ACH 101: Connecting Your Business to the ACH Network

Before we jump into the deep end of what the ACH Network is and how it works, let’s establish some helpful definitions and demystify some acronyms.

The Automated Clearing House Network processes more than 29 billion transactions each year. This electronic Network is how banks and credit unions in the United States move funds between bank accounts, and it has formed the foundation of the United States payments industry since its inception in 1972. ACH transactions are governed by both Federal Reserve Bank regulation and rules established by Nacha.

The ACH Network moves an incredible amount of money—$73 trillion in 2022—from business accounts to personal accounts, from personal accounts to personal accounts, from business accounts to business accounts, and more. Most electronic payments that are initiated by providing bank account information—as opposed to a credit card—are ACH transactions.

And it’s growing.

According to a recent report by Nacha, the ACH Network handled 7.6 billion transactions in the fourth quarter of 2022, a 2.3% increase from Q4 in 2021. As money flows through this Network, it’s important to understand the steps in the process that enable fast and secure payments.

Sending Money via the ACH Network

To send money through the ACH Network, a business or individual initiates an ACH credit entry (also known as a push transaction). This process enables an originator to push money through the ACH Network to another bank account.

Here’s how the transaction happens.

1. A business/individual (the originator) instructs their financial institution (the ODFI) to send a certain amount of money from their bank account to an individual or business (Receiver) at another financial institution (RDFI). This might be to pay an employee via direct deposit or to pay a vendor invoice. *Note: The originator is responsible for getting the authorization needed to send the receiver the money.
2. The financial institution (the ODFI) receives the payment instructions, batches them with all the instructions it has received in a certain time period, and electronically sends that batch of instructions to its ACH operator.
3. The ACH operator passes the instructions on to the receiver’s financial institution (the RDFI).
4. The ACH operator calculates net settlement totals (ACH credit entries vs. ACH debit entries) for its financial institutions for that day and submits the totals to the Federal Reserve.
5. After settlement, the RDFI will credit (or push) the amount of money in the instructions into the receiver’s account, and the ODFI will debit that same amount from the originator’s account. *Note: The timing of the debit from the originator’s account can vary based on the ODFI.

Let’s go through those same steps with a common use case: a business directly depositing an employee paycheck. When an employee starts at a new employer and fills out their new hire paperwork, it includes which bank account they give the employer permission to electronically deposit their paycheck into.

1. When the employer runs payroll, it sends instructions to its financial institution (the ODFI) to electronically send the funds for a paycheck from its bank account via ACH on a specified settlement date.
2. The ODFI receives these instructions, batches them with all the instructions it has received in a certain time period, and sends that batch of instructions to its ACH operator.
3. The ACH operator passes the instructions to the employee’s financial institution (the RDFI).
4. The ACH operator calculates net settlement totals (ACH credit entries vs. ACH debit entries) for its financial institutions for that day and submits the totals to the Federal Reserve.
5. After settlement, the employee’s financial institution credits the employee’s account for the amount of the paycheck, and the employer’s financial institution debits the employer’s account for that same amount. *Note: The timing of the debit from the originator’s account can vary based on the ODFI.
   
   

Receiving Money via the ACH Network

To receive money through the ACH Network, the ACH process actually works in the exact same way, but the funds move in reverse. A business or individual can initiate an ACH debit transaction (also known as a pull transaction). This process enables an originator to pull money through the ACH Network from a receiving party’s bank account.

Here’s how this transaction happens.

1. A business/individual (the originator) instructs their financial institution (the ODFI) to pull a certain amount of money from an individual or business (Receiver) at another financial institution (RDFI). This might be for a business executing automatic bill pay instructions for a customer. *Note: The originator is responsible for getting the authorization needed to request the money from the receiver’s account.
2. The financial institution (the ODFI) receives the payment instructions, batches them with all the instructions it has received in a certain time period, and electronically sends that batch of instructions to its ACH operator.
3. The ACH operator passes the instructions on to the receiver’s financial institution (the RDFI).
4. The ACH operator calculates net settlement totals (ACH credit entries vs. ACH debit entries) for its financial institutions for that day and submits the totals to the Federal Reserve.
5. After settlement, the RDFI will debit (or pull) the amount of money in the instructions out of the receiver’s account, and the ODFI will credit that same amount into the originator’s account. *Note: The timing of the debit from the receiver’s account can vary based on the RDFI.

Let’s take a look at how these steps play out using the example of an individual that has automatic payments with their utility company. An individual registers for their local utility services and provides their banking information to the utility company to set up recurring monthly payments. This gives the utility company permission to automatically pull money from the individual’s account to pay their utility bill.

