An ACH payment is a fast, convenient, and affordable way to send a bank-to-bank transfer electronically. However, there are stipulations when it comes to how you can send an ACH payment and what it takes for the recipient to receive it.
If you’re new to ACH payments, then don’t worry— Sila has you covered with this guide to ACH payments.
In this guide, we will cover the following:
- What ACH payments are
- How an ACH transfer works
- The ACH Network
- Initiating the ACH payment process
- ACH payment processing closing
- The speed of an ACH transaction
- The cost of an ACH transfer
- Tools and resources needed to make ACH payment
- Secure and ACH regulations
- And ways to incorporate ACH payments into your financial model
Here is your complete guide to ACH payments!
Table of contents
If the term ‘ACH payment’ is sounding foreign to you, then don’t fret. Chances are you have interacted with an ACH payment in your life.
An ACH payment, for example, is how an employee receives a direct deposit from an employer in the United States. This payment goes through the Automated Clearing House (ACH) Network and is automatically checked to ensure that the payment is legal, accurate, and legitimate.
Sending money via an ACH transaction is the most common method for sending electronic payment. This popularity is due to several factors, including the fact that ACH transfers are far more affordable and more secure than other payment methods.
There are two terms related to sending an ACH transfer: an ACH debit and an ACH credit. The ACH debit is when the Originator, who makes the ACH payment request, will have money taken out of their account. An ACH credit is the reverse, and the Originator will have funds deposited into an account. The ACH debit is the most common; you might experience an ACH credit when someone is issued a refund.
How ACH Payments Work
As a consumer, sending an ACH payment or requesting an ACH transaction is relatively simple. Your financial institution, like your bank or credit union, most likely has this process set up and ready to be used through online banking. This is known as the ACH system.
In order to send an ACH payment, the following information is required:
- The name of the bank account of the recipient (other party)
- Their bank account number
- Their ABA or routing number
- Sometimes their transit number
- And the amount, date, and frequency of the ACH payment
Of course, to send an ACH payment, your banking information is needed as well. If you are sending the ACH transaction through your financial institution, they already have your banking details, and you are not required to input any information manually.
The ACH payment process looks something like this:
- The person who starts the ACH transaction request, known as the Originator, inputs all the relevant information (from above).
- The bank receives the payment entry form.
- The bank, known here as the Originating Bank, can process the request, and that day or the following day, the payment request is sent to the Clearing House.
- The payment entry request (or ACH file) will be submitted in a batch along with other ACH payment entry requests submitted by other members of that bank.
- The Clearing House confirms that the information provided is accurate and then it completes the request by sending it through the Federal Reserve and then finally to the Receiving Bank.
- It is recommended that the Receiving Bank wait at least 48 hours to send the payment to the recipient so that it is confirmed that the money has been “cleared” by the Clearing House. If a return code shows up, the money cannot be sent, and the RDFI needs to send that information back to the ODFI.
- Once the pending period has passed, the money is then available in the recipient’s account.
An ACH payment can usually only be initiated with an entity or business that is widely recognized as being able to receive these payments. So, for example, you cannot send money to a friend through an ACH payment. However, you can pay a bill, deposit money into a savings or IRA account, or get paid through direct deposit.
The ACH Network
To regulate this process, the ACH Network was established. This Network is comprised of registered private banks and financial institutions in the United States, the Federal Reserve, the Automated Clearing House, the National Automated Clearing House Association (NACHA), and us, the people who send ACH payments every day.
To be included in the ACH Network and to be considered as an ACH Operator, or someone who facilitates the money transfer, the financial institution must be approved by NACHA as well as follow all the guidelines around money transfers.
Once approved, the financial institution is considered to be an ODFI and an RDFI.
- An ODFI stands for the Originating Depository Financial Institution and is the financial institution approved for originating or initiating an ACH payment.
- The RDFI stands for the Receiving Depository Financial Institution, and it indicates that the bank is the one facilitating the receiving of funds. The RDFI usually processes the return codes.
It is up to the RDFIs and ODFIs to maintain compliance with NACHA regulations, to not pass fraudulent ACH transfers, and to protect their consumers against fraudulent ACH transfers.
Initiating the ACH Payment Process
If you are interested in initiating the ACH payment process, you will first need to identify whether or not your financial institution is ODFI or RDFI approved. If it is, then good news—you can send an ACH payment!
Sending an ACH payment through your bank is simple and can usually be done through online banking. If your bank does not have an online banking center, you will need to visit a branch to send money.
To send an ACH payment, you will have to be a member of an approved bank already. The bank would then have the personal banking information required to submit payment. You also need to make sure that the account you wish to use is still open and has the necessary funds available for the ACH debit.
An ACH payment can be submitted online at any time. It will only be processed during regular banking hours.
You will need the following information to initiate the ACH payment process:
- The name on the bank account of the recipient
- The bank account number
- The ABA or routing number
Once you plug in this information, you can then provide the amount that you wish to send (to be debited from your account) and how often you want this payment process to occur. Recurring payments are very common with ACH transactions and can be used to pay regular monthly bills or make frequent contributions to a savings account.
