What is ACH and when to use ACH Payments?

The ACH (Automated Clearing House) payments system is a relatively inexpensive way for businesses and individuals to transfer money from one bank account to another. Conceived in the early 1970’s, the ACH system can process large volumes of individual payments electronically, and stands as the largest payments system in the United States. Individuals and businesses today write fewer and fewer checks than they did 10 years ago, and most of these former paper check payments are now moving as electronic transactions via the ACH network. In the 2nd quarter of 2007, more than 3.46 billion ACH transactions worth $7.2 trillion were processed within the ACH system, which is a 15% increase over the same quarter in 2006.

The ACH is governed by rules established by NACHA, which is a not-for-profit association that was formed in 1974 for the purpose of facilitating the nationwide clearing of ACH payments.

ACH payments are most useful in situations where recurring automatic payments or recurring deposits need to be made. Because ACH transactions are processed in batch mode within the banking system, ACH payments don’t typically work as well as other payment forms for applications where the payment funds need to be delivered in real time and guaranteed between the sender and receiver. For example, if you're selling and delivering goods to consumers through an Internet retail store, and you want to offer ACH payment capability on your website, you may find it necessary to withhold delivery of goods for shipping to the consumer for several days after the consumer completes their purchase.  This helps ensure that the consumer has enough money in their bank account to cover the amount of the payment. If they don’t, you will receive notification from your bank of non-sufficient funds (NSF), just as you would if the consumer gave you a bad check in person. If an ACH payment is bad, you will usually hear about it from your bank within 3 business days. There are providers that will offer funding guarantees related to ACH payments, but the fees that they charge to do so will usually rival interchange fees charged for credit and debit card purchases (2% – 3%).

Online retailers who offer ACH as a payment option often choose to implement a 3 day hold practice, and will not ship the goods to the buyer until 3 business days have passed to minimize this risk of returned payments.

Some of the many applications where ACH payments are the electronic payment method of choice include:

  • Direct deposit of payroll checks
  • Electronic bill pay systems (these can be hosted at a bank site or at a biller site)
  • Government tax revenue deposits and refunds
  • Social Security payments
  • Regular recurring auto debit payments to billers such as insurance companies, mortgage companies, auto loan lenders, utility companies, health clubs, etc.
  • Automated deposits to brokers and mutual fund companies
  • Corporate payments