What is an ACH payment: A complete guide

Automated Clearing House is used to electronically transfer money between banks. Explore what ACH payments are and how it works to send money hassle-free.

Understanding the many ways to send, transfer, and receive money is essential to sustaining your business as a merchant—and that starts with ACH payments.

In this article, we’ll break down the basics of ACH payments, including:

  • What is an ACH payment?
  • How ACH payments work
  • Types of ACH payments
  • What to know about ACH vs. direct deposit
  • Pros and cons of ACH payments
  • Alternatives to ACH payments

What is an ACH payment?

ACH, or Automated Clearing House, is a direct payment method that can electronically transfer money between banking networks in the United States.

Here’s how ACH payments work: These electronic transactions allow business owners or their customers to debit funds directly from their respective bank accounts instead of processing a transaction via credit card, paper check, wire transfer, or cash. In other words, ACH payments facilitate the transfer of funds between bank accounts via a centralized clearing system.

Here are a few common examples of ACH payments:

  • An employee who receives their bi-monthly paycheck via direct deposit from their employer
  • A customer who pays a bill via ACH payment instead of writing a check
  • A person who receives a tax refund or interest payment straight into their bank account
  • Someone who uses mobile payment apps like PayPal or Venmo to send money to friends and family

Read on to learn more about ACH payments and how they can help you send money easily.

Types of ACH payments

There are two types of ACH payments: credit and debit. Here’s what they mean:

  • ACH credit: A business or entity can use this method to move money into another bank account outside of their own. For example, an employer pays an employee via direct deposit, or a person receives a tax refund from the government. In these cases, money leaves one account and is deposited into someone else’s account.
  • ACH debit: This type of ACH payment describes a business or operation pulling money from someone’s account (i.e., a customer). For instance, when a customer pays a bill via direct pay, the money is “pulled” out of their checking account to complete the transaction.

ACH vs. direct deposit

Is ACH the same as direct deposit? Here’s the difference between ACH and direct deposit: Direct deposits fall under the umbrella of ACH payments. Because direct deposit is a specific type of ACH payment, it primarily focuses on depositing funds directly into an individual's account.

In general, ACH refers to a system that can electronically move funds between bank accounts for various types of transactions, including deposits, withdrawals, and transfers. When it comes to ACH direct deposits, they’re commonly used for employee payroll.

ACH payments common transaction terms

In the world of ACH payments, it’s important to familiarize yourself with common transaction terms that may come up when sending or receiving money.

  • Settlement pending: After the transaction is submitted to the banking network, it is labeled as settlement pending.
  • Failed: This status indicates an error has occurred when submitting the transaction.
  • Settlement declined: If the settlement is declined, it means the banking network will return the transaction within three business days, and the funds will not be disbursed. A fee may apply here.
  • Settled: The transaction was not returned in the three-business day timeframe, which means the funds will be disbursed. If a return is received after a transaction has "settled," the status will remain “settled.”

How long does an ACH transfer take?

The short answer? A couple of days, at least. ACH payments are not an immediate payment method like a credit card. Instead, they are processed in batches based on when the transaction is submitted. On average, an ACH payment can take three to five business days to process.

Keep in mind: With ACH, there are no prior authorizations as there are with credit card transactions, so a receiving bank may choose to hold back the money while they verify that the originating bank has sufficient funds available to complete the transaction without issue.

What information is needed for an ACH payment?

Before sending an ACH payment, you’ll typically need the following information:

  • The recipient’s bank account number and bank account type
  • The recipient’s routing number
  • The account holder’s name
  • Transaction or payment amount

Pros and cons of accepting ACH payments at small businesses

Why use ACH to accept payments? From saving time to avoiding potential fees, there are numerous benefits of ACH payments for small businesses, as well as some drawbacks to make note of.

Pros of ACH payments

As a business owner, here are some potential benefits of ACH payments:

  • Convenient and seamless compared to other payment methods.
  • Allows customers to avoid credit cards, wire transfers, and paper checks.
  • Lower processing costs compared to credit cards.
  • Faster alternative to payment methods like paper checks.
  • Varied payment methods offered to customers can lead to a better overall customer experience.
  • Can be a secure payment method with encryption and authentication measures.
  • Integrations with accounting software for simplified record-keeping and reconciliation processes.

Cons of ACH payments

There are some disadvantages and limitations of ACH payments, such as:

  • Speed, as it can take several days for transactions to be processed.
  • Location, as ACH payments can only be made in the U.S. Payments between international bank accounts are not possible.
  • Daily and monthly caps on how much money can be sent or received.
  • Cutoff times, as an ACH payment may not be processed until the next business day, depending on when it is sent.

Why some ACH payments can be rejected?

There are some reasons why ACH payments can be rejected, including:

  • Insufficient funds: When a customer does not have sufficient funds to cover the amount of the payment.
  • Bank account closed: If a customer closes a previously used account for ACH payments and forgets to update the transaction with the new account.
  • Unable to locate bank account: Banking details are incorrect or do not match bank records.
  • Payment stopped or authorization canceled by customer: Customer cancels the transaction.

Alternatives to ACH payments

Beyond ACH payments, you may utilize alternative payment methods and checkout payment methods provided by PayPal, such as:

  • Digital wallet, which holds various payment methods for customers in one convenient digital portal.
  • Pay Later, in which buyers can pay for a purchase over a period of weeks or months while the merchant receives the funds upfront.
  • Cryptocurrencies, which allow users to check out with crypto.

Learn more about accepting payments with PayPal.

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