Content of the material
- ACH Regulations (31 CFR Part 210)
- Bottom Line
- Benefits of the ACH Network
- Get the best of Town Square, right in your inbox
- How does ACH work?
- ACH credit
- ACH debit
- Benefits of paying by ACH
- Network Administration Fees
- How long does an ACH transfer take?
- What Does ACH Do for Consumers?
- What’s an ACH credit refund?
- ACH Categories: Direct Deposit vs Direct Payment
- What are ACH credit payments?
- Pros and cons of ACH
- Payments Myths
- What Are The Clearing Houses?
- Benefits of ACH payments
- You are leaving the Wells Fargo website
- The difference between an ACH and bill pay
- Examples of ACH transactions
- Setting up automatic payment for your car payment
- Businesses sending payments to suppliers
- Transferring funds from one bank to another
- The Bottom Line
ACH Regulations (31 CFR Part 210)
These regulations define the rights and liabilities of everyone involved with ACH. They cover ACH credit entries, debit entries, and data that agencies send or receive through ACH.
The Automated Clearing House, or ACH, can streamline payments and make it easier to pay a bill or to collect money from friends. As the world continues to become more digitally centered, ACH payments are likely to only increase in demand and use. The rise of peer-to-peer services like Venmo, Square, PayPal, and Zelle has expanded its role exponentially. ACH is essentially an electronic payments network that makes it easier, faster and safer to send and receive payments.
Benefits of the ACH Network
Electronic transactions made through the Automated Clearing House are fast, efficient, and reliable. Consumers don’t have to pay any processing fees to use the ACH, making it even more attractive than other transaction options. It’s also easier to keep records with electronic payments. Financial institutions create a trail without necessitating papers floating around with your bank information.
With ACH payments, there is no physical document to lose or damage. Plus, fraud is very rare. Perhaps best of all, you can automate transactions using the ACH network. That means your payments always arrive on time, and you never forget to pay a bill.
Businesses also benefit from the ACH network. Digital transactions are easy to manage and consumers typically pay more quickly and regularly if there is an automated option. It also eliminates the need to order, write and send checks, the need for an extensive record-keeping system, and the need to pay for postage.
Better yet, the ACH speeds the process along at a lower price point than its alternatives. When it comes to recurring payments, these savings really add up over time. It’s also more challenging to reverse an ACH payment, so you’re more likely to keep funds in your account.
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How does ACH work?
There are two types of ACH payments: credit and debit.
With an ACH credit, also known as a direct deposit, you “push” funds from your bank account into an employee’s or vendor’s bank account. The payer initiates the transaction. It takes three steps:
- Step 1: Obtain the vendor or employee’s name, bank name, account type, account number, and bank routing number.
- Step 2: Submit payment details through Wells Fargo Business Online® or Commercial Electronic Office® (CEO®) ACH that includes the account information and payment amount.
- Step 3: The funds are transferred from your account on the designated date.
For recurring payments, such as payroll, rent, or mortgage, you can set up automated ACH credits.
For an ACH debit, also known as a direct payment, money is “pulled” from one account to another. With the payer’s permission, the recipient initiates the transaction to withdraw funds from the payer’s account. The payer provides the recipient the same banking information as listed in Step 1 above. The recipient submits the payment file to their bank and pulls funds from your bank account.
For example, you might set up automated ACH debit for your utility bills, which arrive monthly but vary in cost each month.
Benefits of paying by ACH
Using ACH payments to receive and send money offers companies several benefits.
Fast and convenient—ACH payments are usually processed faster than checks through the mail. Companies have to process payments and deposit checks into their bank account. It may take a week or more to make payments via paper checks vs. ACH payments that may be available the same or next business day or within a day or two.
Secure—Checks sent through the mail may get lost or stolen. If someone steals your check, it may be cashed or altered before it’s reported as missing. Plus, banks usually charge stop payment fees ($25 to $35) on missing checks. Transferring funds electronically means information is protected by bank-level encryption. And you can easily track ACH payments for you and your customers since they appear on bank statements.
Low cost—ACH fees range from a few cents ($.50 per transaction) to a few dollars depending on volume and transaction size. Costs are more favorable compared to domestic wires ($15 or more), credit cards (mainly in the 2%-4% range) and paper checks (varies, but usually a few dollars).
Network Administration Fees
One of the ways that financial institutions help sustain a healthy ACH Network is through Network Administration Fees.
Each depository financial institution that transmits or receives ACH entries is required to pay Nacha an Annual Fee and a Per-Entry Fee for costs associated with the administration of the ACH Network. The fee amounts are set to recover costs of the ACH Network administrative functions, which Nacha performs for the industry on an “at-cost” basis.Learn More
How long does an ACH transfer take?
ACH transfers can occur on the same day, the next day, or in two days, depending on what the payer selects. Payments are only settled on business days when the Federal Reserve is open.
What Does ACH Do for Consumers?
If you’re an individual, you may enjoy several benefits of using ACH to transfer funds.
- Get paid by your employer quickly, safely, and reliably. You avoid the hassle of waiting for your paycheck to arrive or depositing the check at your bank.
- Automate your payments, so you never forget to pay (and your payments arrive on time).
- Make purchases online without using a check or credit card. You pay quickly and avoid credit card processing fees.
- Minimize the number of pieces of paper floating around with your bank account information. This helps reduce the chances of fraud in your accounts.
The main drawback for consumers is that setting up ACH provides businesses with direct access to your checking account. They take the money to pay your bills whether you’re ready to pay or not. If you’re short on funds, you might prefer to pay a different way. Alternatively, you might want to prioritize certain payments when you have limited funds, paying only the most urgent bills first.
For more details on how consumers use ACH, read about setting up ACH debit.
What’s an ACH credit refund?
