What are ACH payments & how to send them: A full guide

ACH payments are one of the most popular B2B payment methods. But are ACH transfers the right choice for your business? In this guide, we’ll cover everything you need to know about ACH payments—from what they are to how they differ from options like wire transfers and how to send them.

What is an ACH payment?

An ACH payment, or Automated Clearing House payment, is an electronic funds transfer (EFT) between bank accounts through the ACH network, a central part of U.S. banking. As a go-to alternative to paper checks, wire transfers, and cash, it helps businesses move money securely and efficiently.

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Run by the National Automated Clearing House Association (NACHA), the ACH network is the standard system for bank-to-bank transfers across the U.S. At the same time, NACHA sets the guidelines for handling ACH payments. Companies commonly use ACH payments for payroll, government benefits like Social Security, interest payments, tax refunds, and direct bill payments to bank accounts without needing credit or debit card information.

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Sometimes, ACH payments are used interchangeably with ACH transfers or transactions. They’re almost identical in definition, but ACH payments broadly cover electronic transactions processed via the ACH network, while ACH transfers often refer to the act of transferring funds, like payroll and bill payments.

Types of ACH payments

With a clear understanding of ACH payments, let’s look at the different types and how each one functions within the direct payments category:

1. ACH credit (push transfer): This type of ACH payment lets you "push" funds from your account to another, like paying vendors or employees. For businesses, direct deposits to employees are a typical example of ACH credit.
2. ACH debit (pull transfer): An ACH debit, or "pull" transfer, happens when funds are pulled from another account, like when customers pay you. Setting up ACH debits allows you to receive customer payments automatically, making it ideal for recurring payments.

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While ACH credits and debits cover most ACH payments, it's worth noting the difference between ACH and general bill payments:

• ACH payments vs bill payments: Bill payments can be made in various ways—by ACH, check, or card—while ACH payments are a specific type of transfer done only through the ACH network, moving funds directly between bank accounts. This makes ACH one method of bill payment, but not all bill payments are ACH transfers.

Comparing ACH, direct deposit, and wire transfers

Beyond ACH credits and debits, it’s useful to understand the types of electronic transfers, like direct deposits and wire transfers:

• ACH payments vs direct deposit: ACH payments and direct deposits aren’t necessarily the same. Direct deposits are a type of ACH payment, specifically an ACH credit, where funds are deposited directly into a recipient’s savings or checkings account. Typically, “direct deposit” refers to payments from employers or government agencies, processed securely through the ACH network.
• ACH payments vs wire transfers: ACH and wire transfers are both types of bank transfers but work differently. Wire transfers allow for near-instant payments between two financial institutions, usually at a higher cost, while ACH transfers are more cost-effective and can take up to 1-3 business days to complete.

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ACH payments offer benefits that wire transfers don’t, including lower costs, support for automated recurring payments, and the ability to both push and pull funds, unlike wire transfers which are typically one-time transactions.

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Here’s a look at the main benefits of ACH payments over wire transfers:

• Cost-effective: ACH payments are cheaper than wire transfers and services like Stripe, Zelle, or Square, which is a plus for businesses with tight operating budgets.
• Cash flow control: Set it and forget it. You can set up recurring ACH payments to receive money from customers automatically.
• Low failure rates: ACH transfer and payment options are reliable and predictable. They take up to 1-3 business days to process and help you maintain strong vendor relationships.
• Automated payments: Automate ACH payments for easy tracking of accounts payable and receivables.
• Easy setup: ACH payments are easy to set up, with no extra infrastructure needed.

How long does an ACH transfer take?

ACH payment processing usually takes 1-3 business days, depending on the timing of your request and your bank’s processing schedule, as ACH debits are processed in multiple batches throughout the day. Each bank has its own cut-off deadlines, so requests submitted after business hours may not be processed until the next day.

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Thanks to technological advances and new NACHA guidelines, same-day ACH transfers are increasingly common. Though, one typical exception is when the sender's account has insufficient funds, affecting transactions like paychecks. In these situations, the RDFI will issue a rejection code.

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Zelle is sometimes mistaken for an ACH payment method, but it operates over a different network primarily designed for smaller, immediate person-to-person transfers rather than high-volume transactions.

How much do ACH payments cost to accept?

The cost of accepting ACH payments depends on the service provider, but they typically charge different processing fees for ACH transactions, which can vary:

• Per transaction costs: 0.5-1.5% 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

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Your ACH payment processor may charge a flat fee or a percentage per transaction based on the type of risk associated with your business. Factors such as business credit score, transaction volume, industry, and payment frequency can impact costs. Additionally, your ACH operator may have specific guidelines or fees.

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Some providers offer free pull or push payments but charge for the other, so check for details on all fees.

