What are ACH payments?

ACH is a payment method run by its namesake entity, the Automated Clearing House (ACH), enabling account to account transactions in the United States. It facilitates the movement of money between bank accounts without requiring paper checks, wire transfers, or cash. This network processes large volumes of credit and debit transactions and can bundle payments to recipients in batches, making it a cost-effective alternative to credit card payments and wire transfers for high-volume payment use cases for businesses and individuals alike.

ACH processing is managed by Nacha (the National Automated Clearing House Association), which establishes the rules and standards for the ACH Network. Per Nacha in 2023, the ACH network processed a staggering 33.6 billion payments worth $86.2 trillion in 2024, an increase of 7.6% over the previous year.

This article examines how ACH payments work and what users of the network can expect when processing on it. 

‍How long do ACH payments take? 

ACH processing timelines operate according to transaction windows dictated by the Federal Reserve. There are various speeds of ACH, with varying costs to use, which can deliver funds to a recipient within desired timeframes. 

• Standard ACH: Typically take 4-5 business days to complete
• Same / Next-day ACH: Funds available by the end of the business day specified by specific transaction window.
• Instant ACH: Funds settled real-time using instant rails like RTP and FedNow

It’s important to note when planning an ACH payment’s arrival to a recipient that ACH is not processed on the weekend, or on bank holidays. Furthermore, the actual settlement time of an ACH payment can be influenced by factors beyond just the transaction windows set by the Federal Reserve. This is due to the participation of discrete financial institutions and payment processors, each of which may have their own bespoke processing windows within the Fed’s windows. 

How does processing an ACH payment work? 

The life of an ACH payment includes several distinct steps from beginning to end. 

1. Initiation: The originator (the person or business sending the payment) goes to make an ACH payment. Depending on the nature of the transaction and what it’s for, this might be processed either as a credit - funds being sent to the recipient in a “push” - or, as a debit, in which funds are “pulled” out of the payor’s bank account. 
2. Submission: With the payment’s data having been created according to the nature of the transaction, the relevant information is packaged by the ACH processor and sent from the Originating Depository Financial Institution, or ODFI, to the Receiving Depository Financial Institution, or RDFI for short. 
3. Distribution: The ACH operator - either the Federal Reserve or the Clearing House - sorts numerous ACH transactions and when applicable batches them for consolidated delivery. The file data created from the organizational process is made available to the financial institutions. 
4. Settlement: The RDFI receives the transaction information, verifies the account details, and either credits or debits the receiver's account accordingly.
5. Completion: Funds are transferred between the financial institutions, completing the transaction.

Each of these phases has its own distinct details that can be further explored as needed when considering how to improve an ACH program. 

‍What are some good uses for ACH?

ACH processing serves numerous financial needs across various sectors:

• Payroll: Direct deposit of employee wages and salaries
• Bill pay: Rent payments, utilities, insurance premiums
• Person-to-person transfers: Account-to-account transfers between individuals
• Business payments: Vendor payments, B2B transactions, and monthly 
• Online shopping: More and more ecommerce stores and digital subscription platforms are enabling ACH as a funding method
• Marketplace payments: ACH is an increasingly common method for both making payments and receiving disbursements from marketplace economies 

The versatility of ACH processing makes it suitable for both one-time and recurring transactions across personal and business applications.

Three important pillars of a strong ACH program

When considering how to improve an existing ACH payments program, or how best to approach starting a new one, there are a few key areas of focus to keep in mind. 

If you strategize your program to nail these, you’ll be in a good spot. 

Advanced security with native risk tools

Implementing strong security protocols is critical to minimize the risk of losses due to user error and fraud when processing payments like ACH. 

• Running a real-time account validation tool upon engaging with a new bank account to determine its legitimacy
• Engaging with transaction assessment tools to evaluate counterparty risk on a payment
• Leveraging open banking account to account linking tools to use real-time data in financial operations

Efficient use of data and the network to speed up and streamline successful payments

ACH transactions are far more customizable than legacy providers might allow you to believe. When planning an ACH program, consider: 

• Unified underwriting, to reduce overhead on compliance checks like KYB
• Customizable batch payout rules, getting money to its recipient in as few payments as fast as possible 
• Data storage standards to minimize re-collection of standardized data
• Automated systems for managing recurring transactions
• Real-time transaction monitoring with automated updates and alerts

Proactive communication with payment stakeholders

ACH payments should be a business critical function for customers, and that means business critical quality communication. Establishing effective communication looks like: 

• Transparent policies regarding processing times and fees
• Prompt notification of transaction status changes or issues
• Clear authorization forms and disclosures for customers
• Dedicated support channels for resolving ACH-related inquiries

By focusing on these three essential areas, businesses can build a robust ACH program that reduces risk of ACH settlement while speeding up the payment. 

ACH in review

ACH processing continues to evolve with technological advancements, offering faster processing times and enhanced security features. As electronic payments become increasingly prevalent, understanding and optimizing ACH processing capabilities is essential for businesses and individuals seeking efficient financial transactions.

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