1. When the individual’s utility bill is due, the utility company sends automated instructions to its financial institution (the ODFI) to pull the amount of the bill from the individual’s account and deposit that amount into its bank account.
2. The utility company’s financial institution (the ODFI) receives the instructions, batches them with all the other instructions it has received in a certain time period, and electronically sends that batch of instructions to its ACH operator.
3. The ACH operator passes the instructions on to the individual’s financial institution (the RDFI).
4. The ACH operator calculates net settlement totals (ACH credit entries vs. ACH debit entries) for its financial institutions for that day and submits the totals to the Federal Reserve.
5. After settlement, the individual’s financial institution (RDFI) will debit (or pull) the amount of the utility bill out of the individual’s account, and the utility company’s financial institution (ODFI) will credit that same amount into the utility company’s account. *Note: The timing of the debit from the receiver’s account can vary based on the RDFI.
   

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How long it takes to complete an ACH transaction varies depending on a number of factors. Many ACH transfers can be completed within one or two business days, but the type of transaction, potential errors, and the ACH’s batching process can affect this timeline.

ACH transactions aren’t real-time or instant transactions. Instead, the transactions post and settle in batches. These batches of ACH transfers are sent by banks to the ACH Network, similar to how a letter dropped in a mailbox waits to be picked up by the U.S. Postal Service.

The ACH Network processes batches of transactions at specific times during the day, so there may be a delay between the initiation of the transaction and the instruction being sent to the ACH Operator. For example, let’s say a bank sends its ACH files to an ACH Operator at 11 a.m., 3 p.m. and 6 p.m. In that case,

• An entry originated at 11:02 a.m. won’t be sent to the ACH Operator until 3 p.m.
• An entry originated at 6:05 p.m. won’t be sent to the ACH Operator until the next business day at 11 a.m.

And there are other factors involved. Let’s go back to the payment to a utility company for a moment.

Let’s say an individual’s utility bill is due, and the company initiates the transaction by sending the ACH file to their financial institution on Friday at 6:30 p.m. However, the financial institution sends its last batch of ACH files to the ACH Operator at 6 p.m., so the file has to wait until Monday to be processed.

This particular Monday is a bank holiday, so the financial institution is closed and doesn’t process any ACH files. The financial institution finally processes the file and sends it to the ACH Operator on Tuesday, and the transaction will settle on Wednesday.

If an individual’s payment information was entered incorrectly, if their funds were insufficient, if they hadn’t authorized the transaction in the first place or if there is another issue, the financial institution will issue one of more than 80 ACH Return Codes. While we aren’t going to get into return codes here, you can check out this resource for more information.

If speed is a priority, the ACH Network provides several windows to send ACH files and Same Day ACH, which offers settlement of ACH transactions on the same business day the instructions are sent. Learn more about them and how they impact the payment processing timeline from this resource.

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Whew, that was a lot of information to digest! Now that you have a better understanding of how money moves within the ACH Network, let’s dive deeper into how ACH can benefit you and your business operations.

Lower Costs

When comparing the cost of an ACH payment to debit/credit cards, checks or wire transfers, ACH transactions are generally less expensive. Typical ACH transaction fees range from $0.26 to $0.50 per transaction. Percentage-wise, that’s an average of 0.5% to 1.5%. A quick comparison of your current payment fees to these numbers will show you just how much you could save by taking advantage of ACH payments. *Note: Higher risk businesses may be required to pay slightly higher per transaction fees to offset potential returns.

Efficiency

A major advantage of using ACH for payments is the ability to automate recurring payments, such as bills for utilities or subscriptions. Instead of manually writing and mailing checks, businesses can use software to schedule these payments, saving significant time and resources. This automation not only increases efficiency, but also improves security by reducing the risk of lost or stolen checks. Additionally, it eliminates the need to purchase paper checks and postage, resulting in cost savings for the business.

Reliability

The ACH Network is a highly secure and reliable system, with a low incidence of errors or fraud.

Flexibility

Businesses can choose the payment speed, schedule and amounts that best suit their needs. This allows businesses to strike the right balance between speed and cost, and adapt to changing business conditions. Depending on the ACH setup, businesses may even have the option to choose different payment speeds for different parts of the transaction, which can reduce costs and risks. Unlike credit cards and wire transfers, which typically offer only fast but expensive options, or paper checks which are slow and insecure, ACH payments offer a range of options that can be tailored to meet the specific needs of the business.

Learn more about the timing of various payment methods in the ACH Network in this guide.