Whether you've ever paid your mortgage online using your checking account or had your employer directly deposit your paycheck into your bank account, then you've taken advantage of a transfer through the Automated Clearing House system. When you use this electronic funds transfer system to move money from one bank account to another, you get benefits in terms of convenience and security. There are several situations where you might use ACH transfers, and this makes the system even more important. Read on to learn all about ACH including its uses, pros, cons and instructions for sending and receiving money with the system.
Understanding Automated Clearing House Basics
When you first hear about the ACH system, you might think it works just like wire transfers since the money electronically passes between bank accounts. However, there's a major difference in how these types of transfers are processed. While wire transfers get handled at the bank level, ACH transfers use an automated process where a clearinghouse handles verifying and forwarding the requests – typically through a process that takes two to five days. Further, you usually don't have to pay anything for an ACH transfer, while regular wire transfers can incur a fee each time.
ACH transactions come in two forms that you can see identified on your bank statement: ACH debits and ACH credits. When you see there was an ACH debit transaction, then money came out of your bank account to pay some person or company, while an ACH credit would mean someone sent you money. For example, an ACH debit from your bank account would take place if you pay your mortgage payment from your bank account. On the other hand, an ACH credit would show on your bank statement if you received a direct deposit from your employer.
Along with these few examples of ACH transfers, there are plenty of other use cases in daily life. For example, you can use ACH to pay your taxes or receive a tax refund from the federal government as well as your state. You can set up ACH auto payments for your utility bills each month as well as use ACH payments for goods you buy online. If you've heard of Venmo or Zelle for money transfers with friends and family, know that these payment services also take advantage of the ACH system and allow you to avoid transaction fees.
Read More: ACH Bank and Branch Code Guide
Exploring ACH Payment Processing
The ACH payment process involves several steps that include the following:
- It starts with the payment's originator initiating the request and their bank making an ACH entry that contains the information about the transaction to take place.
- The originating depository financial institution will send that ACH entry in a batch – according to the specific bank's schedule – with other people's ACH payments for further processing through an ACH operator; this can be either a clearinghouse or the federal reserve.
- At that point, it's the operator's job to process the ACH entries in that batch and determine whether money's being sent or received. Then, the operator sends the ACH entry to the other party's bank.
- The receiving depository financial institution gets the ACH entry and checks whether the transaction is valid and there are enough funds in the originator's account for the transaction to successfully take place.
- If successful, the receiving bank will complete the transfer with an ACH debit or credit. Otherwise, the ACH transfer will fail. In case of failure, a failure code gets assigned to the ACH entry, and the originator will need to correct the error – such as by having sufficient funds for a payment – and submit another ACH transfer request.
ACH Transfer Pros and Cons
A key reason why people and businesses take advantage of ACH transfers is the convenience it offers over writing and sending in paper checks. Although ACH transfers do take a few days to complete, they can be faster than waiting for a check to arrive, and there's also the environmental benefit that not needing to use paper offers. ACH transfers usually don't come with transaction fees for consumers and thus provide a benefit over wire transfers. Further, they're also pretty secure since both the sender and recipient have to agree to the transaction.
Despite these benefits, ACH transfers come with downsides that make some consumers opt-out of these transactions. A transfer requires time to complete, and this can be a problem when you have an urgent transaction. Some consumers might not like the idea of giving their banking information to another party. Lastly, despite ACH being secure, billing errors and account fraud can still happen and inconveniently lead to money taken from your bank account.
Using ACH Payments and Deposits
Whether you plan to send or receive money, be prepared as you'll need to have some bank information handy such as your account and routing numbers, account type (savings or checking) and your bank's name and contact details. After you've got this information, you can follow these steps to initiate an ACH payment or set up an ACH deposit:
- Direct deposit from employer: When you first get hired, your employer will usually ask whether you want to use direct deposit and may present you with a paper form or direct you to a place on your company's internal portal to set up the agreement. But otherwise, you can request the form or change your payment method settings through the online system at any time. Further, your bank likely has a form you can download from its website and hand to your employer. Be prepared to tell your employer what percentage of your check you want direct deposited, as you can specify the amount or even spread money across multiple accounts.
