Understanding ACH credit payments means understanding the way in which different types of ACH payments are processed in the US banking system. ACH credit payments differ from ACH debit payments, and both are distinct from credit and debit card payments. In this article, we will explore the differences between each type of payment, along with their key features and benefits.
TL;DR
- ACH payments are a popular way for individuals and businesses to transact with each other because they are easy and quick to send.
- ACH credit payments are best for sending one-time payments, whereas ACH debit payments are more suited for making regular payments, such as for monthly utility bills.
- ACH transactions are secure and available for submission 24/7/365, but they are only processed and settled on business days (Monday through Friday, excluding federal holidays). Making a payment via the ACH network differs from making a payment with a credit card in that you are sending the money directly from one account to another, instead of charging it to a card you would later be liable to repay.
What are ACH credit payments?
An ACH credit payment is a type of payment processed through the Automated Clearing House (ACH) network. ACH payments work as a one-to-one payment where a customer makes a payment to another person or company by submitting the details of the transaction via their bank’s online account, transferring money from one bank account to another.
The receiving bank then credits the money to the account of the receiving customer. ACH credit payments are often used for business-to-business (B2B) payments and end-of-the-month payroll payments. They are also used for peer-to-peer (P2P) payments or community crowdfunding campaigns.
Effectively, these are payments that the customer initiates and pushes their funds to the intended recipient. It’s like a direct deposit from one account to another, but unlike wire transfers, they are not subject to a fee by the processing banks.
The ACH network is governed by the National Automated Clearing House Association (NACHA), an American organization that administers risk management and rule enforcement for all ACH transfers and works with the Federal Reserve.
What are ACH debit payments?
An ACH debit transaction is another form of payment processed by the ACH network. With an ACH debit payment, a customer requests their bank to withdraw money from their account and then deliver it to the receiving party’s bank account. The receiving bank then credits the money to the account of the receiving customer. These payments are often used to make person-to-person transfers or to withdraw funds from a line of credit (LOC).
With ACH debit payments, the recipient is in control, so these payments are pulled, rather than pushed. A customer authorizes these electronic payments by indicating it’s their preferred payment method for recurring bill payments or other essential funds transfers, such as an annual tax payment. Of the two types of ACH transfers, an ACH debit tends to be favored by firms expecting regular ongoing payments. It allows for simpler payment processing over having to request credit card payments on a monthly or irregular basis.
The payee, not the payer, receives the benefit of a predictable, automated payment pull, but the payment itself is not guaranteed by the ACH system. It is subject to return if the payer has insufficient funds (NSF). ACH debit transactions are usually completed within two days of initiation.
ACH credit key features & benefits
Same-day ACH is an option, but ACH credits are not inherently immediate. Standard ACH settlement is next business day (1 business day). Same-day ACH is an available service but may be subject to cut-off times, volume limits, and a small fee imposed by the originating depository financial institution (ODFI). Customers can initiate an ACH credit payment online or by phone.
Low cost – The ACH network is an open system that is accessible to banks and financial institutions. The process of sending payments is often free for the consumer, but merchants pay a low, flat fee per transaction to their processor (like Stax) to manage the origination of the payment file.
Easy and fast – ACH credit payments are simple and quick to process. Customers can send payments directly from their bank account through online banking or by contacting their bank.
Visibility – Customers can track the progress of their ACH credit payments online. The details of the transaction are available for the customer and the receiver to view and follow.
Guaranteed – Unlike paper checks, ACH credit payments are guaranteed by the customer’s bank account. If the payment is not received by the other party, the bank that holds the account re-credits the money back to the customer.
No fraud risk – ACH credit payments are securely initiated via the internet through online banking portals, payment platform APIs, or other electronic methods. However, the funds transfer itself occurs within the private, regulated ACH Network, not over the public internet. Customers can choose to certify their payment and send it to the other person’s bank account.
Hard to lose – ACH credits are hard to lose and difficult for fraudsters to steal.
