What Is An Automated Clearing House (ACH) And How Can Businesses Benefit From It?

One of the most vital parts of our financial structure is the Automated Clearing House (ACH) Network. You may not know its name, but you know its practices. The ACH Network affects anyone who sends or receives electronic payments — in other words, pretty much everybody.

ACH Basics

An ACH payment is an electronic transfer of funds between two entities, directed by an intermediary called an Automated Clearing House. There are two categories of ACH transactions: debit and credit. The former is when funds are pulled from an account (e.g., bill pay), and the latter is when funds are put into an account (e.g., direct deposit).

Steps of the ACH Process

1. Originator Makes a Request: An entity — like a business — creates a request to send money to another entity’s bank account.0

2. ACH Receives Funds: The first entity’s bank — known as the Originating Depository Financial Institution — sends the funds to the ACH to be routed to the final destination.0

3. Receiver Gets Funds: The ACH sends the money to the receiving entity’s bank — AKA the Receiving Depository Financial Institution — which puts the funds into the individual account.

Benefits of the ACH Network

ACH payments are a preferred method for receiving customers’ funds and settling debts. Here are some reasons businesses favor ACH transactions over credit cards and paper checks:0

  • Cost-Effective: ACH payments are cheap, typically less than $1 to process — lower than credit cards. They also beat paper checks, which carry postage fees.
  • Easy to Track: Online banking makes viewing electronic payments simple. Businesses can see a history of received and processing payments. This provides an advantage over paper checks, which are harder to track and file.
  • Few Errors: ACH payments require a one-time setup of checking account info. Once your details are verified, you rarely need to update them. This is especially helpful if you sign up for automatic bill payments: There’s no need to worry about incorrectly written checks not going through.
  • Flexibility for Customers: Depending on a business’ structure, there are multiple ways clients can set up ACH payments — via the internet, a phone call or a company form. Once a customer’s info is in the computer system, repeated transactions can take place easily.
  • Quick and Easy: Transactions are speedy because the ACH Network uses batch processing, handling multiple requests at scheduled times. At most, this takes a few days, though same-day processing is becoming more frequent. Checks take longer because they have to be written, sent, received and deposited.
  • Secure: Checks and credit cards can be lost or stolen. With ACH payments, on the other hand, checking account info is entered into a secure system and subsequently encrypted — hard for prying eyes to see.