ACH transactions involve automatically and electronically transferring deposits between banks. “ACH” stands for Automated Clearing House, a financial network in the USA that handles these transactions. This network is regulated by both the National Automated Clearing House Association (NACHA) and the federal government.
When merchants accept ACH deposits, this means that your customers are able to transfer funds from their own bank accounts into your business bank account through electronic means. This is a popular and effective alternative to paying with cash or paper checks.
But is it right for your business to dive into this extensive network? Today we’re breaking down what you need to know about ACH and how it works for small businesses as a payment method:
What are ACH deposits and ACH payments?
Generally, the term “ACH payment” is used to cover all related ACH transactions. However there are actually two kinds of ACH transactions that mainly differ based on the direction of the payment process.
Direct ACH Payment
A direct ACH payment involves individuals, companies, or others pulling money from another account. A popular example is when someone sets up recurring payments with his service provider, allowing the business to automatically get funds from his bank account according to a previously agreed upon schedule.
Direct ACH Deposit
In a direct ACH deposit, it works the other way around from direct deposits. Individuals or organizations can push funds into another bank account, whether that’s between consumers, their own accounts, to pay businesses, or when employers deposit payroll in their employees’ accounts.
How do ACH transactions or payments work?
Transferring funds using ACH payment processing is simple, safe and fast. Take a look at the steps involved in a typical ACH transaction:
- An originator (typically an individual, a business, or a bank) initiates an ACH transaction, such as a direct deposit or a direct payment.
- The originator’s payment processor, also called the Originating Depository Financial Institution (ODFI) submits the ACH entry.
- Following a predetermined schedule, the ODFI sends ACH entries in batches to an ACH operator.
- The ACH operator within the network then sorts through all the batches of ACH entries to determine whether they’re a payment or a deposit.
- The ACH operator then transmits the entries to their corresponding Receiving Depository Financial Institutions (RDFI).
- If the transaction is an ACH deposit, this involves pulling funds from bank accounts and requires the receiving bank to first check that there is enough funds in the ODFI.
- Depending on whether the transaction is a payment or a deposit, the receiving bank will then credit or debit the receiver’s account.