When sending an ACH payment, your options aren’t entirely endless. Here are the ACH limits for the top 10 banks as of February of 2020:
- Bank of America: $3,000 per day or $6,000 per month for standard delivery and $2,000 per day or $5,000 per month for next-business day delivery
- Chase: $10,000 per transaction or $25,000 per day
- Wells Fargo: Varies depending on your account history but typically $5,000 per day
- Citibanks: $2,000 per day or $10,000 per month
- Capital One: $10,000 per day or $25,000 per month
- U.S. Bank: Varies depending on your account history but typically $2,500 per day
- PNC Bank: $2,000 per day or $5,000 per month (transfer limits may be reviewed and raised if you have positive account history)
- TD Bank: Varies depending on your account history but typically $3,000 per month
- BB&T: $5,000 per day or $12,500 per month
- SunTrust: $10,000 per day or $20,000 per month (inbound) and $2,000 per day or $10,000 per month (outbound)
Major banks in the U.S. limit the amount of money that can be sent daily and monthly to $2,000 per day based on the UFB Direct impositions. Some of these banks allow ACH transfers past this recommended limit, which is great for customers who want more flexibility in how they move their money.
Closing the ACH Payment Process
When closing the ACH payment process, there is not much that needs to be done due to how the ACH payment system is set up.
When the banking information is provided to the ODFI to initiate an ACH payment, the Clearing House and the Federal Reserve have all the information that they need to complete the ACH payment request.
There are, however, a few things that might hold up an ACH payment. For example, the name of the recipient may not be correct when the Originator made the initial request. The ODFI would not be able to catch this because they do not have access to this information. Only the receiving bank can identify if the recipient’s information is correct.
Additionally, the ACH request might be returned if there were insufficient funds in the originating account. While there might have been sufficient funds in the account when the request was placed, things change. If money was removed from that account before the ACH request was processed, the ACH payment would be halted and returned.
When closing the ACH payment process, both parties must ensure that the account to be debited is still active and that there are sufficient funds available. Failure to do so will result in a failed ACH transaction.
Speed of ACH Payment
Consumers love ACH payments because they are very affordable and secure. However, because of security features, the funds that are sent are not immediately available. In fact, the ACH transfer might take anywhere from 1 business day to 4 business days before the funds are fully available.
Why is this?
Well, to be safe, the Automated Clearing House requires each RDFI to ensure that the banking information is correct. To complete this process, there needs to be at least a 48 hour holding period where the funds are not yet available. This hold allows the bank to ensure that the ACH payment was not fraudulent and that the funds are still in the account when they are pulled. In essence, this “lag” of 1 business day to 4 business days is to ensure accuracy and security.
The amount of time it takes to process an ACH transaction may change depending on how the bank submits the ACH payment. There are two ways to submit an ACH payment: a same day ACH payment and a standard payment.
The same day ACH payment allows the ODFI to submit two batches of ACH payment requests in one day. ACH payment requests are not submitted individually but as batches for ease and organizational purposes.
The standard payment option allows for only one entry request batch to be sent daily. Therefore, if your bank uses the standard ACH payment method, you will usually have to wait until the end of the next day before your payment is sent off. It all depends on processing timelines. Sometimes your ACH payment request will be included in that day’s batch, but you cannot count on this.
If your bank uses same day ACH payment, the payment request is submitted at the latest by 5 pm EST.
As of right now, ODFIs can submit same day ACH payments through two clearing windows:
- 10:30 AM ET, with settlement occurring at 1 PM
- 2:45 PM ET, with settlement occurring at 5 PM
By 2021, banks will be able to submit same day payments in 3 daily batches, decreasing the time it takes for ACH payments to be processed.
If your bank uses the standard ACH payment method, you should expect at least 3 to 4 business days for that payment to be processed.
RDFIs are required to receive same day ACH payments and they are mandated to make funds available from same day ACH credits to the depositors by 5 PM local time in the RDFI’s local time.
Virtually all ACH transactions (99% of the current ACH volume), including both ACH credits and ACH debits, are eligible for this type of processing. International transactions (IATs) and transactions above $25,000 are not eligible.
Usually, higher yield banks will be submitting ACH payments using the same day payment method, but be sure to inquire with your bank before initiating the ACH payment process.
Cost of ACH Payment
There is usually a nominal fee for sending an ACH transaction, but the actual cost of this fee will depend on the bank.
According to MyBankTracker, as of February of 2020, these are the ACH fees for the top 10 banks:
- Bank of America: $3 for standard time delivery and $10 for next-business day delivery
- Chase: $0
- Wells Fargo: $0
- Citibank: $0
- Capital One: $0
- U.S. Bank: $0 for standard time delivery from other institutions, $3 for standard time delivery to other institutions
- PNC Bank: $0 if done online and $3 if assisted in branch
- TD Bank: $0
- BB&T: $3 for standard time delivery and $10 for next-business day delivery
- SunTrust: $3 for standard time delivery and $6 for next-business day delivery
Sometimes the bank subsumes the fee for clients with a premium checking account. Additionally, fees are usually tacked on when setting up an ACH payment from a savings account, but this is not always the case.
