- What is ACH, and how does it work?
- What are the different types of ACH payments?
- What are the benefits for payment operations?
- How does an API enable automation?
Collecting and disbursing payments is a critical piece of a business’s payment operations. From startups to large corporations, every business can benefit from streamlined payment processing technology.
Modern, automated payment operations unlock the full potential of payments by eliminating the need for traditional paper checks, manual processes and the hidden costs that come with them. Through the power of ACH and an updated payments platform, businesses can improve cash flow, account reconciliation and even profitability.
What is ACH, and how does it work?
ACH stands for the Automated Clearing House Network, which manages billions of electronic transactions yearly throughout its network of US financial institutions and supports both ACH credit and debit payments. The National Automated Clearing House Association (Nacha) governs this network, setting its rules and regulations.
An ACH payment is an electronic transaction between two bank accounts that typically takes one to five business days to complete. ACH payments are used for various purposes, such as payroll direct deposits, bills and vendor and supplier transactions, and in some ways offer a higher level of security compared to traditional checks. For those needing faster processing, Same Day ACH allows a credit or a debit to settle within the same business day. It’s important to understand that while ACH transactions are faster than mailing a check, they are not instantaneous, even if they’re automated—no such thing as instant ACH exists.
Under the ACH umbrella, bank-to-bank transfers are processed reliably via the ACH Network. The ACH network keeps track of all the transactions happening between banks throughout the day. This ensures funds go exactly where they should go and keeps everything organized.
What are the different types of ACH payments?
The ACH Network supports various payment types for different scenarios, but the most common categories are credits and debits. Below, we’ll break down the specifics of these two payment types.
ACH credit transactions, also known as push transactions, are the process of electronically sending money to a bank account. An example is an employer depositing a paycheck directly into an employee’s bank account— funds are being pushed into the account.
ACH debit transactions, also known as pull transactions, withdraw funds from a bank account and deliver them to another bank account. This method is commonly used for recurring payments that can be automated for timely and efficient transactions. An example is a lender automatically withdrawing monthly car loan payments from a borrower’s bank account.
Both transaction types are entered into the ACH payments system by an originator responsible for obtaining the required authorization for each transaction.
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What are the benefits for payment operations?
ACH payments have grown significantly in popularity—and for good reason. Automated ACH can solve many of the pain points in a business’s payment operations when they use:
If a business is primarily processing checks, using automated ACH can offer these benefits.
| Faster processing times | ACH allows for faster settlement compared to traditional paper-based methods. Instead of waiting for physical checks to be mailed, received and processed through the banking system, ACH enables electronic delivery and clearing, reducing the time it takes to complete the transaction. |
| Improved efficiency | Automation streamlines the check processing workflow. With ACH, a business can automate the entire process, from payment initiation to settlement, reducing manual intervention and the risk of errors. This efficiency translates to cost savings and a more streamlined accounts receivable/payable process. |
| Lower costs | According to AFP’s 2022 Payments Cost Benchmarking Survey, the median cost of initiating and receiving an ACH payment for all businesses is between 26 and 50 cents. This is a substantial difference from the $2.01 to $4.00 median cost of issuing a paper check. ACH payments have some of the lowest transaction fees and can be processed in large batches and even automated, which can help reduce overall costs and the risk of human error. |
| Enhanced security | Checks can be lost or stolen, leading to potential fraud or identity theft risks, and the manual process around paper checks leaves room for human error and makes them more susceptible to fraudulent activity during mailing. ACH transactions are encrypted, reducing the likelihood of unauthorized access. To help reduce risk, NACHA has rules and regulations for anyone trying to authorize a transaction through the ACH Network. |
| Reduced risk of failed transactions | Bank connectivity providers offer the ability to verify account information and funds availability. Integrating these tools alongside ACH automation can significantly reduce the risk of failed transactions due to insufficient funds, helping businesses maintain a stable cash flow. |
| Simplified reconciliation | With ACH, transaction information is electronically recorded and can be easily integrated into accounting systems. This streamlines the flow of data and increases the accuracy of the reconciliation process. |
| Eco-friendly and sustainable | ACH contributes to a more eco-friendly and sustainable business practice by reducing paper waste and the environmental impact of traditional check processing. |
| Increased convenience for customers/vendors | ACH allows customers or vendors to receive and process payments electronically, which can enhance customer satisfaction and improve business relationships. |
If a business is primarily processing credit cards, using automated ACH can offer these benefits.
