Automated Clearing House: What Is an ACH Payment?

You’ve probably seen those three letters, ACH, when banking and wondered what an ACH transfer means: Simply stated, ACH transfers move funds electronically from one bank account to another. ACH stands for Automated Clearing House, which is a centralized system — sort of like Grand Central Station for the electronic distributions of funds. It may be how your paycheck magically appears in your bank account via direct deposit, and it may be how you make online payments.

ACH transfers play an important role in banking today, so let’s take a closer look at what ACH is and how it works so you can bank smarter and better. We’ll cover:

•   What ACH transfers are and how they were created

•   The pros and cons of ACH transfers

•   How secure ACH payments are

•   The benefits of automating your banking

What Is an ACH Transfer?

An ACH transfer is a convenient way to move money around, without using checks, credit cards, or other methods. It enables direct deposits from employers and government benefit programs, bill payments, and external fund transfers. What’s more, ACH transfers fuel person-to-person payments. Such providers as PayPal and Venmo use the ACH network.

What Does ACH Mean?

As we mentioned, ACH stands for Automated Clearing House. But it’s not a bricks and mortar location. It is a network that financial institutions use to aggregate transactions for processing. This processing is then typically completed three times a day on every business day.

The ACH network processes bank transfers for both direct deposits and direct payments. Direct deposits usually include:

•   Paychecks

•   Government benefits

•   Tax refunds

•   Expenses that an employer is reimbursing an employee for

•   Annuity payments

•   Interest payments

In terms of direct payments, the ACH network may process:

•   Online bill payments from your bank account

•   Zelle

•   PayPal, Venmo, and other P2P services

How to Find an ACH Routing Number

If you are going to send or receive ACH transfers, you will likely need the following information, including an ACH routing number, on hand to set up your payment:

•   Bank name

•   Bank routing number

•   Account number

•   Type of account (checking or savings)

•   Authorization

Many people struggle to find their bank’s routing number (aka the ACH routing number). It’s a unique, nine-digit code that is assigned to a banking institution. You can find it by looking at your checkbook. Your routing number is the series of nine numerals at the bottom of each check, next to your account number. You can also search online for the name of your bank and then “ACH routing number.” Or check your bank’s online platform.

Beginnings of the ACH Network

The ACH network began in the late 1960s, when a group of U.S. bankers worried about the increasing number of checks being issued and cashed. They feared that rising numbers of checks would overwhelm the banking system, and they began to explore technological solutions.

To help, they formed a committee called SCOPE, Special Committee on Paperless Entries, to brainstorm solutions. About that same time, the American Bankers Association also began seeking ways to improve the country’s payment system. Here’s a timeline of what happened after that.

•   In 1972, an ACH association formed in California to manage electronic banking transactions, with other regional ACH networks forming soon after that.

•   In 1974, these regional networks formed NACHA (the nonprofit National Automated Clearing House Association) to oversee and administer the ACH network. This organization creates and enforces how this network works, while the Federal Reserve and The Clearing House actually process the transactions.

•   In 1975, the Social Security Administration began testing direct deposit, which led to today’s widespread adoption. Approximately 99% of SSA’s payments are currently completed via direct deposit.

•   In 2001, online and phone payments via ACH became available, a key step forward to accelerating and automating banking transactions.

•   In 2021, ACH total payments topped $29 billion, debits were more than $16 billion, and credits were over $12 billion. The total dollars transferred exceeded $72 trillion, indicating how big a role ACH transfers play in global finance.

Benefits of ACH Transfers

So now you know what ACH transactions are and how they became so popular. Let’s look at their benefits to your daily life and banking.

•   Speed. They are quick and save you time running around with checks and the like. People who get paid through direct deposit don’t need to go to the bank to deposit their checks, which may be especially convenient if they telecommute, are on vacation, or otherwise out of town on payday. Plus, the transactions themselves can be fast. The transfers are typically completed within one day.

