ACH payments: what are they and how do they work?

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?

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

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What is an ACH payment transfer?

An Automated Clearing House (ACH) payment transfers money from one bank account to another in the U.S. without requiring a paper check, wire transfer, or physical cash. It’s a form of direct payment through the Automated Clearing House Network. Most people can easily set up ACH payments in their business checking or savings account.

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One of the most common ways to use ACH payments is for paying bills online with an electronic funds transfer or EFT. This skips the need for credit card or debit card information and can speed up the payments process. Another common use case is paying employees via direct deposit. That form of payment is also done with an ACH. 

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As a business owner, you’ll typically use an ACH service provider, or payment processor to accept ACH payments from customers.

What is the ACH network?

The ACH network is run by the National Automated Clearing House Association, also known as NACHA. It’s a regulatory body that has monitored the ACH network in the U.S. since 1974. In 2022 the network processed 30 billion payments amounting to nearly $77 trillion.

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5 benefits of ACH payment for businesses

ACH payments have multiple benefits for small businesses thanks to the fact that they’re direct, electronic, and secure. 

1. Inexpensive to process 

ACH payment transfers are cheaper than wire transfers. They also cost less than services offered by payment processors like Stripe, Zelle, or Square. This is a big win for businesses where margins might be tight and every dollar counts in the operating budget.

2. Greater control over cash inflows

Set it and forget it. You can set up recurring ACH payments to receive money from customers automatically.

3. Low failure rates

ACH payment and transfer options are almost instantaneous, allowing you to maintain good relationships with your vendors.

4. Automated 

You can automate ACH payments to suppliers or receive money from customers. It can help to simplify these processes to help you keep track of your accounts payable more easily. 

5. Easy setup

ACH payments are not complicated to set up and do not need additional infrastructure, making them super accessible and easy to use.

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Types of ACH transfers

There are two types of ACH payments:

ACH credit or push transfers

This is any time you set up an ACH payment to send or “push” your money from one account into another account. 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. As a business owner, direct deposit salary payments to your employees are a type of push transfer.

ACH debit or pull transfers

An ACH debit transfer happens when you make a request or pull money from another account, e.g. your customers' accounts. That’s why an ACH debit is called a “pull” because money is being pulled from an account for a request. 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.

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How much do ACH payments cost?

There are different payment processing fees associated with ACH payments that service providers typically charge. Keep in mind that these fees 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 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 to the service provider. Always check with your provider about specifics around processing fees and other fees associated with payments.

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

• Your business credit score
• Debt
• Payment frequency
• Collection record
• Time in business
• Profitability
• Transaction volume
• Industry (many service providers consider some businesses like gambling and check cashing high-risk)

When choosing an ACH provider you should also check whether it 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.

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Are ACH payments safe?

Yes, ACH payment transfers 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.

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NACHA oversees almost 10,000 institutions in the U.S. 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:

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How do ACH payments work?

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 are ACH network intermediaries that handle ACH batches
• Receiving Depository Financial Institution (RDFI): The receiver's bank
• Receiver: The party receiving funds

6 steps to make an ACH payment

The ACH transfer process can be broken down into six steps. Note that 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. These batches are typically sent three times each business day (Monday through Friday, barring any holidays) between 9 AM to 4:45 PM ET. The daily cutoff for batch processing is  4:45 PM ET.

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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.

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How long does an ACH transfer take?

An ACH transfer typically takes one to two business days. But they‘re usually completed by the next business day. If an ODFI sends a transaction with their first batch of the day, the receivers' bank account might be credited the same day. But it’s important to keep in mind that they are not real-time transfers.

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Same-day ACH transfers are increasingly common thanks to technological advances and new guidelines from NACHA. 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.

Understanding 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 out 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 accepting ACH payments 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.

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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 might be 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 come 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 handle payroll and ensure your employees get paid on time with minimal fuss and fees.
• Utility and operating expenses: Automating bill payments through ACH direct debits or push transactions will simplify your monthly spend analysis process and cash flow projection.

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3 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.

1. 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. This can end up costing businesses a lot of money.

2. US-centric

ACH is a domestic-only payment channel. So if you currently work with a lot of people outside of the U.S. or plan to in the future, it might not be the best fit.

3. 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.

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How ACH payments work in Ramp Bill Pay

Managing accounts payable processes for a small business can get complicated quickly.

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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 can quickly lose control of your expenses.

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ACH debit transactions help you automate payments to your vendors. However, most service providers don’t integrate them with broader AP workflows.

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Here's how Ramp's account payable software simplifies vendor payments.

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Save time

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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 vendor setup

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

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

Save money

Ramp does not charge any processing fees for domestic bill payments.

Multiple payment channels

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Pay however you want with Ramp Bill Pay—through ACH, virtual credit cards, checks, or wire transfers.

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Learn more about Ramp today.