July 7, 2022
Explainer

ACH payments 101: How they work, how long they take, and is it your best option?

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ACH payments, one of several B2B payment methods, are one of the most popular ways for businesses to send and receive money. The question is: are ACH transfers right for your company? 

In this guide, you will learn everything about ACH payments, including the following:

What is an ACH payment?

An Automated Clearing House or ACH payment transfers money from one bank account to another without a paper check, wire transfer, or physical cash. You’re probably using the ACH network if you pay bills by transferring funds directly into another bank account without entering credit or debit card information.

ACH is a form of direct payment and exists on the Automated Clearing House Network. You can set up ACH in your business checking or savings account.

Here are a few facts about the ACH network:

5 benefits of ACH payment for businesses

ACH payments hold numerous benefits for businesses, given their electronic nature. Here are some of the most important ones:

  • Inexpensive to process: ACH payments are cheaper than wire transfers and credit card payments. They also cost less than services offered by payment processors like Stripe, Zelle, or Square.
  • Greater control over cash inflows: You can automate ACH payments and receive money on designated dates without follow-ups.
  • Low failure rates: ACH payment options are reliable and almost instantaneous.
  • Automated: You can automate ACH payments to suppliers or receive money from customers.
  • Easy setup: ACH payments are not complicated to set up and do not need additional infrastructure.

Types of ACH transfers

There are two types of ACH payments:

  • ACH credit or push transfers: Set payment instructions and pay your bills automatically. ACH push transfers can help you track expenses better since you can predict cash outflows and positions ahead of time. You can also use push transfers to pay your employees. For example, salary direct deposits are push transfers.
  • ACH debit or pull transfers: If your customers set up ACH payments, you will receive money from them automatically on a specified date. By doing this, you eliminate the need to follow up or chase after payments.

How much do ACH payments cost?

Here is a breakdown of ACH payment processing costs:

  • Per transaction costs: 0.5 to 1.5 percent or flat rates of $0.25 to $1.75 per transaction
  • Internal payment processing costs: $0.29 per transaction
  • ACH processing monthly maintenance costs: $20
  • ACH batch processing fee: $1 per batch
  • ACH return fee: $2 per transaction

Your service provider will charge you a percentage per transaction or a flat fee. The model and fee charged depend on your business and the risk it exposes the service provider.

Here are some of the factors that determine the risk inherent in your business:

  • Your business' credit score
  • Payment frequency
  • Collection record
  • Number of years in business
  • Profitability
  • Transaction volume
  • Industry—service providers consider sectors such as gambling and check cashing high-risk

Check whether your service provider offers both push and pull ACH payments. Some service providers might offer pull payments for free but might charge you to push payments or vice-versa.

Are ACH payments safe?

Yes, ACH payments are just as safe as other digital or electronic payments. NACHA's operating rules cover all facets of ACH transfers, from third-party entity compliance to data security. Violating these rules carry a hefty fine, along with a significant loss of brand image for the violating institution.

NACHA oversees almost 10,000 institutions in the US and Puerto Rico as part of its ACH network compliance protocol. In case of a violation, anyone can contact NACHA's enforcement team by reporting the incident. Typically, institutions monitor each other for violations, and consumers rarely encounter issues.

Is ACH the same as a bank transfer? 

ACH payments are not the same as bank transfers, even though both payment methods involve account-to-account money transfers. Here are the differences summarized:

Bank transfers
ACH payments
Can take several business days
Takes two business days at the most
Costs a percentage of the transaction
Costs either a flat fee or a small percentage of the transaction
Requires manual approval from bank compliance
Fully automated
Generally secure. Tough to retrieve funds sent to the wrong account
Extremely secure. Transactions can be withdrawn or returned in case of errors
Can initiate only push transactions
Can initiate push or pull transactions

How do ACH payments work?

There are five parties involved in an ACH transaction. These are:

  • Sender: The party sending funds
  • Originating Depository Financial Institution (ODFI): The sender's bank
  • Federal Reserve banks: These are ACH network intermediaries that handle ACH batches
  • Receiving Depository Financial Institution (RDFI): The receiver's bank
  • Receiver: The party receiving funds

Here are the six steps in the ACH transfer process. In the steps below, we've highlighted an ACH credit or pull transaction process. In a push process, the only change is that the receiver initiates the transaction, and the RDFI begins the process.

Step #1: Initiation

The sender begins the process by requesting a fund transfer. If this is the first transaction between both parties, the sender will have to enter and validate the receiver's banking details, such as:

  • Account beneficiary name
  • Account number
  • Routing number
  • Receiver's bank name and address

During subsequent transactions, the sender's bank will automatically retrieve these details.

Step #2: Entry submission

Upon initiation, the ODFI submits an entry and begins executing the first phase of the ACH transfer.

Step #3: Batch entries sent

Banks and financial institutions group ACH entries in a batch before sending them. They usually send batches three times everyday between 9 AM to 4:45 PM ET. 4:45 PM ET is the daily cutoff for batch processing.

ODFIs send ACH batches to Federal Reserve banks. These banks are intermediaries in the ACH system regulated by the US government. They are authorized to handle money transfers between banks.

Step #4: Batch entries sorted

The Federal Reserve banks sort the batch entries based on transaction types. Push and pull transactions are separated and passed forward to RDFIs.

Step #5: Fund verification

Once an RDFI receives an ACH notification, it checks whether the ODFI account has sufficient funds. If funds are insufficient, the RDFI raises an error and communicates this message to the ODFI.