No unauthorized chargeback risk – When a customer initiates and authorizes an ACH credit payment (push), the payer cannot unilaterally recall the funds simply due to buyer’s remorse, unlike a card chargeback. However, an ACH credit payment can be reversed if it was sent by mistake, unauthorized, or for corporate transactions where necessary settlement criteria weren’t met.
No interest or fees – Unlike with a credit card, there are no fees or interest charged on ACH credit transfers. Some payments require a fee, however.
ACH debit key features and benefits
Immediate availability – Customers can access the money immediately once it is received by the bank.
No risk of bounced checks – Customers do not run the risk of a bounced check preventing them from receiving their funds to their checking account or savings account.
Security – ACH debit payments are processed via secure electronic funds transfer (EFT) with minimal risk of outside interference.
Less fraud risk – ACH debits are subject to customer dispute (chargeback), known as an ACH return. A customer can easily dispute an unauthorized debit using return codes like R10. NACHA rules allow a consumer to dispute an unauthorized debit for up to 60 calendar days after the settlement date. This is a major risk for merchants using ACH debit.
Confirmed payment – Customers can track the progress of the transaction in their online account. They will be notified when the payment is confirmed.
No interest or fees – Unlike with a credit card, there are no interest or fees charged on an ACH debit payment. Though just like with ACH credit payments, some payments would be subject to a fee.
Periodic payments – ACH debit payments can be set up within the payment system to make regular payments each month.
Payee control – Customers can set up ACH debit payments that are controlled by the payee. This is useful when making regular deductions from your account, such as health insurance premiums or utility bills.
No interchange fees (the percentage fee credit cards charge) – ACH transaction fees are charged by the originator/processor. While the consumer often pays no fee, merchants (payees) pay a small flat fee per ACH transaction to their bank or processor (like Stax) to originate the debit.
When to use ACH credit vs. ACH debit payments
Choosing between ACH credit and ACH debit transactions depends on the nature of the payment and the control that either the payer or payee wishes to have. Each payment option offers distinct advantages for different types of transactions, making it easier for businesses to meet specific operational needs and customer preferences.
ACH credit payments: Ideal for one-time, payer-initiated transactions
ACH credit transactions are initiated by the payer, meaning the individual or business sending the funds controls when and how much to pay. In this setup, the payer “pushes” funds to the recipient’s bank account. ACH credit payments are commonly used for:
- Employers often use ACH credit for payroll because they can schedule direct deposits in bulk, paying multiple employees quickly and without transaction fees associated with other payment methods like wire transfers.
- Many businesses prefer ACH credit payments for paying suppliers or vendors, especially when the amounts vary or when the payments are made irregularly. It allows businesses to control payment timing based on cash flow and due dates.
- Government agencies use ACH credit to distribute tax refunds, rebates, and other reimbursements. This method offers a secure way to make direct payments to individuals without needing checks or physical transfers.
- For substantial, single payments, ACH credit is advantageous because it provides a secure, low-cost option for transferring funds directly from one bank to another without the high processing fees associated with credit cards.
Since ACH credit transactions are controlled by the payer, they offer greater flexibility for businesses that may need to manage cash flow, ensure payment accuracy, and track specific payment schedules. Additionally, since ACH credit payments are not “pulled” by the payee, the risk of overdrafts or insufficient funds is minimized for the payer.
ACH debit payments: Best for recurring, payee-initiated transactions
ACH debit transactions, on the other hand, are initiated by the payee, who “pulls” funds from the payer’s bank account based on a pre-approved authorization. This type of transaction is perfect for regular, predictable payments. ACH debit payments are widely used for:
- Paying bills. Utility companies often use ACH debit to collect monthly payments for services like water, electricity, and gas. Customers benefit by not having to manually make payments, reducing the risk of missed payments or late fees.
- Making loan payments. ACH debit is ideal for recurring payments such as mortgages, auto loans, or student loans. With ACH debit, banks and lenders can automatically withdraw payments on the agreed-upon due date, ensuring timely repayment and a predictable payment stream.
