What is an ACH Payment? How ACH Works

Learn the basics of how ACH payments work, plus the costs and differences between wire transfers and ACH transactions in this guide.

Paying invoices online or through the mail is a reasonably efficient way to settle a single debt. 

When your transactions number in the hundreds, however—and your debtors and credits are spread across the United States—paper checks become a much less efficient way to receive and send money. 

The Automated Clearing House (ACH) network solves this problem by facilitating electronic transfers between financial institutions. 

What is the ACH?

The Automated Clearing House is an electronic network designed to process electronic payments between banks. The ACH network is managed by the National Automated Clearing House Association (NACHA), a not-for-profit association under 501(c)(6) status connected to some 11,000 different financial institutions.

What are ACH payments?

ACH payments are electronic fund transfers processed through the Automated Clearing House network. They enable businesses and consumers to send and receive online payments in a fast, secure, and cost-effective manner. ACH payments are commonly used for direct deposit payrolls, bill payments, and transferring funds between bank accounts.

Types of ACH payments

There are two main types of ACH transfers: ACH credit and ACH debit. Here’s a look at the differences between them:

ACH credit

ACH credit transactions involve the transfer of funds from the sender’s bank account to the recipient’s bank account. 

ACH credit is used for:

• Direct deposit of payroll, Social Security benefits, and tax refunds
• Business-to-business payments
• Bill payments initiated by the payer

ACH debit

ACH debit transactions involve transferring funds from the recipient’s bank account to the sender’s bank account. 

ACH debit is used for:

• Paying bills like utilities, mortgages, and loans
• Recurring payments like subscription and membership fees
• Business-to-business transactions initiated by the payee

	ACH Credit	ACH Debit
Initiation	Sender initiates the transaction.	Recipient initiates the transaction.
Authorization	Not required.	Required from the sender.
Use Cases	Payroll, B2B payments, bill payments.	Recurring bills, membership fees, B2B payments.
Risk	Lower risk of unauthorized transactions.	Higher risk of unauthorized transactions.
Control	Sender has more control over transactions.	Recipient has more control over transactions.

For example, if you’re a US retailer on the Shopify plan, you can verify your bank account as a primary payment method for direct debits. Confirm with your bank whether your account supports ACH debits or open a Shopify Balance account.

What are typical ACH processing times?

ACH transactions can take up to three business days to process. The exact time depends on the transaction type and when it is submitted. ACH transactions are batch-processed multiple times a day, ensuring efficient payment processing and settlement between financial institutions. Same day ACH payments are also available for an additional fee. 

How do ACH payments work? 

The Automated Clearing House network is an intermediary between financial institutions—allowing banks, businesses, and institutions to send money electronically. The ACH network organizes and processes a type of electronic funds transfer, known as an ACH transfer.

Here’s an example of how a direct deposit payment process using ACH works: 

1. The originating party (in this case, the employer) initiates a payment, like its employee’s biweekly paychecks. Employees just need to give the employer their checking account information (account number and routing number) to receive ACH transactions.
2. The originator’s bank (also known as ODFI, short for originating depository financial institution) batches the transaction along with other ACH bank transfers. These batched transactions are sent out at regular intervals during the business day.
3. An ACH operator (Federal Reserve or The Clearing House Payments Company) receives the batched transactions, sorts them, and submits them to the receiving depository financial institution (RDFI).
4. The receiving bank or credit union account processes the transaction and credits the receiving account (that of the employee).

All ACH transfers are categorized as either credit or debit transactions, with the classification being determined by the action of the originating party. 

Direct deposit, for example, is considered a credit transaction because the originating party moves money from their account to the recipient’s bank account, resulting in a debit from the originating account and a credit to the receiving account.

Direct deposit vs. direct payment 

ACH transactions can be broadly classified into two main categories: direct deposits and direct payments.

• ACH direct deposits: In ACH deposits, funds are transferred from the originator’s account to a receiver’s account. They are used for payroll, government benefits, interest payments, and tax refunds. 
• ACH direct payments: These are transactions that are transferred from a payer’s account to a payee’s account to make payments or settle bills. 

Direct payments are often used in business-to-business (B2B) transactions, such as making payments to suppliers or transferring funds between business accounts. 

How much does it cost to use and accept ACH payments?

ACH payment fees can be calculated in several ways—either as a flat fee per transaction, a percentage of a transaction, or a monthly cost. If you choose to accept ACH payments directly, your bank will determine the fees owed. Transfers such as bill payments, payroll direct deposits, and direct payments are often free of charge.

