More and more businesses today are using automated clearing house (ACH) transfers to simplify payments to vendors, suppliers, and employees, and to receive payments from customers. ACH payments are a safer, faster, and more efficient payment method than mailing paper checks, and often more cost-effective than processing debit or credit cards.
What are ACH Payments?
ACH payments are electronic payments. Put simply, ACH payments move money electronically between bank accounts using the Automated Clearing House (ACH) Network, an electronic funds transfer system managed by the nonprofit National Automated Clearing House Association (Nacha). You’ll often hear ACH transactions referred to as “direct deposit” or “direct payment.”
ACH transfers include payroll direct deposit, Social Security benefits, and tax refunds. Consumers frequently use ACH debit transfers to pay recurring bills like mortgages and utilities. Businesses use the network to process large volumes of transactions as well as one-time payments to vendors and suppliers.
Business use of ACH payments continues to grow rapidly: In the third quarter of 2020, B2B payments jumped by 12.4% over the same quarter of 2019.
How Do ACH Payments Work?
ACH payments go through several steps to ensure the security of the transaction (hence the “clearing” part of the “clearing house). Here are the basic steps for making an ACH payment to a vendor:
1. Your business—the “payment originator”—initiates the payment by authorizing the transaction.
2. Your bank, known as the Originating Depository Financial Institution (ODFI), records the transaction.
3. The OFDI sends batches of ACH requests one to three times each day to the ACH operator.
4. The ACH operator receives the batches, accept the requests, and processes them, making sure they get to the correct financial institution and account.
5. The ACH transmits the requests to your vendor’s bank, referred to as the Receiving Depository Financial Institution (RDFI).
6. The funds should reach the vendor’s account within one to three business days; meanwhile, you’ll see a debit in your account showing that the payment has been deducted. Nacha rules determine the timeline, although a recent rule makes some payments are eligible for same-day payments, referred to as “same-day ACH.”
Types of ACH Transactions
ACH transfers are either debit transactions, where money is deducted from your account to make a payment, or credit transactions, where funds are transferred into your account.
You should also know that Nacha requires ACH transactions to include an ACH Standard Entry Class (SEC) Code, which indicates how the payment originator authorized the transaction. There are specific codes for B2B transactions; you’ll need to choose the correct entry class before processing ACH payments, because incorrectly coded payments can be disputed.
Benefits of ACH Payments
ACH payments are usually a better choice for businesses than paper checks and wire transfers, especially for businesses making large volumes of B2B payments.
They’re less expensive
Whether you’re making a payment or receiving one, ACH transfers are typically much less expensive than wire transfers, credit card payments, or debit cards—and certainly less expensive and less hassle than paper checks. Payment processors usually charge a flat ACH processing fee of less than $1 per payment. The more transactions you process, the lower the cost to your business, especially when compared to credit card fees.
In contrast, wire transfers within the United States usually cost between $25 and $30, making them impractical if your business makes high volumes of B2B payments.
They’re more efficient
ACH payments reduce processing time. For high volumes of B2B payments, ACH transactions win hands down over wire transfers or other forms of payments, especially for paychecks, bills, and supplier invoices. They allow businesses to streamline both payments and receivables processes, reducing errors and relieving AP departments from time-consuming manual processes. And they get vendors paid faster, strengthening business relationships.
They’re more secure
Paper checks can get lost or stolen, putting your business’s bank account information into the wrong hands and exposing you to fraud. ACH payments transfer money directly between accounts with bank-level encryption, preventing confidential information from being compromised.
Furthermore, ACH payments are subject to Nacha rules and regulations, so ACH Network participants must follow numerous security measures around protecting sensitive data and verifying identities. If there’s fraud or a mistake, most payment processors will reverse the charges; in contrast, a wire transfer can’t be reversed.
ACH payments also provide businesses with more protection than credit cards, where charges can be reversed fairly easily. Customers can only dispute ACH charges for three reasons:
1. They never authorized the transaction, or they revoked authorization.
2. The transaction was processed on date that was earlier than authored.
3. The transaction was for a different amount than the one authorized.
To dispute a charge, the account holder must notify their bank in writing within 60 days of the payment.
Compared wire transfers, initiating ACH payments from one U.S. company to another requires the least amount of information. Typically, all you need from the recipient is:
- The 9-digit ABA/routing number of the receiving bank
- The recipient's bank account number
- The recipient's name, as listed on the account
- The recipient's address, as listed on the account
ACH payments also make things easier on your accounting department, which can track payments more easily. There’s no need to account in your books for paper checks that have been mailed but not cashed.
How Routable can help with ACH payments
If you’re considering setting up ACH payments for B2B transactions, automated payment solutions such as Routable can simplify the process even further. Routable allows you to receive bills or invoices in the way that’s most convenient to you—by email, manual PDF uploads, or batch processing—then then get them approved and paid quickly. Routable even supports same-day ACH transactions up to the U.S. federal government’s current limit of $25,000, as well as next-day transfers.
Routable also lets you accept ACH payments from customers, so your business gets paid faster while maintaining transparency.