What Is an ACH Payment and How Does It Work?

By Janet Siroto · May 20, 2024 · 8 minute read

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What Is an ACH Payment and How Does It Work?

To put it simply, an ACH transfer moves funds electronically from one bank account to another. The three letters ACH stand for Automated Clearing House, which is a centralized system. You might think of it as Grand Central Station for the electronic distributions of funds. The ACH network could be how your paycheck appears right on schedule in your bank account thanks to direct deposit, and it may be how you send online payments to, say, your WiFi provider.

Key Points

•   ACH transfers electronically move funds between bank accounts via a centralized system known as the Automated Clearing House.

•   These transfers are integral for direct deposits from employers, government benefits, and online bill payments.

•   The ACH network was established in the late 1960s to reduce the overwhelming number of checks processed by banks.

•   ACH payments are typically faster and more cost-effective than traditional methods, often completing within one business day.

•   Despite their benefits, ACH transfers can have limitations such as transaction caps and potential fees for expedited services.

What Is an ACH Payment?

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.

As mentioned above, 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.

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How Do ACH Payments Work?

Here, you’ll learn a little more about what is ACH, the history of ACH payments, and how they work.

History of ACH

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.

•   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 the most recent year studied, ACH payments numbered more than 30 billion, and the total dollars transferred exceeded $77 trillion. These figures indicate how big a role ACH transfers play in global finance.

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Categories of ACH

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 other transactions. What is an ach transfer can include:

•   Online bill payments from your bank account

•   PayPal, Venmo, and other P2P services.

Types of ACH

As you’ve already learned, ACH works both ways: incoming and outgoing payments can be processed via the ACH network.

ACH Credit

An ACH credit occurs when one party sends funds to another entity. A very familiar instance of this would be the way (if you are among the millions who have direct deposit) arrives in your designated bank account on payday. Your employer sent instructions, their bank transmitted funds to yours, and you received your money.

ACH Debit

An ACH debit, as you might expect, moves in the opposite direction. In this case, funds are pulled from one account and processed in batches to get to their destination. In the situation of a direct deposit paycheck, while the employee receives the ACH credit, the employer’s account gets debited.

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What Is an Example of an ACH Payment?

You’ve just gotten the scoop on ACH credits vs. debits, but what is a specific example of an ACH payment? When Social Security payments get deposited in millions of Americans’ bank accounts monthly, that’s the ACH system at work.

Also, if you’ve set up an automated payment of a utility or other recurring bill, that may also be an example of an ACH payment in action.

Benefits of ACH Payments

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. Plus, the transactions themselves can be fast. The transfers are typically completed within one day. There may be ways offered to speed up your payment, often for a fee (such as when PayPal or Venmo offers an instant transfer).

•   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.

•   Low cost. ACH transfers are typically free and may even 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. (An exception may be when a financial institution charges a nominal fee to transfer funds to another bank.)

Downsides of ACH Transfers

There are a few potential disadvantages 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.

•   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. This might cause problems for people needing to pay a bill by a certain due date and/or time.

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 and mailing it.

•   Regulations exist that protect consumers in the rare case of an electronic funds transfer negatively impacting their bank accounts because of fraud or error.

•   ACH payments are very safe because they go through a clearing house that has strict rules about confidentiality of information. In addition, ACH transfers typically have an extremely low rate of error.

ACH Transfers vs. 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.

Consider a couple of scenarios that highlight the potential differences:

•   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.

•   ACH transfers, however, are processed in clearinghouses and banks in batches. The ACH system may sometimes provide same-day transfers and is increasingly moving towards this same-day benefit being available more often.

•   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 transfer fees can cost the person sending it up to $35 or more, and the recipient might have to pay a small fee, too.

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The Takeaway

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 the time it takes for money to clear. That’s why they are such a popular way to transfer funds, such as receiving one’s paycheck by direct deposit.

In addition to ACH payments, another way to ensure a smoothly functioning financial life is to partner with a bank account that offers convenient access and the tools you need most.

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How long does an ACH transfer take?

ACH transfers typically take a day, but they may take as long as three days.

What is needed for an ACH transfer?

To complete an ACH transfer, the following are needed: the name, routing number, and account number of the destination, whether the account is a business or personal account, and the amount of money to be sent.

How do I set up an ACH payment?

An ACH payment can be set up in a variety of ways. As a consumer vs. a business, you might use a payment app or see what forms of money transfers your bank uses. For instance, many use Zelle®. Or you could see if the prospective recipient of your funds (say, a utility company) offers an automated payment system, which might use the ACH network.

Can you send an ACH to a personal account?

Yes, you can send an ACH payment to a personal account. For example, if you use a payment app to send a friend money for your share of a dinner out that they paid for, you would likely be sending an ACH payment.

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