How ACH Payments Work?

How ACH Payments Work?
By alphacardprocess January 11, 2022

ACH, which stands for Automated Clearing House ,is a payment system created in the United States.It is considered as an electronic banking network that enables all kinds of transactions between banks and customers such as bill payments, debits and credits etc.ACH transfers are most often used by businesses to receive money from customers.For instance, when a company receives a bank transfer from a customer, it is considered as an ACH payment.

What is an ACH Payment?

To create an ACH payment ,a business will have to sign up for a merchant account with a financial institution that offer ACH services .After that it can start accepting payments from customers via checks or online directly to its bank account .At this point, the payment is routed through the Automated Clearing House. The customers have to give their consent before making an ACH payment.They must agree that they are authorizing a certain company or individual to move money from their checking account to another one .

ACH payments are suitable for recurring bills. For instance, imagine you have a gym membership. From the first visit to the last one, you are being charged on a monthly basis . You had signed up for this service because it was convenient for you. So ,you had also given your checking account number to the company in order for them to withdraw the fees each month without any trouble.

The main advantage of ACH is the fact that it’s easy to use. It can be used by individual or businesses for receiving or sending money. It is usually used by banks to make transfers within their networks.However, there are some ways for individuals and companies outside of bank networks to place an ACH transaction on their accounts. As mentioned earlier ,financial institutions offer ACH merchant accounts .

ACH Payment & the Network Rules:

A financial institution has to follow a set of rules and follow its policies as well as procedures in order for such transactions to take place successfully.The network rules state that an authorized payment must always be moved from the sender’s account directly to the receiver’s account .These transfers take place in batches and not individually. It usually takes between 1 to 3 days for an ACH transaction to be completed from start to finish.

ACH Payment Fees:

A fee is taken by the financial institution each time a customer makes an ACH payment. In other words, if you made weekly payments from your bank account to a checking account at the same institution, every withdrawal from you account is considered as an ACH payment and is subject to fees.

Why is ACH Payment Important?

The Automated Clearing House makes up almost 80% of all electronic transactions that take place in the United States .For instance, more than 24 billion ACH transactions took place last year.In addition, more than 87% of all business-to-business payments in the United States are made using the Automated Clearing House .

ACH Payments & Fraud:

Another important factor to take into consideration is that businesses can become vulnerable to fraud when accepting payments via ACH. Therefore it is vital to have the right tools in place for preventing this from happening . For instance, merchants are usually required by law to have a written agreement with their customers before making ACH payments.

ACH Payment & E-Commerce:

Most transactions that take place on e-commerce websites are made through credit cards. However, many companies decide to switch from credit card transactions to ACH because of the lower fees involved. It is a well known fact that in business debit cards are not considered as a cash equivalent .

ACH Payments & Social Security:

The government requires employers to withhold social security tax when making payments for their employees . Employers must then pay all withheld tax and their own share of social security tax to the IRS in full and on time .It is worth pointing out that ACH is used by many companies when paying employees’ wages .

Other Benefits of ACH:

As mentioned earlier, businesses can use this payment method for accepting bill payments. Another great benefit of Automated Clearing House is that it allows banks to provide customers with access to their accounts through their computer or mobile device .Also, transferring funds using ACH does not require any special software.

ACH Payment & Data:

Another great benefit of the Automated Clearing House is that customer data can be used for creating reports and analysis products. In other words, the data generated by ACH transactions is extremely valuable .

Steps for a Successful ACH Payment:

To make an ACH payment, you must provide the following information: account number, bank routing number and name of receiver.In order to successfully complete this transaction, you must have all these details available when initiating it.

ACH Payment: Instances Where it’s Not Possible:

There are some instances where an ACH payment cannot be initiated. For instance, an ACH payment is not possible from a business account to another business account .In other words, the bank routing number should display as a personal routing number on your bank statement for this transaction to be valid.

ACH Payment Options:

There are three types of ACH payments available for businesses – same bank, different bank and electronic wallet. The first one is when you make a payment from an account at the same bank/credit union to another person’s account at the same financial institution .The second type is when you make a payment from an account at one bank to another person’s account at a different financial institution. The third type is when mobile payments are made through companies like PayPal, Google Wallet, Boku and Payfone .

Industry Growth Statistics of ACH Payment:

As mentioned earlier, the Automated Clearing House is responsible for processing more than 19 billion transactions every year. In fact, ACH payments are the most favored non-cash method for several types of businesses . Also, they are growing at a steady rate every year. For instance, more than 30% of businesses who use this payment method have experienced an increase in ACH transactions over the past five years .

Even though this article provides you with all the necessary information about ACH payments, it is important to take all precautions in order to prevent fraud . Here are some of the most helpful tips for preventing fraud when using the Automated Clearing House:

  • Always verify a company before sending them any money via ACH. Also, check bank statements on a regular basis to make sure all your transactions are secure.
  • Keep track of email and mail correspondence with business partners in order to make sure you know exactly what is expected of you.
  • Only open emails from known senders. If the sender isn’t familiar, delete it immediately without opening it. Also, never open attachments from unknown senders .
  • Carefully check bank and credit card statements each time you receive them. If anything looks suspicious, do not hesitate to contact your bank immediately.
  • Only enter your account information on secure websites that use SSL certificates. Never submit sensitive information without verifying the website’s security status.