The cost of processing an ACH transaction might diminish if using an ACH payment API. But in general, ACH transaction costs are very minimal, ranging from $0.20 to $1.50 per each transaction.
Here are some variables that might affect an ACH transaction fee:
- The average transaction size
- The volume of transactions submitted by the company you are submitting your ACH transaction to
- Whether or not your provider uses same-day ACH
- The size of the bank
- Monthly ACH transfer fees
- Personnel costs of the provider or the third-party payment processor (TPPP)
- Batch fee (typically per batch, < $1)
- Incidental fees; NSF fees (ACH return or bounce)
- Incidental fees; the ACH needs to be charged back (refund)
- How a bank charges fees (percentage or flat-rate)
- Any hidden fees
Security and ACH Regulations
ACH payment processors are guided by Regulation E of the Electronic Funds Transfer (EFT) Act, OFAC, the CCPA and GDPR, and the National Automated Clearing House Association (NACHA) Operating Rules.
To comply with customer privacy laws and data protection laws, all banking information must be kept encrypted and sent over a secure network. RDFIs and ODFIs must also ensure the following:
- Customers are approved through Know Your Customer (KYC) or Customer Due Diligence (CDD) rules
- Banking information is stored securely in protective on-site and cloud storage, using Payment Card Industry Data Security Standard (PCI DSS) approved hardware and software
- ACH transfers are verified to follow the Office of Foreign Assets Control (OFAC) regulations to protect against financial crimes from foreign entities
- All accounts have multi-factor authentication allowed and privileged accounts require increased security
- Third-party service providers are vetted
ACH payments are sent online so each transaction must be verified secure. Any data that is collected as part of the transaction must also be stored securely.
Implementing ACH Payments
As an ACH operator, businesses will need to educate clients on the limitations of ACH payments and processing. Companies are also subject to specific financial requirements based on location and services to obtain financial credibility.
Trusted customers can set up long-term payment plans, like recurring bill payments, in the form of ACH payments. Customers who only want to send one or two payments can also be set up through a third party app or payment gateway.
ACH payments can be easily integrated into all types of financial payment systems. For a smaller business entity, ACH payments are integrated through a third party payment processor, payment gateway, or digital wallet. A business banking platform will also allow some degree of ACH payment processing, but the extent of that processing will depend on the account.
ACH payment APIs can also be easily integrated into an eCommerce platform, financial software, or a POS system. ACH APIs open up what is possible when sending money, so your customers can quickly send money through a mobile app or use cryptocurrency to bypass currency conversion limitations without the hassle of using a credit card.
Tools and Resources Needed for ACH Payments
Here are some tools and resources that you will need when navigating ACH payments as an ODFI, RDFI or ACH Operator:
- NACHA Operating Guidelines: https://www.nacha.org/rules/operating-rules
- Office of Foreign Assets Control: https://www.treasury.gov/about/organizational-structure/offices/pages/office-of-foreign-assets-control.aspx
- IAT Guidelines: https://www.nacha.org/content/international-ach-transactions-iats
- List of Return Codes: https://www.nacha.org/rules/differentiating-unauthorized-return-reasons
- Federal Reserve Automated Clearinghouse Services: https://www.federalreserve.gov/paymentsystems/fedach_about.htm
- Consumer Financial Protection Bureau: https://www.consumerfinance.gov/
If you are a CFO or CEO and want to learn more about ACH payments, you can also look to these resources:
- Sila’s ACH Glossary:
- Sila: https://silamoney.com/blog/
- NACHA News: https://www.nacha.org/news
- NACHA: https://www.nacha.org/
- NIST: https://www.nist.gov/
- PCI: https://www.pcisecuritystandards.org/
- Cost of an ACH transaction: https://silamoney.com/2020/05/18/processing-costs-for-ach-transactions/
- Processing time of an ACH transaction: https://silamoney.com/2020/06/16/how-long-does-an-ach-transfer-take/
- Common return codes: https://silamoney.com/2020/06/02/ach-return-codes/
- ACH payment fees: https://silamoney.com/2020/06/09/do-ach-payments-have-fees/
- Security best practices for payment data: https://silamoney.com/2020/07/03/security-best-practices-for-ach-api-payment-data/
Your Guide to ACH Payments
The ability to process ACH payments gives your customers more flexibility in terms of how they spend their money. ACH payments are considered to be more secure than a credit card or debit card, faster than a wire transfer, and the most affordable way to send money electronically in the United States.
By adopting ACH payment processing into your financial platform, you will be able to cut down on operating costs and diminish financial fees associated with credit card transactions. This will also show your customers that you are making a concerted effort to make the financial process simpler and more reliable. Consider implementing an ACH API with Sila’s app today!