While all ACH credit transfers are meant to be definitive, certain mistakes require that a refund be issued. The National Automated Clearing House Association (Nacha), the main governing body over the ACH system, allows for credit transaction reversals in four situations:
1. The payment was for the wrong amount
2. The payment was deposited in the wrong account
3. There was a duplicate deposit
4. An incorrect settlement date was listed
In most cases, the Originating Depository Financial Institution (ODFI) has up to five business days from the requested settlement date to deliver a refund request. Though there’s not always a guarantee that the funds in question will still be there. Credit transactions typically settle by 8:30am ET on the second business day after the request is processed, meaning that the money may have already been made available for the recipient to spend or withdraw before the refund request. While the RDFI will work with the recipient to restore the funds in those cases, it may take some time for them to do so, and they won’t always be successful.
ACH Categories: Direct Deposit vs Direct Payment
There are two main categories of ACH transactions: direct deposits and direct payments.
Direct Deposit is used for payments from businesses or the government to a consumer, particularly for payroll, as well as government benefits, tax refunds, interest payments, and more.
Direct Payment covers the electronic movement of funds to make or receive payments, both by individuals or organizations. Examples include sending money to family, purchasing a product or service, paying bills, or supporting a not-for-profit organisation. Direct Payment ACH transactions are the primary focus of this guide.
What are ACH credit payments?
An Automated Clearing House (ACH) credit payment occurs whenever someone instructs the ACH network to “push” money from their account to someone else’s.
This could be an employer (often via some processing partner) pushing payroll to their employees, or a government agency pushing cash payments to eligible citizens. It could also be a consumer digitally paying a bill, buying something online, or initiating a peer-to-peer transfer to a friend through a service like Venmo or CashApp.
ACH credits essentially move money from one bank account to another in an easy and inexpensive way—from as fast as a few hours to as long as a few business days—all with just a name, bank account number, routing number, and basic transaction details.
Pros and cons of ACH
- Funds transfer faster, whether you’re receiving payment (paycheck) or paying someone.
- You don’t have to mess with paper checks or wait for the recipient to cash them.
- You can pay bills on time and avoid late fees.
- Increased security results since you aren’t carrying your bank information around on paper checks.
- You have to give your bank account access, which can increase the risk of a security breach.
- You have to keep track of automatic payments, or you risk an overdraft.
Do you think ACH payments take 3-5 days to process? They don’t. That’s a myth. Or do you think if payday is on a Friday, you won’t get your money until Monday (or later if Monday is a holiday)? That’s another myth. Learn more about the realities of ACH.
What Are The Clearing Houses?
All transactions within the network are run through one of two “clearing houses,” the Federal Reserve or The Clearing House. Each clearing house ensures the efficient matching and processing of transactions between financial institutions.
Benefits of ACH payments
1. ACH is cheaper than accepting card payments
With ACH, funds are transferred directly from one account to another and not routed through expensive card networks, which charge 1.3%-3.5% as a base fee.
2. ACH Debit lets you decide when you get paid
Unlike wire transfers, ACH Debit is a pull payment that gives you control over the transfer date, frequency, and amount.
Taking control of your incoming payments guarantees you have better cash flow in your business. Improved cash flow enables you to undertake realistic business planning and relieve the wasted time and stress of chasing late payments.
3. Low payment failure rate, higher customer retention
Bank accounts do not expire or become lost, so payment failure and accidental customer churn rates are significantly reduced compared to card payments, with their failure rate of 10-15%. In the relatively rare event of payment failure, attempts can be made to pull the payment from your customer's bank automatically, using an intelligent retries product such as Success+.
4. No more chasing late payments
By reducing failed and late payments, ACH Debit frees up the time businesses otherwise spend on dealing with these issues, creating more space to get other essential tasks done.
5. Automation saves time and money
By integrating automated payment collection via ACH Debit with existing accounting software, businesses can save even more time on financial admin such as bank reconciliation.
6. It's easy to start accepting ACH payments
In just a few clicks, you can create a mandate and send a link to your customer who completes the online form – you can then collect payments as required.
"Paying with a low-cost method like ACH debit really makes a big difference for small businesses. It allows us to reduce costs, and, as a result, more money stays in the local economy." – Carrie Pollak Owner, Diaper Stork
You are leaving the Wells Fargo website
The difference between an ACH and bill pay
Remember that ACH transfers are electronic, bank-to-bank money transfers processed through the Automated Clearing House (ACH) Network.
Bill pay allows you to organize your recurring bills/payments in one place and pay them automatically instead of using multiple payment sites. You may also use bill pay to make a one-time or manual bill payment when necessary. Banks and credit unions offer bill pay services, as do third-party companies.
Examples of ACH transactions
ACH transactions happen daily with individuals, banks, and businesses. Here are a few examples:
Setting up automatic payment for your car payment
If your car payment is due on the 5th of each month, the bank will automatically transfer the funds from your bank account to the bank holding your car loan. You don’t have to write a check or initiate the transaction.
Businesses sending payments to suppliers
When businesses buy supplies, they do so on credit, paying the bill usually in Net 30. Rather than writing a check to the supplier, a business pays the bill online, initiating an ACH transaction.
Transferring funds from one bank to another
If you have a bank account at your local bank, but you set up automatic transfers to your online high-yield savings account each month, you use ACH transfers. Keep in mind that ACH transfers are different from wire transfers.
The Bottom Line
ACH transfers can be a relatively hassle-free way to send money or receive it. Either way, make sure you understand your bank’s policies for ACH direct deposits and direct payments. Also, be vigilant for ACH transfer scams. A common scam, for instance, involves someone sending you an email telling you that you’re owed money, and all you need to do to receive it is provide your bank account number and routing number. If something sounds too good to be true, it probably is.