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Thursday, September 28, 2023

ACH payments: Here’s everything you need to know

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Though you may not pay much attention to it, the Automated Clearing House (ACH) plays a significant role in your everyday life. It enables you to receive payments and make payments too. The ACH is a nationwide network that banks use to clear checks and transfer funds electronically. It is responsible for processing everything from direct deposit of paychecks to mortgage and credit card bill payments.

According to Dave Fortney, the executive vice president of product development and management at The Clearing House, many consumers are unaware that they use ACH. Still, the majority of people use it frequently. In 2022, the ACH network processed over $72.6 trillion, totaling around 30 billion payments. This information is provided by Nacha, an organization that works towards advancing and facilitating ACH payments.

How does an ACH transaction work?

According to Fortney, whenever an employer or the government makes an electronic deposit to a consumer, it is done through the ACH network. This involves transferring funds from one bank to another bank account.

ACH not only processes direct deposits of paychecks or Social Security benefits but also handles electronic payments made by you. You can authorize your mortgage lender or servicer to deduct a recurring amount from your bank account on the same day of each month using your bank information.

Transactions occur during regular business hours but are not processed in real-time. The network has two submission windows: payments submitted before 10:30 a.m. ET are settled at 1 p.m. ET, and payments submitted before 2:45 p.m. ET are settled by the close of business at 5 p.m. ET.

Fortney stated that many money movement platforms, such as Venmo, Zelle, and PayPal, use ACH as their primary method of transferring funds, although they may have other methods available.

Benefits of ACH transactions

The ACH network is designed to provide you with a reliable and swift way to send and receive payments. Some of the advantages of using the ACH system are:

  • The payments are faster than paper checks, and they have become more popular over time. In 2021, only 11.2 billion checks were processed compared to 42.6 billion in 2000, according to Federal Reserve data. Using electronic payments can eliminate the need for paper checks altogether.
  • The ACH network is utilized by the majority of financial institutions, especially those dealing with traditional checking and savings accounts since it has been in existence for over 40 years.
  • According to Bridget Hall, who leads real-time payments at ACI Worldwide, using ACH for payments can simplify managing personal finances. ACH automates the payment process, reducing the amount of effort needed to make payments. One significant advantage is that consumers can easily schedule recurring debits from their bank accounts without having to put in additional effort after the initial authorization. This is done on their behalf by the payee company or government.
  • Getting money through the ACH network is usually affordable or even free, making it a cost-effective option for transferring funds. In contrast, wire transfer fees can be as high as $30, which is significantly more expensive than ACH transactions.

Cons of ACH transactions

According to Hall, ACH transactions have their downsides just like any other payment type. Some of the cons of ACH transactions may include:

  • Automated payments have the potential to cause overdrafts. Even though not remembering to pay your utility bill may be convenient, it is possible to overlook a payment and not have enough funds to cover it. As per Hall, recurring payments occur automatically, and the user may forget to review their invoice for any mistakes or to check their bank account for adequate funds. This could result in an overdraft fee.
  • You may not receive payments until the next business day, even though ACH payments operate on a same-day network. The Clearing House’s Fortney clarified that the network is “business-day driven.” Therefore, if a payment is made during a weekend or a holiday, it will not reflect in your account on the next business day.
  • Your bill payments could also be delayed because the ACH network operates only on business days. Additionally, if you initiate payment on the same day that your bill is due, ACH may not be fast enough to ensure timely payment. According to ACI Worldwide’s Hall, for one-time payments, ACH may not be able to make the payment quickly enough to prevent late payment fees if the bill is due that day.

An alternative to ACH transactions

If you don’t have much time, it’s recommended to use an electronic payment option that operates on the Real-Time Payment (RTP) network. The RTP network was established in 2017 and is managed by The Clearing House. It permits consumers and companies to send payments in real-time, 24 hours a day, 7 days a week. Presently, The Clearing House claims that 65% of bank accounts in the United States are connected to this network.

According to Fortney, the RTP network processes payments immediately and without any difference in behavior on weekends or at different times of day. This is due to RTP payments clearing and settling individually in real-time, which is faster than ACH payments that are processed nationally in batches.

Bottom line

ACH transactions is a safe and efficient method for receiving payments and making payments. It eliminates the need to mail paper checks to pay bills, and you can easily wake up to a direct deposit in your checking account. Additionally, ACH transactions are relatively quick in transferring money between banks.

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