what, exactly, is an ACH payment, and how is it processed?

ACH stands for “automated clearing house.” This is an electronic network that connects every bank in the US and allows for a seamless transfer of funds via computer. It is, essentially, a way to write an electronic check.

There are many applications for ACH transfers, but some of the more common uses for small businesses include:

  • Automated bill pay
  • Direct deposit for employee paychecks
  • Tax payments
  • Vendor payments 

An ACH payment is also known as an Electronic Funds Transfer (EFT). 

What is an ACH Transfer?

ACH and EFT payments utilize banking information to either send or receive money from an authorized account. The transactions fall under two categories: credit and debit.

When the ACH is used to send money, as in the case of employee payroll, this is known as an ACH “credit” transaction. 

When an EFT involves pulling money from another account as payment, this is called a “debit” transaction. ACH/EFT debit transactions are typically recurring bill payments, such as mortgage and utilities. 

In either case, a bank account number and a routing number (or blank check) are required to set up the transfer of funds. Funds are sent and received based on direct communication between the Originating Depository Financial Institution (your bank, perhaps) and the Receiving Depository Financial Institution (your mortgage lender’s bank, maybe). 

ACH Payments versus Wire Transfer

In theory, ACH payments may sound a lot like wire transfer. Funds are sent electronically from bank to bank, after all. This is really where the similarities end, however. 

A big difference between ACH transfers and wire transfers is the time it takes to receive the money. Wire transfers are processed in real time and arrive within hours of the request. ACH payments, on the other hand, are processed in batches around three times per day. This means it can take, on average, 3-5 days to receive these payments. 

Because of this, wire transfers tend to be much more expensive than ACH payments. They are usually employed in case of emergency, while ACH/EFT transfers are utilized for expected or recurring payments. 

Why Would You Want ACH Payments Instead of a Debit or Credit Card?

The main reason business owners like ACH transfers is because they are typically much less expensive to process than credit and debit cards. While credit cards can charge up to 2.5% of the total sales price (plus additional fees like convenience and service fees), ACH merchant services providers generally charge no more than 1 percent. 

This is not to say there aren’t drawbacks associated with accepting ACH payments. Aside from the increased processing time, ACH payments are not guaranteed. Because of this, you always run the risk of an EFT being denied for reasons like insufficient funds. 

Get Help Setting Up Merchant Services

In the end, most business owners opt for a combination of card and ACH payments. They can reap the benefits of quick processing and guaranteed funds in the form of credit and debit cards, while saving money on recurring transactions using EFTs.

Discussing your options with a qualified merchant services broker is a great first step in setting up your payment processing system. At Summit Payments, we are well-versed in all aspects of payment processing, from security compliance to the latest trends. Contact our office to get started today.