Are ACH payments safe?

Yes, ACH payment transfers are as safe as other digital or electronic payments, though they operate on a batch processing schedule rather than real-time. NACHA's operating rules cover all facets of ACH transfers, from third-party entity compliance to data security. Violating these rules carries a hefty fine and a significant loss of brand image for the violating institution.

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NACHA oversees almost 10,000 U.S. and Puerto Rico institutions as part of its ACH network compliance protocol. Anyone who reports a violation can contact NACHA's enforcement team. Typically, institutions monitor each other for violations, and consumers rarely encounter issues.

How sending ACH payments work

First, it’s important to understand how the ACH payment process works. There are five parties involved in an ACH transaction. They are:

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

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With each party's role in place, you can make ACH payments in one of two ways: by sending the funds directly as a ‘push’ payment (ACH credit) or allowing the payee to initiate it as a ‘pull’ payment (ACH debit).

How to pay someone via ACH

As a business, you’ll be the one initiating the ACH transfer. Here’s the process for paying someone with ACH:

1. You initiate the transfer: Start by requesting the transfer. For first-time transactions, enter and validate the required ACH information, such as the receiver’s name, account number, routing number, and bank information. Your bank or credit union will automatically retrieve these details for future transfers.
2. Sender’s bank submits an entry: Upon initiation, the ODFI (sender’s bank) submits an entry and begins the first phase of the ACH transfer.
3. Batch entries are sent: Banks group ACH entries into batches typically sent multiple times daily on business days between 9 AM and 4:45 PM ET. ODFIs will send ACH batches to Federal Reserve banks.
4. Batch entries are sorted: Federal Reserve banks sort the batch entries by the type of ACH transfers, separating push and pull transactions before forwarding them to the RDFI.
5. Funds are verified: The RDFI confirms if the ODFI’s account has sufficient funds before submitting it to the ACH network.
6. Funds are transferred: If funds are sufficient, the RDFI debits the sender’s account and credits the receiver’s.

Understanding ACH payment rejection codes

The ACH network has several rejection codes, but business owners only need to focus on four:

• R01—Insufficient funds: This error code is sent by the RDFI when the sender's account has inadequate funds. If you’ve initiated a pull transaction, you can retry or ask the payer to use a different payment method.
• R02—Bank account closed: Issued when the sender’s bank account is closed. Contact the payer to arrange an alternative payment if there is an error.
• R03—No bank account: Triggered if bank details are incorrect or outdated. The RDFI will send this error code to the ODFI. You’ll need to contact the payer or your bank to correct the information.
• R29—Withdrawal not allowed: When the ODFI blocks fund withdrawals, you may need to provide the ACH-originating ID to the RDFI. Contact your bank if necessary to resolve this.

Limitations of ACH payments

Using ACH payment systems has some drawbacks for businesses to consider before making them your primary payment method:

• Error code occurrences: Error codes may lead to additional costs. For example, if a customer cancels a subscription and you still debit them or their bank info changes without an update, you could incur fees. If your bank info changes, make sure customers use updated information to prevent rejected payments and possible fees.
• US-centric: ACH is limited to domestic transfers, so it’s unsuitable if you work internationally and need money transfers beyond the U.S.
• Lack of credit: ACH doesn’t support credit networks, so you can’t issue partial debits or credit notes.

Are ACH payments right for your small business?

ACH transfers are just one of several payment channels your business can use to accept payments. ACH payments are cost-effective compared to credit cards and wire transfers, but they aren’t ideal for every business model.

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If your business receives or makes the bulk of its payments through the modes below, here are a few situations where ACH might be the best fit:

• Subscriptions: ACH reduces processing costs on recurring membership or subscription payments.
• Rent: Monthly rent payments can be quickly debited from tenants’ accounts, saving time and fees.
• Recurring billing: Ideal for monthly retainers or regular invoices, ACH simplifies client payments.
• Payroll: ACH makes sure employees receive their pay on time with minimal fees.
• Utility and operating expenses: Automating bill payments streamlines monthly spend analysis and cash flow management.

Automate your accounts payable with ACH payments

Managing accounts payable processes for a small business can get complicated quickly. ACH debit transactions help you automate vendor payments, but most service providers don’t integrate them with broader AP workflows.

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‍Ramp’s corporate cards with accounts payable software lets you:

• Save time: 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 vendor setup: Centralize vendor onboarding and verify bank account information to make sure your payments go through. Vendors can verify their information via a secure link.
• Pay with multiple channels: Pay however you want with Ramp—through ACH, virtual credit cards, checks, or wire transfers.
• Save money: Ramp doesn’t charge processing fees for domestic bill payments.

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Try Ramp's accounts payable software to simplify payments, improve cash flow, and keep your business running smoothly.