What Is ACH? A Business Owner’s Guide to ACH Payments — Backoffice (2022)

Giving your roommate a $10 bill (or writing them a check) is a pretty efficient way to settle a debt. However, when your transactions number in the hundreds—and your receivables and credits are spread across the United States—paper checks become a less efficient way to receive and send money. The ACH network solves this problem by facilitating electronic transfers between financial institutions.

What is an Automated Clearing House (ACH)?

Automated Clearing House (ACH) is an electronic network for processing electronic payments between banks. The ACH network is maintained by an organization called NACHA, or National Automated Clearing House Association, a 501(c)(6) not-for-profit association connected to approximately 11,000 different financial institutions.

The need for NACHA was identified in 1968 when a group of banks in California noted an increase in the amount of paper checks they were handling and processing. These bankers organized a special committee on paperless participation, or SCOPE, and, in 1972, formed the first ACH organization in California to handle electronic payment processing. NACHA followed in 1974.

NACHA manages everything related to the maintenance, development and administration of the ACH network, which has become the primary mechanism for handling financial transactions electronically in the United States. Each year, it facilitates billions of dollars in payments related to business, government and consumer needs.

How does ACH work?

The Automated Clearing House Network acts as an intermediary between financial institutions—allowing banks, businesses and institutions to send money electronically. The ACH network arranges and processes a type of electronic funds transfer known as an ACH transfer.

Here’s an example of how the direct deposit payment process using ACH works.

1. The originating party (in this case, the employer) initiates the payment, such as the employee’s biweekly salary.
2. The originating bank (also known as an ODFI, short for original depository financial institution) processes the transaction along with other ACH transfers. These batch transactions are sent periodically on business days.
3. An ACH operator (either the Federal Reserve or the Electronic Payment Network) receives the batched transactions, compiles them, and submits the transactions to the receiving depository financial institution (RDFI).
4. The recipient’s bank account processes the transaction and credits the recipient’s (employee’s) account.

All ACH transfers are categorized as either credit or debit transactions, with the classification determined by the action of the originating party. Direct deposit, for example, is considered a credit transaction because the originator transfers money from their account to the recipient’s bank account, resulting in a debit from the originator’s account and a credit to the recipient’s account.

How much does it cost to use and receive ACH payments?

ACH payment fees can be calculated in several ways—either as a flat fee per transaction, as a percentage of the transaction, or as a monthly cost. If you choose to accept ACH payments directly, your bank will determine the fees to be paid. Transfers such as bill payments, payroll direct deposits and direct payments are often free.

Many business owners also choose to work with third-party payment processors (such as PayPal, Stripe, Square or others) to process business-to-business and business-to-consumer transactions. In this case, the third-party payment processor determines the transaction cost, with typical ACH transfer fees ranging from 0.8% to 1.5% of the total transaction cost.

Advantages of the ACH network

cost

One advantage of sending and receiving ACH payments is cost savings. Using ACH transfers to receive and send money allows companies to avoid paying credit card transaction fees, which can amount to up to 2.5% of the total transaction value.

On $10,000 in sales, that’s $250—and since total sales cover operating costs and cost of goods sold, these fees can eat into your profit margin significantly. If your net profit on a $10,000 sale is $3,000, for example, a 2.5% credit card fee reduces your profit by 8.3%.

Safety

ACH payments offer security advantages over paper checks and cash. Checks can get lost in the mail, and large amounts of cash require advanced security measures to prevent theft—think security guards and armored trucks.

Electronic payments are less vulnerable and ACH payments provide an additional advantage over instant transfers: processing times of one to three days provide a buffer in which businesses can stop payments if fraud is suspected or an error is identified.

Comfort

Electronic processing of ACH payments makes it easy to set up recurring payments to vendors or employees, reducing your administrative burden and reducing operational costs. Customers and employees also appreciate the convenience of ACH payments.

Disadvantages of the ACH Network

Processing time

Because ACH transfers are processed in batches, direct ACH payments are not processed immediately. It can take one to three business days for the transfer to appear in the recipient’s bank account once it is initiated. Some banks also allow same-day ACH transfers, which may be available for an additional fee. However, note that processing cut-off times may result in same-day transfers being processed the next business day.

Some third-party processors allow instant ACH transfers by crediting the recipient’s account immediately in the processing app, then reconciling the account through the ACH transaction process at a later date. These processors may also have an “instant” transfer option available.

No international fees

ACH payments can only be deposited into a US bank account. International money transfers require businesses to use wire transfers or other methods such as sending a paper check or initiating the transfer through a third-party payment processor.

Transaction limit

Some banks impose daily, weekly, monthly or per-transaction limits on the amount of money that can be sent by ACH. Check with your bank to make sure that its policy supports the type of transfers you need to support your business operations.

Final thoughts

The business world moves fast—and writing, mailing, and cashing paper checks is a frustrating analog process. A world where you can pay your subway fare with a tap of your credit card and buy your groceries via fingerprint recognition is a world where efficiency matters—for your business as well as your customers.

ACH transfers offer increased security and convenience for both creditor and recipient at a relatively low cost. Your bank (or third-party processor) can make sending and receiving payments an efficient and low-cost aspect of your business operations.

source: https://www.shopify.co.id/blog/what-is-ach