How ACH Processing Works

Introduction

Both businesses and consumers want options when it comes to accepting payments. With more payment options comes the opportunity to do commerce. Merchants love payment options that don't cost a lot to process such as ACH (Automated Clearing House Payments), commonly known as e-checks.

This kind of electronic money transfer is most commonly used for monthly payments to various service providers like utilities, and also by employers for direct deposit payments. These types of payments are increasingly being used for point-of-purchase payments and online payments, as well as P2P (person-to-person) and B2B (business-to-business) payments.

One of the great things about ACH payments processing, as opposed to credit card payments for merchants, is the lower fees when accepting this type of payment. Credit card transaction fees generally higher than the fees for accepting ACH payments.

There are more businesses conducting ACH transactions than ever and the number is increasing every year. This article is going to help you understand how ACH processing works.

What is ACH Processing?

ACH processing is an electronic debit or credit transaction which allows customers to make payments for utilities, mortgage loans, and other such bills from their bank accounts. They can also receive payments from other parties.

A lot of payment processors offer ACH payment processing options, especially for monthly or subscription-based transactions. The Automated Clearing House is basically an electronic network used for financial transactions in the US. It processes large volumes of transactions (both credit and debit) in batches.

This system was originally created to replace paper checks. Rather than use paper checks, the ACH payment tool electronically debits a customer's bank account. It allows businesses to receive electronic payments directly from buyers' checking accounts.

Our ACH processing services complement traditional card processing services and we can help you generate increases in sales revenue for your business. GAM Payments offers physical and online businesses the opportunity to provide their customers with additional payment options. This could mean the difference between landing or losing that sale.

How ACH Processing Works

The ACH network and ACH payments work in a relatively simple way. The ACH transaction process is as follows:

An Originator (this can be an individual, corporation, or other entity) initiates either a Direct Payment or Direct Deposit transaction via the ACH Network. These transactions can either be debit or credit payments. They commonly include Direct Deposit of payroll, Social Security benefits, mortgage, online banking payments, B2B payments, P2P payments, and other bill payments.

Rather than use paper checks, ACH entries are transmitted electronically which makes the transactions much quicker, safer, and easier.

The Originating Depositry Financial Institution - or ODFI - will enter the ACH entry at the request of the Originator and aggregate payments from customers, then transmit them in batches regularly, at predetermined intervals, to the ACH operator.

The ACH Operators receive the entries from the ODFI in batches. There are two central clearing facilities: The Clearing House, and the Federal Reserve. The ACH transactions are then sorted and made available to the Receiving Depositry Financial Institution - or RDFI - by the ACH Operator.

The RDFI then debits or credits the Receiver's account according to the particular ACH entry. Anyone can be a receiver whether an individual, a business or any other entity. ACH credit transactions settle in one to two business days. Debit transactions settle in just one day.

Third-party Service Providers can arrange transactions and perform other vital services increase efficiency for all ACH network users such as RDFIs, ODFIs, Receivers, and Originators. They can perform user functions when engaged and authorized.

By adding ACH payments to your business, you will open up payment acceptance options that go beyond credit and debit cards. This is something that merchants stand to benefit immensely from. With ACH payments, your non-payment-card customers will have a hassle-free option that allows them to make payments for their purchases straight out of their checking or savings account.

If you think of an ACH payment transaction as a direct electronic payment from the customer's bank account to yours, you can see how initiating the process and setting up the proper merchant account can only serve to enhance your business and improve customer satisfaction.

At the end of your business day, when settling the batch, just submit an ACH file which contains all the bank routing and account numbers that are to be debited, together with the corresponding amounts of each transaction. These can be securely processed online quickly and easily via our electronic payment gateway.

Once the transaction has been authorized, the system then debits the customer's account and transfers the money to your business account within seven business days. ACH payments (such as paper checks) do take some time to clear and they may bounce, but they can be an extremely useful alternative for those merchants who seek to offer a complete range of payment options to customers.

How is ACH different from debit and credit transactions?

How ACH processing works is different from debit and credit transactions because it bypasses the card networks. This means that it also bypasses the interchange and assessment fees which typically makes ACH a lot less expensive than card payments.

Both debit transactions and ACH transactions draw funds from a checking account but a debit transaction is processed through card networks which means that the transaction is prone to the same type of charges as credit cards.

How much does it cost to process ACH payments?

The cost of processing ACH payments depends on your particular merchant account provider or entity that you use to process your ACH payments. Some ACH processors typically charge a flat fee that ranges from $0.25 -$0.75 for each transaction while other ACH processors charge a flat percentage rate which ranges from 0.5% - 1%.