Many small business owners also choose to work with payment processors (such as Shopify Payments, PayPal, Stripe, or Square) to process business-to-business and business-to-consumer transactions. In this case, the third-party payment processor determines the cost of the transaction, with typical ACH transfer fees ranging from 0.8% to 1.5% of total transaction cost.

Benefits of ACH 

Cost

One advantage of using the ACH payment system is cost savings. Using ACH transfers to receive and send money allows companies to avoid paying credit card transaction fees, which can total up to 2.5% of the total transaction value. 

On a $10,000 sale, that’s $250—and because sales amounts cover operating costs and cost of goods sold, this fee can significantly eat into your profit margin. If your net profit on a $10,000 sale is $3,000, for example, a 2.5% credit card fee reduces your overall profit by 8.3%.

Security 

ACH payments offer security advantages over both paper checks and cash. Checks can go missing in the mail, and large amounts of cash require advanced security measures to discourage theft—think security guards and armored trucks. 

Electronic payments are less vulnerable, and ACH payments provide an additional advantage over instant transfers: ACH payments take between one to three days to process, providing a buffer during which businesses can stop payment if fraud is suspected or an error is identified. 

Convenience

Electronic processing of ACH payments makes it easy to set up recurring payments to vendors or employees, cutting down on your administrative burden and reducing operating costs. Customers and employees also appreciate the ease of ACH payments. 

Downsides of ACH

Processing times

Because ACH transfers are processed in batches, direct ACH payments are not processed instantly. It can take one to three business days for a transfer to appear in a recipient’s bank account once it is initiated. 

Some banks and credit unions also allow for same-day ACH transfers, which may be available for an additional fee. Note, however, that processing cutoff times may result in same-day transfers processing during the next business day.

Some third-party processors allow for instant ACH transfers by crediting money to a receiving account immediately within the processing app, then reconciling the accounts through the ACH transaction process at a later date. These processors may also have “instant” transfer options available.

No international payments

ACH payments can only be deposited into United States bank and credit union accounts. International money transfers require businesses to use wire transfers or other methods, such as mailing a paper check or initiating a transfer via a third-party payment processor.

Transaction limits

Some banks impose daily, weekly, monthly, or per-transaction limits on the amount of money that can be sent through the ACH system. For example, savings accounts are governed by Federal Reserve Regulation D, which limits certain withdrawals or transfers to six per month. If you go over the limit, you could get hit with a penalty. 

Check with your bank to make sure that its policies support the kind of transfers you need to support your business operations.

Use ACH to settle payments faster for your business

The business world moves fast—and writing a paper check or paying with a debit card is a frustrating process. A world where you can pay your subway fare with a tap of your credit card and purchase your groceries through fingerprint recognition is one where efficiency is key—for both your business and your customers.

ACH transfers offer increased security and convenience for both creditors and recipients at a relatively low cost. Your bank (or a third-party processor) can make sending and receiving payments an efficient and low-cost aspect of your business operations.

ACH payments FAQ

What is an ACH in banking?

ACH stands for Automated Clearing House payment. It is an electronic payment system for transactions between two parties. It is a secure and efficient way to transfer money from one bank account to another. ACH payments can be used for online payments, direct deposits, and bill payments.

What are examples of ACH payments?

Some examples of ACH payments include direct deposit, bill payments, peer-to-peer payments, and charitable donations. Some online retailers may also accept ACH payments as a payment method.

What is the difference between an ACH and a bank transfer?

Bank transfers, or wire transfers, are faster than ACH payments, ACH payments are cheaper and generally more secure. But, bank transfers can be sent internationally, whereas ACH payments are US-only.

Is PayPal considered an ACH?

PayPal itself is not considered an ACH. However, it does use ACH transactions to move money. When you link your bank account to your PayPal account, PayPal can use ACH transfers to deposit or withdraw money to and from your account.

How does someone pay you via ACH?

To pay someone via ACH, the payer needs to know the recipient's bank account number and routing number. When the payer has this information, they can initiate an ACH transfer through their bank's online system. Once the funds are processed, it usually takes a few business days to complete.

Is an ACH payment the same as an EFT?

An ACH payment is a type of Electronic Funds Transfer (EFT). But not all EFTs are ACH payments. An EFT payment can refer to many types of electronic payments, including ACH, wire transfers, and electronic checks.