| Cost savings | ACH transactions often have lower processing fees compared to credit card transactions. Where card processing fees are typically a percentage of the transaction, many ACH providers charge a small flat fee per transaction. This particularly comes into play with high-value transactions. |
| Recurring payments | ACH is well-suited for recurring payments, such as monthly subscriptions or membership fees. Credit cards expire every few years, and customers might switch credit cards due to compromised data or seeking better rewards. Changing banks, however, is inconvenient, so customers tend to keep the same bank account for many years. Consequently, using ACH for recurring payments can reduce the risk of expired payment information or declined cards and time spent asking customers for an updated payment method. |
| Returns and reversals instead of chargebacks | Chargebacks can be a challenge for businesses processing credit card payments. The ACH process uses returns and reversals instead, which tend to have lower fees and be more business-friendly. |
| Enhanced security | Credit card transactions generally experience a high incidence of fraud. As we covered above, ACH transactions and the ACH network offer robust security features, reducing the risk of fraud and unauthorized access. |
| Eco-friendly and sustainable | Similar to check processing, ACH is a more eco-friendly option than credit cards, as it reduces the need for physical materials like plastic cards and paper receipts. |
| Simplified reconciliation | Credit card transactions are sent in real time and vary in format and processing timelines. ACH transactions are batch processed, have a standard format and process predictably, which makes it easier to collect information about them and reconcile them with bank account records. |
If a business is primarily processing ACH manually, using automated ACH can offer these benefits.
| Efficiency and time savings | The most apparent advantage of using automated ACH is the efficiency it brings to the transaction process. Manual ACH processing involves time-consuming tasks like data entry, verification and submission. With automation, you can streamline these processes, significantly reducing the time and effort required to handle ACH transactions. |
| Reduced errors | Manual data entry is prone to human errors, such as mistyping account numbers or payment amounts. Automated ACH processing minimizes these mistakes by eliminating the need for manual data entry. |
| Lower operational costs | By reducing manual labor and associated administrative tasks, automated ACH processing can lead to cost savings in the long run. It enables your team to focus on more strategic tasks rather than repetitive manual processes. |
| Faster transaction processing | Manual ACH processing often takes longer to complete, leading to delays in funds transfers and reconciliation. Automation can expedite the process so funds are transferred and settled more promptly. |
| Improved cash flow management | With faster transaction processing and settlement times, automated ACH can enhance cash flow management for your business, help you meet financial obligations and improve your overall financial planning. |
| Enhanced security | Automated ACH processing typically includes robust security measures, like tokenization, to protect sensitive financial information during transmission. It reduces the risk of data breaches or unauthorized access that may occur when manually handling sensitive financial data. |
| Better transaction tracking and reporting | Automated systems provide detailed transaction logs and reports, making it easier to track payment statuses, reconcile accounts and generate financial insights. |
| Scalability | As your business grows and the volume of ACH transactions increases, manual processing can become overwhelming and prone to errors. Automation allows businesses to scale to higher transaction volumes without compromising accuracy and efficiency. |
How does an API enable automation?
The world of automated ACH payments offers a wealth of benefits, and an ACH API is the bridge that connects businesses to the ACH Network for automated transactions. ACH APIs enable a streamlined payments experience by allowing businesses to automate their manual and repetitive payments processes, including data entry and verification, confirmation and reconciliation of payments. Businesses don’t have to stress over paper checks, credit card processing or manual ACH processes. Automation using ACH APIs reduces the risk of errors and cuts down on costs associated with manual labor, leading to more payment efficiency and more time for your business to focus on what’s important.
Check out how this healthcare company used ACH and automation to digitally transform their payment operations and improve their data capture by 300%.
Before advanced payments technology, sending and receiving funds was a major obstacle. With the integration of an ACH API, like Dwolla’s, businesses can improve and streamline their payments operations and stay ahead of their customers’ expectations for a digital payments experience.
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