What is an ACH Debit and how does it work? ACH Bank Transfers & Payments
You have many payment options as a business. Direct payments can be made in cash, paper checks, credit card, debit card, or wire transfer. There is another type of payment that has been growing in recent years. This payment option offers automatic and direct bank payments. You may even be able to use it at your home. This is ACH and it’s something you should add to your customer’s payment options.
ACH debit is a term that you often see when you read about ACH. But what exactly is it? This article will explain what ACH is and what ACH debit payments can be. We also discuss the benefits and drawbacks of this payment method.
What is an ACH Debit and how does it work? ACH Bank Transfers
An ACH debit, which is a type ACH transfer that pulls funds from your bank account, is a type ACH Clearing House transfer. An ACH debit is used to transfer funds automatically to the recipient’s bank account when you set up recurring monthly payments.
Understanding ACH Credit and Debit Payments
An ACH debit is money that a company “pulls” from a customer account. It is sometimes called “direct payment” because it is not a “pushed payment”.
The “pushing” by customers of funds is usually done to pay one-time bills. You can let vendors or utility companies pull funds from your account to pay your bills, or you can draw from customer accounts to reimburse you for your products.
ACH debits are most commonly used for recurring bills payments. This method is preferred by billers because it is less expensive than other payment options, allows for faster money transfers, and reduces late payments. __S.23__
Understanding the Automated Clearing House Network
Electronic Funds Transfer (EFT) can be used for both ACH debits or ACH credits. Every EFT is processed through the Automated Clearing House, a network of 25,000 US financial institutions, including credit unions and banks. It follows established guidelines and practices that ensure funds are transferred safely and efficiently.
The rules and regulations for the automated clearinghouse services are set and overseen by a board of governors at Nacha, previously known by its acronym NACHA (National Automated Clearing House Association).
This clearinghouse network, unlike credit card networks and middlemen, allows direct bank-tobank transactions. Let’s take a look at how it works from the point of view of a business owner.
- To enroll your customer in the network, you use ACH software. To verify your customer’s bank account information, including routing numbers and bank account numbers, you will need to have their email address and birthday.
- Your customer approves an agreed-upon payment frequency, such as a one-time payment, annual payment, monthly payment, or any frequency you specify.
- Your bank transmits a request for payment to your customer’s bank through the ACH network at a recurring time. This makes you the Receiving Financial Depository Institution (RDFI,) and the customer’s bank the Originating Financial Depository Institution (ODFI).
- With clearance provided by the customer during signup, the customer’s bank verifies funds are on hand and transmits the funds to your bank.
- Your bank will verify the funds and deposit them into your account.
Here are some examples of ACH payments
- ACH payments are something you probably know from your own personal life. ACH is a popular way to pay monthly bills from a utility company such as:
- Electric company
- Cable company
- Phone company
- Insurance company
What is the Clearing Time for an ACH Debit?
Banks send ACH payments at certain times in a business day. These are called batches. __S.47__ This happens within a bank’s business day. Requests to banks can also fall after hours. The average transmission time is 3-5 days. Although “Same Day ACH debits” can speed up the process, it may still take more than one day due bank hours.
Advantages over Other Payment Forms
ACH offers many advantages over other forms of payment. The ease of payment is one of the greatest benefits. You can get continued payments every month or as often as you want. Each customer receives automatic bill payments for their products and services. You don’t have to chase them to demand payment or charge late fees.
It is also beneficial to your accounts receivable section. It informs customers that payment will be taken, creates invoices and processes payments. Customers receive receipts. All this is done automatically.
You can get additional benefits with certain types of payments. Let’s take a look at each.
Benefits over cash payments
ACH deposits are easier and more secure than cash. Employees and thieves can steal cash. Cash is a nightmare to track down. All payments must be properly logged in, accounted for and deposited at the same amount.
Benefits of paper checks
ACH is a stronger alternative to a paper check. It is actually very similar in certain ways. It can be compared to a paperless check. Not only do you get the bank-to-bank transfer benefit, but you also receive quicker payments than with checks. This is especially true for orders that have higher dollar amounts. Checks, just like cash, can be stolen or lost. ACH is more secure. A hard-copy check can also be fraudulent. Stolen checks can be a problem again, while ACH requires more compliance in order to initiate.
Then there’s overall convenience. It’s not easy to pay your bills each month by check. Customers must schedule a payment, make the check on time, mail it, attach a stamp and address it properly. It is more difficult to send a certified check for a payment that is important. The entire process is automated with ACH and can be done quickly and safely. __S.82__
Advantages of ACH payments over electronic payments
Wire Transfers vs. ACH Payments
While both ACH and wire transfers move pre-verified funds electronically, there are some key differences. Each has its own benefits. __S.86__
Although wires can be made as instant payments (even same-day ACH), the ACH timing takes longer. You can also receive cross-border payments with wires (domestic and international wire transfers), whereas ACH is restricted to US transfers. __S.89__
ACH payments are still a popular option to wire transfers. However, there are many advantages to ACH payments. Here are some of the benefits:
Lower Processing Costs due to Lower Operating Costs
While wire transfer payments can be expensive, processing fees for moving them can run up to $30. However, ACH payments are only cents per dollar. This allows for significant cost savings. Although the processing fees for ACH may be higher in some cases due to validation costs, overall ACH services are relatively inexpensive.
A wire transfer cannot be refunded if bank information is obtained by an untrustworthy party. The money is gone. ACH payments typically allow for funds to be returned within a few hours of deposits. Because ACH only works with US banks, fraud via international wire transfers is less likely. __S.100__
ACH Payment vs. Debit Card Transaction
Both ACH payments as well as debit card transactions work the same way. They differ also from one another in terms of the transaction type.
- Debit cards require PINN or signature for authorization, whereas ACH debit transactions require an account and routing numbers and online credentials, making it a powerful fraudulent transaction detection system.
- A debit card payment is also similar to a credit-card transaction in that it requires payment processors and card networks to communicate with banks. This means you will pay the same transaction fees as credit cards. These fees can increase the transaction cost. ACH debit transactions can be cheaper or even free. __S.108__
- You also get the advantage of higher withdrawals, making ACH more useful for high-dollar business transactions.
ACH Payments vs. eChecks
An eCheck can be described as an ACH debit. ACH debit is the overarching term that covers all debit types within the network. eChecks, however, are a subset. EChecks enable you to convert paper checks into electronic debits, offering payment benefits over standard check payments and ensuring quick, verified funds.
Why are some ACH payments rejected by banks?
It is a positive sign that bank account transfers are being rejected by bank employees. This is a sign that ACH works. Bank ACH transfers require verified funds from a customer’s bank. Bank transfers can be canceled if there are insufficient funds on the bank account. This is because bank money transfers must have a minimum credit reserve balance. __S.119__
Are ACH payments safe? Security risks of ACH
If sensitive bank information is stored, it can cause problems if it is not properly secured. However, once this initial setup has been completed, the information is no more required. Protected software installed on your website, or via an email link, provides superior protection in many cases. We regularly install this software on business systems as a merchant service provider. You should also consider the advantages ACH offers over other payment methods like checks, cash, or electronic transfers. ACH is safer in many ways. __S.127__
How Businesses Can Accept ACH Payments
BNG Payments offers full merchant services, including ACH payments capability. This service is a benefit that we have experienced firsthand. Regular payments are proven to increase financial security and make businesses more profitable. This allows them to spend more time on their business and provide more funds for future growth.
We offer hardware that can be used to facilitate transactions, improving your overall performance.
3285 47th St S, Fargo, ND 58104