What is an ACH payment and how does it work?

When you need to move money, you have multiple options. You could write and mail a paper check, or you can transfer money digitally between accounts using the Automated Clearing House (ACH) network.

In fact, you may already send or receive ACH payments, which are also known as electronic checks and direct deposits.

Trillions of dollars — yes, that’s trillions with a T — move through the ACH system each year. Funds travel over the ACH network, which connects thousands of financial institutions across the country.

Let’s look at what ACH payments are, how they work and what you should know when making an ACH payment.

• What is an ACH payment?
• What are the benefits of ACH payments?
• What are the disadvantages of ACH payments?
• What’s the difference between ACH payments and other types of electronic transfer of funds?
• Next steps: Try reducing your risk of ACH fraud

What is an ACH payment?

An ACH payment is an electronic transfer from one bank account to another. With this type of payment you don’t have to use paper checks, wire transfers, credit card networks or cash.

Individuals and businesses can send and receive ACH payments. There are two ways to make ACH payments — ACH debit and ACH credit.

ACH debit

When you authorize a payee to request a withdrawal of funds from your bank account, that’s an ACH debit. The person receiving the payment initiates the transaction.

For example, you might authorize your power company to automatically pull your monthly utility bill from your bank account via ACH. You give the power company your bank account information and permit it to withdraw money from your account each month.

Here’s a somewhat simplified explanation of what happens behind the scenes.

1. The power company creates a digital file of payment instructions (including your payment and other customer payments) and sends it to its bank.
2. The bank deposits the payment into the power company’s account and creates an electronic batch file of all payment instructions to send to the ACH network.
3. The ACH processor receives the instructions from the bank, sorts them into separate files for every bank from which it needs to pull customer payments, and sends payment instructions to each bank.
4. Your bank receives an electronic file from the ACH processor and withdraws your payment from the account.

ACH credit

An ACH credit sends funds from an account — you initiate the payment. For example, you might set up automatic bill pay with your bank to pay your rent or mortgage each month. Instead of having another company “pull” payments from your checking or savings account, you “push” payments from your account.

The behind-the-scenes steps are similar to the ACH debit transaction process outlined above — but instead of your mortgage company or other service provider initiating the ACH payment, you kick it off by sending instructions to your bank. You typically do that by logging into your account via your bank’s website or mobile app, but you may be able to set up an ACH payment over the phone or in writing by visiting a bank branch.

It’s important to note that with either type of payment — ACH debit or ACH credit — both the payor and the payee must agree to the transaction. Your power company can’t pull your monthly payment from your bank account without your consent. And you can’t pay your landlord via ACH credit unless they agree to receive the money electronically.

What are the benefits of ACH payments?

Using ACH payments to send and receive money offers several benefits.

Fast

ACH payments are typically processed faster than sending a check through the mail. When someone mails a paper check, it can take days for it to arrive at its destination. Then the recipient needs to process the mail and deposit the check. Depending on the amount, the bank may hold part of the deposited check for one or two business days. All told, it can take a week or more to make a payment via paper check.

On the other hand, ACH payments may be available the same or next business day, or within a day or two. Direct deposits, such as your paycheck, are typically available on the day they’re made.

Secure

When you mail a paper check, there’s always a chance it will get lost or stolen along the way. If someone steals your check, it could be altered and cashed before you realize it went missing.

If you send a paper check to your utility company and it gets lost or stolen before reaching its destination, your utility company might charge a late fee. Plus, you may need to contact your bank to stop payment on the missing check. Most banks charge a stop payment fee of $25 to $35 to stop payment on a check.

Transferring your money electronically means your information is protected by bank-level encryption.

Low cost

Many businesses accept credit card payments, but the processing fees tend to be high. According to the payment processing company Square, credit card processing fees average between 2.87% and 4.35% per transaction.

The cost of sending an ACH payment, on the other hand, is typically less than $0.50 per transaction.

As a consumer, you may not worry about credit card processing fees when you swipe your credit card to buy gas, groceries or a new pair of shoes. But if you own a small business or do freelance work, the savings of getting invoices paid via ACH instead of a credit card can add up.

Also, since businesses can pass payment processing fees on to consumers, lowering the cost of doing business with ACH payments can mean lower costs for their customers.

