If you work in a business-to-business space, you probably have heard of ACH transfers. Even outside of B2B, the ACH network has become so well-known that you probably have some awareness of it or have interacted with it in some way. In 2020, ACH transfers grew dramatically, reaching an unbelievable 26.8 billion electronic payments. This network has left an impressive mark on the electronic payment industry within the United States.
Even outside of the B2B sphere, ACH payments touch almost every person. So many payments like utility bills, credit card payments, and employee payroll are all financial transactions that are usually handled through this electronic network. They are safe, secure, and quick, making them an extremely popular method for electronic payments within many industries. Because of how helpful and increasingly common ACH deposits are, it is important to get familiar with them.
What is ACH?
ACH stands for the Automated Clearing House Network. This is a type of electronic payment that moves money between bank accounts using this special network. This is managed by a nonprofit organization called Nacha, or the National Automated Clearing House Association. ACH is often referred to as e-checks (electronic checks), direct pay, or direct deposits. A huge range of transactions, from Social Security payments to mortgage payments, are handled through ACH deposits.
This network connects all United States financial institutions so that they can easily move money from one account to another through a routing number and a bank account number. It is how, for instance, you get your paycheck in your checking account if using direct deposit. ACH payments continue to become increasingly common in our everyday lives.
What is a direct deposit?
A direct deposit is when a payment is made electronically directly into a bank account rather than through another payment method. This uses ACH to process the payment and is used in a large variety of applications. Many American workers have filled out a direct deposit form for work, and many also have gotten money back through this method from the federal reserve in the form of a tax refund.
In order for direct deposits to work, the person paying's bank sends out a request. This bank is considered the originating depository financial institution (ODFI). These details are sent through an ACH operator, which helps direct the payment to its correct location. Then the receiving bank, known as the receiving depository financial institution (RDFI), will see the request and add the money to the account.
Other types of electronic payments
One of the most common alternate electronic payment methods is a wire. The process for a wire is a little different than an ACH payment. First, you have to pay for the wire through your bank. Your bank will then securely send your payment details through whatever system they use, such as the Federal Reserve's Fedwire system or the SWIFT system. The transfer itself can take a handful of days actually to occur and can cost up to $50 dollars depending on your bank and where you are sending it (for example, domestically versus internationally).
Becoming more common, there are person-2-person (P2P) services that are becoming popular. All of them have different rules and processing times and have different levels of security, so it is important to do your research. Venmo, Zelle, and Paypal are all commonly seen types of P2P services. While they aren't always used in the business sphere, they don't often have huge fees and can be a viable option - especially for low-traffic, low transaction price businesses.
Money Transfers are more limited and are only offered by certain establishments. This allows for someone wanting to pay in cash or to do a cash pickup to do so through an in-person agent transaction. This is often a more niche situation, and while secure, requires a handful of unique steps depending on where you are handling the transaction.
Advantages of ACH payments
One of the most important advantages of ACH is its level of security. All payments go through an ACH operator like a clearinghouse with rules and regulations they enforce. These payments are also protected by strict Nacha operating rules that not only keep things flowing smoothly but keep you safe. Your transactions are sent directly from one account to another, and your account information is kept confidential throughout the process. Even if fraud does occur, often the payment processor will help provide reimbursements for your money.
Another advantage is that ACH payments are fast and simple. Traditionally when paying rent or an invoice, you would sometimes send a paper check through the mail. This can lead to many problems, such as the check getting lost or delayed in the mail. With an ACH payment, not only is there no chance of it getting to the wrong place unless the initial routing and account numbers were inaccurate, there is no continuous manual entry per payment since reoccurring payments can happen automatically. These are quick transactions that usually arrive within 1 to three business days. On top of all of this, you don't have to visit a bank in person or manually write and send checks to the receiver, saving you time and potential fees.
While cash and credit cards are still commonly used in storefronts, merchants who can use ACH to be paid into their receiving account have many advantages. For instance, while credit card fees can be in the 4% range per transaction, ACH often costs less than $1 per payment. Alternatively, while sending a paper check is often cheap, the labor involved in the process can end up canceling that out entirely. If you are a business with a lot of purchases, that can add up!
Lastly, recurring billing alone is a great reason to use ACH payments. Consider utility payments - if every customer had to manually pay through paper check or wire transfers every time they needed to pay utilities, there would be significantly more missed payments and headaches for both parties. This is also the case for businesses, especially those with a subscription-based or reoccurring payment model. By implementing ACH payments, you prevent a whole swath of cash flow issues from missed payments, incorrect manual entry, and extra labor costs when tracking inconsistent charges.
How Routable helps with ACH payments
Are you starting a business or looking to transition into ACH payments for your business-to-business transactions? If so, using an automated payment solution like Routable can help you track and process these transactions even easier. With features like addenda records and same-day ACH transactions, we can help you manage your sales regardless of scale. We also are adaptable to your workflow; no matter how you receive your invoices or bills (manual PDF uploads, paper, or email), we can help you get them processed, approved, and paid efficiently. Let us help you simplify and save money on your accounts payable process while saving your team time repeating tedious manual tasks.
Lower your costs and help empower your team to deliver by implementing automated payables or receivables software. Get a demo with Routable today to see how we can help you improve your team's flexibility and control.