- Tax refunds and payments: When you complete your tax return, you'll find that IRS Form 1040 actually has a section near the end where you can specify the bank account information so that your refund gets sent through ACH transfer versus in paper check form. An online filing system usually has you enter these details in the final steps as well. And if you have taxes due, you can use the IRS Direct Pay website to submit a payment using your banking information.
- Government benefits deposit: If you receive federal benefits like Veterans Affairs or Social Security payments, you can visit the Go Direct website to find a button you can click to set up a direct deposit. Once you're on the enrollment page, you'll select that you're a public recipient and then enter your bank details and other personal information so you can receive ACH payments for future benefits. State and county benefits like food stamps may also be available through ACH deposits, so you can check with your state or local agency to learn more.
- Money transfers through mobile payment services: Apps like Zelle and Venmo allow you to enter your bank account information and send and receive funds with people you approve. These apps work with domestic banks and can allow for nearly instant transfers and without the direct sharing of banking details between the two parties. Further, these apps have both "send" and "request" options so you can ask others for money or initiate a transfer directly. Note that these apps may also allow you to send money via a credit card, but that comes with a fee, unlike with ACH transfers.
- Online bill payments: To save yourself some hassle when it comes to paying your regular bills, you can use ACH payments either manually or automatically. You can usually locate options to pay by bank account or set up autopayments on your provider's website or set up the agreement by form or phone. For example, companies offering utilities and subscription services alongside lenders and insurance companies usually support ACH payments. If you opt for autopay, the ACH debit occurs on a set date each time for your convenience.
- Investopedia: ACH Transfers: What Are They and How Do They Work?
- FTNI: ACH Processing 101: A Beginner's Guide
- ACHQ: How Does ACH Payment Processing Work?
- Actum Processing: ACH Credit vs ACH Debit: What You Need to Know
- NerdWallet: How to Set Up Direct Deposit
- IRS: Form 1040
- Go Direct: Still Getting Checks?
- San Diego County: Direct Deposit - EBT (Electronic Benefit Transfer)
- CDI: The Pros and Cons of ACH Payment Methods
- The Balance: ACH Debit for Consumers
- Zelle: Send and Receive Money With Zelle®
- IRS: Direct Pay With Bank Account
- Nacha. “What is ACH?.” Accessed June 4, 2020.
- Nacha. “BEYOND SIMPLE AND SAFE: OPPORTUNITIES TO EXPAND THE USE OF DIRECT DEPOSIT VIA ACH FOR PAYROLL,” Page 10. Accessed June 4, 2020.
- Nacha. “ACH Quick Start Tool.” Accessed June 4, 2020.
- Nacha. “How Direct Deposit Works.” Accessed June 4, 2020.
- Nacha. “How Direct Payment Works.” Accessed June 4, 2020.
- Nacha. “October 2017 - Faster Payments Tracker,” Page 6. Accessed June 4, 2020.
- Nacha. “Leveraging the Mobile Channel for ACH Payment Innovation,” Page 25. Accessed June 4, 2020.
- Nacha. “Leveraging the Mobile Channel for ACH Payment Innovation,” Page 8. Accessed June 4, 2020.
- Nacha. “Direct Payment for Consumers.” Accessed June 4, 2020.
- Nacha. “Expanding Same Day ACH.” Accessed June 4, 2020.
- Smart Asset. “What Banks Charge for Wire Transfers.” Accessed June 4, 2020.
- My Bank Tracker. “ACH Transfer Limits at the Top U.S. Banks.” Accessed June 4, 2020.
- Board of Governors of the Federal Reserve System. “Regulation D Reserve Requirements,” Page 3. Accessed June 4, 2020.
- Nacha. “Same Day ACH: Moving Payments Faster (Phase 1).” Accessed June 4, 2020.
- Venmo. “A quick look at our fees.” Accessed June 4, 2020.
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.