•   Convenience. It can be very convenient to have mortgage payments, utility bills, and other payments automatically deducted from a bank account. Or send money to someone via a P2P service. With ACH payments, as we noted, there’s no need to travel to the financial institution to pay the bills or to write a paper check and mail it in. And, when life gets hectic, as long as enough money is in the account to cover the bills, there isn’t even a need to remember to make the payment. It also cuts down on the need to buy stamps for bill paying.

•   Low cost. ACH transfers are typically free. An exception may be when a financial institution charges a nominal fee when someone wants to transfer funds to another bank. However, many times, an automated payment will actually save you money. For example, a bank may offer a lower rate on a mortgage loan or student loan if you set up an automatic ACH funds transfer for your payments.

ACH vs Direct Deposit

As you read about these benefits, you may wonder, “How do things stack up for ACH vs. direct deposits? Are they the same thing?” The answer is: not quite. Direct deposits are a form of ACH transfer, but they are not identical. Here’s a quick example to explain the difference. Your bank may let you take a photo of a check and then deposit it online, without having to visit a bricks and mortar branch or use an ATM. This is an ACH transfer, but it’s not a direct deposit, like your paycheck. Direct deposits technically only happen when a financial institution puts money into an account.

Security of ACH Transfers

You may wonder whether these electronic transactions are secure. An ACH transfer can in fact be more secure than many other payment methods. The reality is that paper checks can always be lost or stolen.

With ACH deposits or payments, you only need to provide bank information once, when the automated transaction is set up. Contrast that with writing a check every month, where bank information is provided each and every time. That makes it clear how ACH transfers can provide a layer of protection against typographical and other errors.

In addition, regulations exist that protect consumers in the rare case of an electronic funds transfer negatively impacting their bank accounts because of fraud or error. This includes transfers between bank accounts, as well as those going into an account (such as payroll direct deposits) or out of that account (for instance, bill payments).

Is an ACH Transfer Safe?

Many people wonder, “Are ACH transfers safe?” To a large part, this may be a worry that comes from fear of a new system when one is used to using checks and other financial vehicles. ACH payments are very safe because they go through a clearing house that has strict rules about confidentiality of information. While not 100% perfect, ACH transfers typically have an extremely low rate of error. For many, this information allays their worries about safety.

Downsides of ACH Transfers

There are a few potential cons when it comes to using ACH transfers. Specifically:

•   Transaction limits. Some banks will limit how much money you can send by ACH transfer in a specific time period, or they might not accept international ACH transfers.

•   Penalties for too many transactions. If you are completing ACH payments from your savings account and that account has a cap on how many withdrawals you can complete per month, you could be penalized. Your financial institution could even turn your savings account into a checking account. Ask your bank so you know their latest guidelines. These rules were, to a large extent, suspended since the COVID-19 pandemic began.

•   Timing matters. Not all banks send ACH transfers at the same time of day — meaning they may have a cut-off time for a transfer to be processed on the next business day. Here’s a scenario: A financial institution has a cutoff time of 2 p.m. in order for the funds transfer to take place the next business day. If money is deposited at 4 p.m. on a Thursday, then that’s past the cutoff for processing on Friday — with the next business day being Monday. This might cause problems for people needing to pay a bill by a certain due date.

ACH Transfers Versus Wire Transfers

When thinking about these kinds of transactions, you may wonder, “What’s the difference between ACH transfers vs. wire transfers?” A wire transfer is another method of electronically transferring funds, which means this system comes with many of the same benefits as ACH transfers bring. But they’re not exactly the same.

First, there is the speed issue. Wire transfers may occur within one business day, with funds often available for use the same day. In many cases, though, a bank employee needs to review this largely automated process, so the funds may not be immediately visible in the recipient’s account — and international wire transfers may take more than a day. If the transfer is urgent, it’s often recommended to send it as soon as possible in the morning.

ACH transfers, meanwhile, are processed in clearinghouses and banks in batches, rather than receiving the individualized treatment given a wire transfer. The ACH system may sometimes provide same-day transfers and is increasingly moving towards this same-day benefit being available more often.