Merchants with larger transaction sizes often find that the fee charged per transaction is generally a cheaper option for them than the percentage. There are some ACH payment processors who charge additional monthly fees but this varies.

How to accept ACH payments

Accepting ACH payments isn't a complicated process at all. Processing ACH payments or e-checks can be done through a merchant account provider or even a separate entity such a standalone ACH processor or a bank. At GAM Payments we offer you an excellent way to conduct ACH transactions online. We also offer services to help boost security and efficiency.

Difference between ACH payments, EFT payments, and wire transfers

So, what makes ACH payments different from wire transfers and EFT payments? Well, both ACH payments and EFT (electronic funds transfer) are ways to transfer funds between two accounts but there are a few differences between them. ACH payments are processed three times a day in batches, whereas wire transfers are processed real time.

This means that wire transfer funds arrive on the same day, guaranteed, but it can take several days to process ACH funds. ACH funds are also less expensive than wire transfers. Some banks don't charge for wires but in some cases, wire transfers can cost the customer up to $60. EFT payments can be used with ACH payments interchangeably as they both describe the same payment mechanism.

Bottom line, on the 'pros' side, ACH payments are cheaper than wire transfers but on the flip side, wire transfers are faster than ACH transactions since they don't use a batch process while ACH payments can take several days to process.

Typical processing times for ACH payments

The typical ACH payment processing time is usually several business days. Financial institutions can opt to have ACH credits processed either within one business day or in one to two business days.

The debit transactions, on the other hand, have to be processed by the next day. After the transaction is completed, the bank may also detain the money that is transferred for a holding period. Overall, you are looking at an average of three to five business days for processing ACH payments.

Why are some ACH payments rejected? 

Some ACH payments are rejected for various reasons. If your payment is rejected, your bank will provide a reject code explaining what happened. The reject codes are vital as they provide your customers with accurate information as to why the payment didn't go through. The four reject codes that are most commonly encountered are:

R01 Insufficient funds.

This reject code means that the customer did not have enough funds to cover the amount of the debit entry in their account. Whenever you get this code, it means that you probably have to rerun the transaction after more money has been transferred into the account by the customer or they provide you with a different payment method.

R02 Bank account closed.

The R02 reject code happens when a customer's previously active account is closed. It could be that the customer forgot to notify you of the change. In order to process the transaction, they have to provide you with new bank account details.

R03 No bank account/unable to locate account.

This one is triggered when the combination of given data doesn't match the records that the bank has (such as the name on the account and the account number) or if a nonexistent bank account number was used. The customer can check and provide the right banking details.

R29 reject.

If a business isn't allowed by the bank to withdraw money from a specific account, this reject code will be sent. When this happens, the customer has to give your ACH Originator ID to the bank in order to enable your business to carry out ACH withdrawals. After the details have been provided to the bank, you can then rerun the transaction.

The benefits of ACH payment processing

There are a lot of benefits to using ACH payments which account for why this payment option is becoming increasingly popular with businesses. Some of them are listed below:

Lower processing costs

The processing fees for ACH payments are among the lowest of any type of payment available right now. As long as you find a provider with a flat rate, your business will pay a lot less out of pocket for processing ACH payments than when processing credit cards.

Fewer 'expiration' declines

Credit cards and debit cards have things that can 'expire' but checking accounts don't. This means that when you're processing ACH payments you will deal with fewer declines.

Added convenience for you

You no longer have to deal with paper invoices, checks, and trips to the bank – all of which can be extremely frustrating and time-consuming.

More convenient for your customers

When you provide your customers with various payment option you create a better customer experience and increase customer satisfaction. ACH payments mean that customers don't have to worry about paying the same bills every month. They can just set and forget them when they sign up for recurring billing.

The drawbacks of ACH payment processing

While ACH payment processing is a convenient and affordable option, it does come with a few limitations. The first is Speed. As previously mentioned, ACH payments can take up to five business days to process. Next, there are the Caps. A daily or monthly cap can be placed on the amount of money you can move. Same Day ACH limit per transfer is set at $25,000 maximum for all transactions.

Then, there are the cutoff times. Transfers won't be processed after a certain time of day. They will only be processed the next business day (which means Monday if it's before the weekend). Last on our list of disadvantages is the fact that ACH is US-only. This means that it's unlikely that your bank allows ACH transactions between international bank accounts.

Conclusion 

Whether you primarily conduct your business online or in person, it's time to consider accepting ACH payments so you can electronically receive funds from your customers' checking accounts.

Since this process is ideal for recurring monthly payments, costs so much less than processing credit or debit cards, and is a lot easier than processing traditional paper checks, your business really has a lot to benefit from making the transition.

Get in touch with us today if you want to know more about how ACH processing works and we will be happy to answer all your questions.