Step #6: Money is transferred

If sufficient funds are present in the ODFI bank account, the RDFI debits that account and credits the receiver's bank account.

How long does an ACH transfer take?

An ACH transfer typically takes one to two business days at the most. They‘re usually completed by the next business day. If an ODFI sends a transaction with their first batch, the receivers' bank account might be credited the same day. They are not real-time transfers.

Same-day ACH transfers are increasingly common thanks to technological advances and NACHA's new guidelines. The only exception to this timeline occurs when funds in the sender's account are insufficient.

In these situations, the RDFI will issue a rejection code.

ACH payment rejection codes

The ACH network has several rejection codes. However, business owners need to pay attention to just four:

  • R01—Insufficient funds: This error code is sent by the RDFI when the sender's account has inadequate funds to cover the transfer. If you're expecting payment and have initiated a pull transaction, you can run the request again, or contact the payer to initiate a new payment method. In this case, the sender (person paying money) has to pay penalties.
  • R02—Bank account closed: This RDFI sends this code if the sender's bank account is closed. If you receive this error, contact the payer and arrange a new payment channel.
  • R03—No bank account: If you've entered incorrect bank details or the sender's bank account details have changed, the RDFI will send this error code to the ODFI. You'll have to contact the payer or follow up with your bank to sort this issue.
  • R29—Withdrawal not allowed: Sometimes, the ODFI will not allow fund withdrawals from the sender's account. In such cases, you will have to provide the ACH originating ID to the RDFI, if your bank doesn't do this automatically. Contact your bank and have them send the originating ID to solve the issue.

Is ACH payment right for your small business?

ACH transfers are just one of several payment channels your business can use to accept payments. While ACH payments are cheaper to process than credit cards and wire transfers, they aren't suited to every business model.

Here are a few transaction types that are ideal for ACH payments. If your business receives or makes the bulk of its payments through the modes below, ACH transfers are right for you.

  • Subscriptions: If your customers pay you through subscriptions or memberships regularly, ACH payments will help you reduce payment processing costs significantly.
  • Rent: If the bulk of your payments is from monthly rent payments, directly debiting money from your tenants' accounts makes sense.
  • Recurring billing: If you collect money through monthly retainers from your clients and invoice them regularly, ACH transfers are a good choice.
  • Payroll: ACH debits are a good way to ensure your employees get paid on time with minimal fuss and fees.
  • Utility and operating expenses: Automating these bill payments through ACH direct debits or push transactions will simplify your monthly spend analysis process and cash flow projection.

The limitations of ACH payments

ACH payments have a few drawbacks for business owners. Make sure none of these hurdles will hobble your business before adopting ACH as your primary money transfer method.

  • Less user-friendly: Setting up ACH transfers can be tedious. Senders must enter the receiver's bank information correctly, or they'll be hit with rejection charges. Thus, you might find it hard to convince customers to sign up and set up pull transactions.
  • Error code occurrences: Error codes increase transaction costs. If a customer cancels a subscription and you debit them, you'll be hit with fees. If the customer's bank account information changes and you don't update your system, you'll pay a penalty. If your bank information changes, you'll have to notify all your customers to make changes. Fail to do this, and they'll be hit with rejection codes.
  • US-centric: ACH is a domestic-only payment channel.
  • Lack of credit: ACH operates on a cash basis. You cannot partially debit customers and issue a credit note. Integrating this functionality ad-hoc on every transaction is close to impossible.

Ramp Bill Pay—A better alternative to ACH payments

As a growing business, you must cater to several vendors. Managing your AP processes is tough in such situations. Vendor invoices must be approved and signed off by the right personnel. 

You must also confirm whether invoice payment terms match contract stipulations. Fail to do so, and you'll lose control of your expenses. ACH debit transactions help you automate payments to your vendors. However, they do not integrate with broader AP workflows.

Here's how Ramp Bill Pay simplifies vendor payments.

Save time

Ramp Bill Pay helps you process hundreds of invoices quickly. You can save 10 minutes per invoice by digitizing approval workflows and automating document matching. Ramp's AI engine takes care of everything, saving you time and money.

Streamline onboarding

One of the issues with ACH transactions is they don't account for bank information changes. If a vendor enters incorrect information or gives you wrong details, payments are rejected.

Ramp Bill Pay helps you centralize vendor onboarding and verify bank account information. Vendors can verify their information via a secure link.

Multiple payment channels

Pay however you want with Ramp Bill Pay. You can initiate ACH, virtual credit cards, or wire transfers to your vendors.

The ACH network is a great choice for many businesses. However, it is one of several options. Evaluate the benefits and drawbacks of this payment channel before adopting it.

Learn more about Ramp today.

Learn how Ramp strengthens your finances

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FAQs
What happens if an ACH payment is returned?

A returned payment will have a rejection code attached to it. Review the code and contact your bank for further steps.

What information is needed to make an ACH payment?

Receivers will need the sender's:

  • Account beneficiary name
  • Account number
  • Routing number
  • Bank name and address

Senders will need to enter the receiver's bank information if they initiate the transaction.

How to stop an ACH payment?

You can stop recurring ACH debits by contacting your bank three business days before the transaction will be executed. Every bank has different policies. Some allow you to issue stop orders online or over the phone. Some banks will ask you to prepare a stop ACH payment letter.

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