Here’s another crucial difference between the two: Wire transfers are considered to be cleared money, which means that the funds are immediately removed from the sender’s bank account and are immediately available for withdrawal upon arrival at the receiving institution. In general, a wire transfer cannot be reversed. An ACH transfer, though, can be reversed in some situations.

A last but important point: ACH transfers are often free, while wire transfers may involve a fee of $10 to $35 for the person sending it, and the recipient might have to pay a small fee, too.

P2P Transfers and On-Demand Payments

We mentioned before that P2P payments can build upon the ACH network. Let’s share some more info on these. P2P transfers (peer-to-peer transfers) allow people to quickly and easily send money to friends and family through mobile device apps (or online accounts) and a linked account. As just one example, people who use PayPal to send money are using a P2P system.

One benefit of a P2P transfer is transaction speed, with same-day service often available. They are, in general, free when sending to friends and family.

Some services, though, may charge a fee for business transactions or if the P2P account is linked to a credit card rather than a bank account. Traditional P2P transfer services require both parties to have an account with the service, although not all services do.

On-demand payments are payments made in real time. They can be made, as the name implies, on demand. These are instant transfers, ideal when a need is urgent — or just because the receiver wants to have the money in the bank quickly. Many P2P services let you, say, pay friends if you are out for dinner and discover you don’t have cash or your cards with you when the check comes.

Automating Personal Finances

The benefits of ACH transfers are probably obvious by now. When you look at the big picture, you’ll also probably see that automating your finances can streamline personal financial management. It also reduces the stress of meeting bill-paying deadlines.

Having money automatically taken out of your account to pay for goods and services may help to prevent late fees and might even make budget management easier.

Besides having direct deposit for paychecks and paying bills though automatic transfers, this technology may be helpful when building an emergency savings fund. Someone might, for example, have 90% of a paycheck directly deposited into a checking account for bill paying purposes, while putting the other 10% into a savings account designated for emergencies.

Or if that emergency fund has already been established, a percentage of pay might go into accounts for other future expenses, like college funds for children, a down payment on a new house, or a vacation fund. Automatic payments might also be set up to contribute to retirement funds.

Optimal Number of Bank Accounts

On this topic of how many bank accounts you might have, let’s quickly delve a bit deeper. Some people find that having just one account for their funds works just fine. For other people, having separate accounts for spending (aka checking) and saving helps them better organize their finances. In fact, some people have multiple bank accounts. You might have two checking accounts, say, if you are married and want to have a joint account and a personal account with your spouse. Or perhaps you have a checking account, plus a savings account to build cash for, say, a vacation or a new car, as well as an emergency fund savings account. It’s all about what best suits your needs.

A downside of having multiple accounts is that some banks may have minimum balance requirements as well as monthly banking fees. In that case, having multiple accounts may spread funds too thinly.

Clearly defining financial goals may help when making the decision about how many bank accounts are ideal. What’s most important? If it’s a new house, then perhaps a separate account for the down payment, where the balance can be monitored as it rises, can serve as motivation to save even more quickly — and maybe even celebrate milestones on the way to the goal.

No two people have the same financial situation and goals. What’s most important is to create a plan that works for your unique needs.

The Takeaway

You have just learned a lot about how ACH transfers can speed and smooth your financial life, automatically depositing and withdrawing funds so you don’t have to deal with checks, cards, or waiting days and days for money to clear. We’ve also looked at how many accounts are optimal and the big-picture benefits of automating your finances.

Financial technologies are zooming ahead, and taking advantage of ACH transfers is just one way you can improve your money management. Another way is with online banking, and here at SoFi we’d like to introduce you to our mobile banking app as a way to rev up your finances. When you open these linked accounts with direct deposit, you’ll enjoy a competitive APY. And we make our accounts fee-free so you don’t have those charges eating away at your moolah.

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SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

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