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ACH payments: what are they?

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  • ACH transfers use the Automated Clearinghouse Network to move money between bank or credit union accounts.
  • These transfers are processed in batches, which adds to the amount of time they take to complete.
  • While other forms of money movement may be faster, ACH transfers remain a key part of the US financial system.
  • Compare the best checking accounts for ACH payments.

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Moving money between people and companies in the 21st century has become an almost seamless process. With the touch of a button, you can transfer funds from your bank to a friend's account. Now your monthly bills can be paid automatically without having to do a thing. And on payday, you can have your employer route the money straight to your account, eliminating the hassle of paper checks.

While all this may seem like one of the marvels of modern technology, in many cases, behind the scenes, you're using a decades-old system known as ACH transfers. There are other means of moving money, like wire transfers and the RTP (real-time payments) network. But ACH transfers remain a crucial part of the financial system. 

What is an ACH transfer? 

ACH transfers electronically move money among bank accounts through the Automated Clearing House Network in the US. They can be used for international payments to and from US accounts, but other countries also have separate transfer networks.

ACH transfers are "part of a long-established, well-oiled machine that moves money from one bank account to another," says Ruby Walia, senior advisor for digital banking at Mobiquity, a digital consultancy. "For most people, it feels like that sort of happens invisibly, but it's a very essential pillar of the US banking ecosystem."

ACH transfers can be used to make all sorts of payments, such as for companies moving money from business bank accounts into employees' personal accounts via direct deposit, as well as individuals transferring money from one bank or credit union account to another. Even payment platforms like Venmo largely rely on ACH transfers behind the scenes, explains Walia.

For example, if you don't have enough money in your Venmo account to send money to your friend to split a dinner bill, you could still initiate a transfer through your linked bank account. Venmo would then essentially front the money into your friend's account. Meanwhile, an ACH transfer would move the money from your linked bank account to Venmo.

The ACH Network is governed by the National Automated Clearing House Association, or Nacha. Members include financial institutions and payments organizations that are involved with ACH transfers and the ACH network.

Nacha essentially maintains and operates what is analogous to a highway system, explains Walia. Then, to facilitate ACH transfers, banks and credit unions typically work with separate organizations known as payment processors that "act as the on-ramps and off-ramps to that highway system," he says.

Types of ACH transfers 

ACH transfers can be split into two main categories: credits and debits. With credits, the sender initiates the ACH transfer, so they essentially push money from their account to another. With debits, the recipient initiates the transfer, where they essentially pull money from another account into their own. 

Direct deposit transfers

With direct deposit transfers, payers can put money directly into recipient accounts. These transfers are ACH credits, because the sender is pushing money into, or crediting, the recipient's account.

For example, an employer can initiate a direct deposit transfer from its business bank account into an employee's bank account. So, rather than sending a paper check, which then requires the employee to deposit into their bank account, the money is routed there directly.

Direct deposits can also be used for other types of transactions, like the government depositing Social Security payments into recipients' accounts.

Direct payment transfers

In contrast to direct deposits, direct payments are ACH debit transactions, where the recipient pulls money from the sender, though the sender gives permission for that to occur. For example, direct payments can be set up to automate bill payments.

If you give your banking details to, say, your electricity provider to set up direct payments, then every month that utility company can debit your account for whatever your monthly bill is.

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How long do ACH transfers take to go through?

ACH transfers can take anywhere from a few hours to a few business days (or even longer), depending on factors like the type of ACH transfer and any holdups, like payment instruction errors.

ACH transfers depend on payment processors sending batches of transactions as electronic files. The transactions are then cleared by one of two ACH operators, the Federal Reserve or the Electronic Payments Network, before the money then eventually gets credited or debited from the relevant accounts. 

This clearing generally occurs within certain settlement windows, as opposed to instantaneously, and depends on the Fed's system being open. That's why ACH transfers don't occur on weekends or holidays, though they can occur overnight.

How much do ACH transfers cost?

ACH transfers have different costs depending on the type of transfer and the parties involved. 

For standard transfers, "Nacha charges a fraction of a penny per individual transaction. But the payment processors, companies like Stripe and Square, will charge a lot more," explains Walia. "They will charge as much as 50 cents per transaction (as a flat rate). In some cases, they charge a percentage of the amount being transferred."

Sometimes banks cover transfer fees for customers as part of their business models. In other cases recipients pay. 

For example, "if your monthly gym membership costs $49.99, you'll pay $49.99. But the gym might only receive $49.49, because the payment processor and the bank took 50 cents off," explains Walia.

Same-day ACH transfers have higher fees. For one, ACH operators collect and disperse 5.2 cents per transaction from the originating financial institution to the receiving financial institution. Customers might also have to pay additional fees to their financial institutions for this faster speed. 

ACH transfer vs. wire transfer 

ACH transfers and wire transfers might sound like the same thing, but they're two different ways of moving money. ACH transfers go through the ACH network, which ultimately involves money being credited or debited from accounts. Transfer instructions are also sent in batches, rather than for each individual transaction right away. 

In contrast, a wire transfer is a direct electronic transfer that can occur through banks or other types of non-bank providers. Without having to go through a clearinghouse, the transaction can occur much faster. In many cases, domestic wire transfers complete the same day they get initiated. However, the fees for wire transfers tend to be much higher. Instead of cents, wire transfers fees are often double-digit amounts of dollars.

Overall, different types of transfers have their pros and cons, so their usage can depend on how the parties involved prioritize issues like speed and cost. As it stands, even amidst new financial innovations, ACH transfers remain key to money movement in the US.

Jake Safane is a freelance writer specializing in finance and sustainability. He runs a corporate sustainability blog, Carbon Neutral Copy, and his work has appeared in publications such as The Economist, CBS MoneyWatch and the Los Angeles Times.


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