What is an Automated Clearing House (ACH) Payment, and How Does It Work?

Have you ever wondered how digital payment and money transfer work? Which systems are involved in making the process simple, secure, and effective? Then, you should know that most direct payments that are other than check payments, credit cards, and other transactions are through the automated clearing house.

Even as a business or an individual, you must have used the ACH payment system but weren’t aware of the exact terminology. So, the next time you pay via ACH, you should know that it is a direct payment. To make things more precise, in this article, we discuss how does ACH work, among other informative things.

The Growth of ACH Payment

Most of the payments you make electronically through your mobile or computer, such as paying bills, shopping online, etc., are through the automated clearing house system. Due to the simplicity and security of electronic payment, the method to pay via ACH has become quite popular and probably the most de-facto method.

Every year, institutions process almost $43 trillion through this method, and they do so because they establish a network to enhance it and make it much more user-friendly. At present, more than 10,000 banks and financial institutions facilitate their customers to make transactions this way.

How Does ACH Work?

In the simplest terms possible, if you want to make a payment:

1. Your bank sends the desired payment information as data to the bank or institution.
2. This information the bank shares with the Clearing House by the institution that then clears it.
3. After the clearing, this information then goes on to the recipient or their bank, which finally clears this process.
4. The final step is accepting the information, allowing the transaction to be completed, and transferring the funds.

Different Types of Automated Clearing House Payments and Transactions

The most common types of ACH are Direct Deposit and Direct Payments. Direct Deposits are like salaries which a company disperse to its employees. The company initiates this transaction, which is shared with each employee directly into their account.

Direct Payments are typically used by companies or institutions that use recurring payments, such as utility companies where consumers allow for recurring payments.

What are Some Benefits of automated clearing house (ACH) Payments?

This payment method is becoming more popular due to its ease among companies and businesses. Here are some of these critical reasons.

Lower Processing Costs

Most banks and institutions don't charge any processing fee as you run your financial transactions through them, allowing them to build their equity. But in cases they do charge, it still is one of the lowest.

Fewer Declines

As most of your account and transactions are done against checking accounts and don’t expire, you hardly get any declining transactions. It is quite the same way as a credit or debit card, as long as you have the money or haven’t crossed your limit.

Convenience

You no longer need to write and sign cheques or follow time-consuming paper processing issues, and it saves you tons of trips to the bank for that.

The convenience transfers to the customer as well because now they have a much better user experience. They don't have to do much else when assigning recurring payments, unlike when you would write checks each month.

More Customer Retention

Unlike many other forms of digital transfer and payments, ACH allows bank-to-bank transactions, which eliminates most of the issues. This is particularly useful when you have to make the same payment a number of times, such as bills and salaries.

Are There Any Drawbacks to Automated Clearing House Payment Method?

Here are some of the limitations to automated clearing house payment procedure, even though it has become quite convenient and cheap.

Slower Speed

As the processing happens in batches, sometimes it can take up to 5 working days to complete your payment. With more security does come a time limitation.

Limits to Daily or Monthly Amounts

For example, the daily limit to your automated clearing house transactions is fixed at $25,000. So make sure to discuss with your bank how much they offer.

Batch Cutoff Times

There are 3 to 4 times each day, the processing happens, and if you do a transaction or data entry after the last time, your processing will start the next day.

US Only Transactions

Most of the banks don’t offer automated clearing house payments to and from banks outside the states.

Costs of Making Automated Clearing House Payment Process

Different banks and financial institutions charge you different amounts. Most of the time, the intermediary merchant account provider will set that cost or fee. This fee can be on each payment or as a whole. It can range from up to $0.75 per transaction or a flat percentage on them.

Following are some reasons that your transaction was rejected:

• R01 – Insufficient Funds: You don’t have enough cleared amounts in your account to make the transaction.
• R02 – Account Closed: Customer has not updated their account information about closing of account while they use a different account now.
• R03 – Incorrect Details: If the recipient has mistakenly missed a digit or code in their bank details, you can get a ‘No Bank Account’ or ‘Unable to Locate Account’ error.

Things to Consider When Adding ACH Method of Payment for Your Business

• Have you set up a business that will take recurring payments? If yes, ACH is the best method of payment for you.
• Enhance your payment for customers still using checks.
• Your customers pay by credit card but want a better option.
• If you save more with ACH than a credit card, you should go for it.

Final Words

Now that you have read through the article about automated clearing house payments and transactions, you must understand its benefits. Making everything digital and more secure removes the hassle and issues physical payments used to be made previously.

ACH not only makes things and transactions so much easier but lets you avoid most of the hassle of transferring money.