23 Apr, 2022

What Is Ach Payment And How Does It Work?

What Is ACH Payment and How Does it Work?
Written by: - Phil Baker

Have you been asked to make an ACH payment but aren’t sure what one is? Perhaps you are looking to send money this way and want to know how to do it? Or maybe you are curious and want to know more? Whatever your reason might be, we have the answer for you!

When it comes to payment methods, we know how confusing they can be. It can be hard to sift through the different methods available and find the right one for you. Often, we can find ourselves stressed and overwhelmed, endlessly scrolling, but never finding the answers that we need.

Well, no more! Today, we are here with the answers that you need. Keep reading to find out what ACH payment is and everything that you need to know about it. 

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What Is ACH Payment?

ACH payment is a method of electronic fund transfer that allows payments to be made between financial institutions without the need for paper checks or cash.

It was developed by the Automated Clearing House (ACH) consortium, which includes more than 1,000 banks and other financial institutions in North America, Europe, Asia, and Australia.

The ACH system enables businesses to make online transactions such as credit card purchases, bill pay, payroll deposit, etc., with their bank accounts.

The ACH Network processes millions of transactions each day. So, let's take a look at ACH payments in more detail.

Also read: How To Organize Your Financial Records In 5 Easy Steps
 

What Is The ACH Network?

The ACH network consists of over 7,500 participating financial institutions that are members of the consortium. These include commercial banks, savings & loans, credit unions, insurance companies, government agencies, mortgage lenders, utility providers, and many others.

Each institution has its internal computer systems that communicate with one another through an Internet-based messaging protocol called SWIFT.

This message routing system allows information to flow from sender to recipient across multiple networks using secure methods.

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How Does The ACH System Work?

When you use your debit card to purchase something on the internet, the transaction goes through the banking system first.

Your bank then sends a request to the merchant’s bank asking it to process the charge. If the merchant accepts the charge, it will send a confirmation back to your bank.

Your bank now has two options: It can either hold onto the money until the next business day or it can immediately release the funds into your account.

If your bank chooses to hold onto the money, you won't get the money until the following business day. However, if it releases the funds right away, they'll appear in your checking account within minutes.

If you have a direct deposit set up, your employer will automatically deduct a certain amount from your paycheck and send it directly to your bank. You don't even know about this until you go home and check your balance.

In most cases, when you receive a direct deposit, you'll see the same number on both sides of your statement.

This is because the bank doesn't want to risk losing any money. If there were a discrepancy, they wouldn't be able to reverse the transaction.

So, what happens when you use the ACH network instead of the traditional banking system?

With the ACH system, your bank transfers the money electronically to the merchant's bank. Once the merchant receives the money, he sends it to his bank, which then forwards it to yours.

You can also choose to have your bank send the money directly to the merchant's bank, but this isn't very common.

Also read: How Much Do You Understand Tax On Bonuses?
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Does It Cost To Use ACH Payments?

Yes, it does cost money. The fees for processing these types of transactions vary depending on whether you're sending or receiving the payment.

For example, if you're sending a payment, you may have to pay a fee ranging anywhere between $0.10 and $0.40 per transaction. This is usually charged by the merchant's bank.

However, if you're receiving a payment, you might only have to pay a flat rate of $0.20 per transaction. This is typically charged by your bank.

Also read: 8 Best Payroll Services Companies In 2021

 

Are There Other ACH Payment Types?

The ACH Network also offers other services such as electronic bill payments, payroll deposits, and more.

 

Electronic Bill Paying (EBP)

EBP is similar to direct deposits except it lets you make automatic monthly payments without having to wait for your paycheck every month.

 

Payroll Deposits

With payroll deposits, employers can transfer money directly to their employees' accounts.

 

ACH Authorized Agent Services

Authorized agent service is used when you need to send large amounts of cash to someone else.

For example, if you're planning an out-of-town trip, you could use an authorized agent service to wire the money to them so that they can pick it up at the airport.

 

Why Use An ACH Transaction Instead Of A Check?

A check is still used for some types of small transactions. For example, if you're buying a gift for someone else, you may ask them to write out a personal check.

However, these days, we rarely use checks anymore. Why not? Because they're slow!

It takes time to mail a paper check, so it could take several weeks before the person receiving the gift gets the money.

And, since it's easy to lose track of a physical piece of paper, people often forget to give their friends and family gifts at all.

An electronic payment like an ACH transfer eliminates all of those problems. The money is transferred instantly. There's no need to wait around for a check to clear. You can make payments as frequently as every hour.

The other great thing about ACH is that you never have to worry about lost or stolen checks. With an ACH transfer, the money is sent directly to the merchant's account. So, if anything ever happened to your checkbook, you'd still be able to pay for things online.

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Are There Still Benefits To Using A Check?

Of course, there are benefits to using a check over an ACH transfer. For example, if the recipient doesn't have access to an Internet connection, they won't be able to accept an ACH transfer.

Also, many merchants don't accept ACH transfers because they prefer to receive a check in the mail - though this has been changing over the years as new technology is launched. 

So, if you want to make sure that you get paid, you should probably stick with traditional checks. But, if you're looking for ways to make your life easier, then you should consider making ACH payments instead.

 

Final Thoughts

ACH Payments are a convenient way to make purchases online without having to worry about missing payments. They're also much faster than using a check.

They've become more popular over the years, and they're becoming increasingly easier to use. So, if you haven't tried making an ACH payment yet, we highly recommend giving it a try.

No matter what type of payment methods you’re dealing with it is also important that any pay stubs involved are of a high quality and can be produced with ease.

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