- Health insurance and premiums. Insurance companies are often ACH operators, using ACH debit payments, making it easier for policyholders to maintain coverage without worrying about late payments.
The main benefit of ACH debit for businesses is its automation capability, which minimizes manual processing, reduces the likelihood of missed payments, and significantly improves Days Sales Outstanding (DSO), helping businesses ensure steady cash flow. For customers, ACH debit offers the convenience of setting up payments once, with no need for recurring manual actions.
Step-by-step guide to how ACH credit payments work
Now that we’ve covered the fundamentals, let’s look at how ACH credit payments work.
Customer initiates the payment – The customer initiates a new ACH credit payment through their online or mobile banking account. They will enter information about the payment, such as the name of the recipient, plus their account information—including the account number and amount due.
Customer’s bank sends the payment to the receiving bank – The customer’s bank (the ODFI—originating depository financial institution) sends the payment file through the ACH Network to the recipient’s bank (the RDFI—receiving depository financial institution).
Receiving bank credits the money to the receiving customer – The receiving bank will then credit the money to the account of the receiving customer.
Customer’s bank updates their account – The customer’s bank will then update their online banking information account to reflect the payment has been made.
Financial institutions, credit unions, or corporations processing a high volume of transactions can streamline their processing of ACH payments through the integration of an ACH API, which allows for greater efficiency of payment processing.
How long do ACH payments take to process?
ACH transaction settlement generally takes 1 to 3 business days for funds to be officially credited to the recipient’s bank account, depending on the service level (standard or same-day ACH) and the processor’s practices.However, there are times when the payment is delayed and takes longer than usual. Delays are rarely caused by “high volume peaks,” but rather by bank-specific cut-off times or the use of standard ACH instead of the faster same-day ACH service. NACHA rules dictate the maximum time; delays beyond that are typically processor- or bank-level issues.
How much do ACH credit transactions cost?
The cost of each ACH credit transaction is determined by the amount of the payment, but all ACH credit payments are free of charge for customers. Banks and financial institutions pay a fee to use the ACH network, and there is a small fee charged if the customer chooses to certify the payment. This is a way of confirming the payment by sending a physical copy of the payment confirmation in the mail. Generally, payment processors keep ACH pricing low, as do any other service providers involved.
What are ACH credit refunds, and how do they work?
ACH credit refunds are payments returned to a customer’s bank account. They are frequently used by government institutions in cases such as refunding a taxpayer who has overpaid their federal income tax. The customer’s bank transfers the refund money back to the customer, provided it is within 180 days of the original payment having been made. After this period, the original transaction, or any part of it, cannot be refunded.
Can ACH payments be reversed?
ACH payments are generally not reversible. However, there are occasions when a customer may receive a refund due to the receiving bank initiating a reversal. A bank may initiate a reversal if they suspect the customer or the receiving customer has been the victim of fraud. In some cases, a bank may also initiate a reversal if they believe the customer’s account does not have enough funds to cover the payment.
Are ACH transactions secure?
The Automated Clearing House network is a highly secure network used to process billions of payments every year. This network is designed to process large volumes of payments in a secure and efficient manner and has many safety measures in place to ensure its security.
When a customer initiates an ACH credit payment, they are routed through an encrypted network, and all data sent via the network is protected by multiple levels of security. These include high-end encryption and security protocols to protect against hacking and data theft.
Conclusion
ACH payment processing is a popular way for individuals and businesses to transact with each other because they are easy and quick to send. In general, there are many benefits of ACH payments, but ACH credit payments are best for sending one-time payments, whereas ACH debit payments are more suited for making regular payments, such as monthly utility bills.
All ACH payment processing is secure and reliable and available for submission 24/7/365, but they are only processed and settled on business days (Monday through Friday, excluding federal holidays). Making a payment via the ACH network differs from making a payment with a credit card in that you are sending the money directly from one account to another (like a money transfer), instead of charging it to a card you would later be liable to repay.
Ready to leverage the speed and security of ACH while minimizing your transaction risk and cost? Stax provides the modern platform and the expertise you need to master ACH payments.