Convenient

For one-time payments, it might be easier to pay by cash, check or credit card. But for recurring transactions, such as a mortgage payment, ACH payments offer convenience. You don’t have to worry about waiting for your bill to arrive, staying on top of payment deadlines, or buying postage. You can set up automatic bill payment via ACH transaction and have the money withdrawn from your account when it’s due.

What are the disadvantages of ACH payments?

There are a few downsides to ACH payments.

Set-up costs for businesses

As a consumer, you may never have to deal with ACH payment fees. If your bank offers free online bill pay, you can schedule and send ACH payments for free.

But businesses that want to accept ACH payments from their customers or pay employees via direct deposit may have to pay to set up a merchant account and face per-transaction fees and other ACH fees. Still, businesses may be able to offset the cost of ACH payments by lowering or avoiding credit card processing fees and the labor involved in processing paper checks.

Set it but don’t forget it

Using ACH credit or debit payments to pay recurring bills can be convenient. But it’s important to keep enough money in your bank account to cover the payments you’ve set up. If a company bills you and you don’t have enough money in your account to cover the ACH transaction, you could face overdraft and/or nonsufficient funds fees.

And a company could possibly bill you for an incorrect amount. For unauthorized ACH payments, you have 60 days from the date you received your bank statement to notify the bank of the error. Then the bank has 10 days to investigate the issue. If, after 10 days, the bank hasn’t resolved the issue, it’s required to temporarily credit your account for a portion of the disputed amount. Then it has 45 more days to investigate.

Still, money may be missing from your account while all of this goes on, which could make it difficult to pay other bills.

Transaction limits

The National Automated Clearing House Association, or NACHA, oversees the ACH network and caps ACH payments at $25,000 per transaction.

While this limit might be more than enough to cover most transactions initiated by individuals, it might not be enough for some large companies — such as a business that needs to make a $30,000 loan payment.

In addition, federal law limits customers to just six transfers per month out of a savings account or money market account. If you go over that limit — which doesn’t apply to checking accounts — your bank could charge a withdrawal limit fee, reject the transfer request, close your account, or convert it into a checking account.

The Federal Reserve Board temporarily lifted this rule, known as Regulation D, because of the COVID-19 pandemic. But the agency hasn’t yet announced how long it will waive those transaction limits.

What’s the difference between ACH payments and other types of electronic transfer of funds?

Are ACH payments right for you? To help you decide, here are how these types of transactions compare to other payment options.

ACH payments vs. wire transfers

Both ACH payments and wire transfers move funds electronically from one financial institution to another. But ACH payments are low-cost, whereas wire transfers cost money for both the sender and receiver. According to MyBankTracker, the average wire transfer within the U.S. costs $15.50 for the sender and $18 for the receiver. International wire transfers can cost even more.

One reason wire transfers may cost more is that they’re processed individually on a transaction-by-transaction basis directly from bank to bank, while ACH transactions are batched together for processing through a clearinghouse. Wire transfers are also generally completed in one business day or less.

ACH payments vs. EFT

People might use the terms ACH and EFT (electronic funds transfer) interchangeably, but they’re not the same. All ACH payments are EFT payments, but not all EFTs are ACH. EFT is a general term that covers many different methods of electronically transferring money from one bank to another, including wire transfers, credit and debit card payments and ACH payments.

The term ACH refers only to direct payments that take place on the ACH network.

ACH payments vs. direct deposit

Direct deposits are a type of ACH payment made via the ACH system. They’re commonly used for payroll, Social Security and tax refund payments.

Next steps: Try reducing your risk of ACH fraud

While ACH transactions are generally more reliable than a check, they’re not risk-free. Anyone who gets ahold of your bank account number and routing number can attempt a fraudulent ACH transfer from your bank account.

To help reduce your risk, follow these best practices.

• Safeguard your financial account information by keeping anti-virus software and firewall software up to date on your PC.
• Use strong passwords for your online accounts and don’t repeat passwords across accounts.
• Monitor your bank account for transactions you don’t recognize. Review online accounts daily or weekly, or set up alerts so you’ll know whenever a transaction hits your account. If you notice any strange withdrawals, notify your bank immediately.
• Don’t give out your bank account information over the phone or online unless you’re sure you’re dealing with a reputable company.
• Don’t log into your bank account from a shared computer or on public Wi-Fi.