what are ach payments and how to accept them - computer on a desk

What are ACH payments and why you should accept them

Tuesday, October 21, 2014

When it comes to accepting payments for your business, one payment type that you might not have considered is an ACH transfer. While you might have heard of ACH before, this article will educate you so you can determine whether or not they are right for your small business.

The basics of ACH

ACH payments are a common way for businesses to send and receive payments. Personally, you’ve probably used ACH payments for bill payments or to make money transfers from one bank or credit union to another.

To start, ACH stands for Automated Clearing House. It’s a network that helps individuals and businesses move money between bank accounts throughout the United States, from one financial institution to another. The National Automated Clearing House Association (also known as NACHA) is the organization that runs the Automated Clearing House Network. ACH transfers can take a little longer than credit cards to process – but most transfers are completed in 3-5 business days.

ACH transactions typically involve four types of entities:

  • The banking institution that initiates the transaction, known as the Originating Depository Financial Institution (ODFI)
  • The banking institution that receives the ACH request, known as the Receiving Depository Financial Institution (RDFI)
  • The entity overseeing and facilitating the ACH network (NACHA)
  • The ACH operators, who process the transactions between the originators and receivers. Currently, there are two ACH operators – the Federal Reserve Bank and the Electronic Payments Network (EPN).

Let’s imagine a fictitious example to highlight how a payment moves through the ACH system.

First, a small business (The Pizza Supply Co.) requests to make an ACH debit transfer because it is charging another business, Joe’s Pizza, for supplies. In this example, since The Pizza Supply Co. is the one to request the transfer, it’s seen as the originator. As the originator, The Pizza Supply Co. sends ACH files containing the bank account numbers and routing numbers to their financial institution or payment processor – who is the ODFI. The ODFI will bundle ACH transfers together and then send them in a batch to the ACH operators, who then sort and send the transactions to Joe’s Pizza’s bank, which is acting as the RDFI. They then receive the ACH files and will note a debit transaction on the customer’s account. After the transfers have been settled the transaction is complete, and The Pizza Supply Co. receives Joe’s Pizza’s money.

For clarity, ACH transfers cannot be processed from debit cards or credit cards because payments are made from one bank to another bank. 

Types of ACH transactions

There are two types of ACH transactions – direct deposits and direct payments. Each has its place for your business. Let’s address direct deposits first.

Direct Deposits (ACH Credit)

This type of ACH transaction is probably the most familiar to you. It encompasses the many different types of deposit payments a business might make to consumers. For small businesses like you, most commonly these are payroll payments or reimbursing employees for business expenses. Other types of direct deposit payments include tax and other refunds, government benefits like social security, or interest payments. Direct deposits are ACH credit payments because you are pushing money from your business bank account to another account.

Direct Payments (ACH Debit)

The other type of ACH transaction is direct payment. This type of payment is from a consumer to the business. Many times, these types of payments are set up on a recurring basis – perhaps weekly, bi-weekly, or monthly. Examples of this type of payment include mortgages and utility bills. As a business, if you plan to accept recurring payments from customers, this is the best way to do so. Direct payments are ACH debit payments because you are pulling money from another account into your account on the specified billing cycle.

Now that we’ve discussed the types of ACH transactions, let’s talk about the benefits for your business.

Benefits of ACH payments

There are a few key benefits to utilizing ACH payments for your business:

Cost considerations 

One of the biggest benefits of using ACH payments is saving on processing costs. ACH transfers typically have lower processing fees than credit cards. That’s because this method is a bank-to-bank transfer and doesn’t require the high rates of card processing networks.

More consistent payments 

While credit and debit cards can expire, checking accounts don’t. Therefore, you’ll deal with fewer declines when processing ACH payments. Also, your customers can automate their payments to you, leading to more consistent and reliable payments for your business.

Increased convenience 

Because payments are electronic, the need for paper checks, mailed invoices, and trips to the bank decreases significantly, making it more convenient and less hassle for you and your customers.

Open to everyone

Because ACH transfers simply rely on each party having a bank account, if your customers or employees have a bank account, they can utilize ACH transfers.

Good for B2B

If you work with other businesses to secure materials or other inventory, ACH transfers can help facilitate these business-to-business (B2B) payments. That’s because ACH transfers allow entities to transfer larger sums of money than other methods – currently up to $100,000 per day.

Should your business accept ACH payments?

When deciding if your business should accept ACH payments, there are a few important questions to ask to help you make the right decision for you.

  • Do you currently accept recurring payments at your business?
  • Do many of your customers currently pay by paper check?
  • Will you save money by accepting ACH in lieu of credit card payments?
  • Will your customers convert from credit card payments to paying by ACH? 

Answering ‘Yes’ to any of these questions means it’s likely your business could benefit from accepting ACH payments. If you’ve decided ACH payments are right for your small business, let’s talk about how you can get ACH payments set up.

Accepting payments at your small business

The process to start accepting ACH payments is pretty straightforward. 

Step 1: Decide to use either a bank or payment processor

First, it’s important to understand that small businesses like yours cannot usually be the ODFI or the RDFI because of size. Instead, you’ll likely have to rely on your financial institution or payment processor to serve as an intermediary to facilitate the payment. You’ll likely want to compare the rates for each provider so you can decide what’s best for your business.

Step 2: Set up a merchant account

Next, you’ll want to set up your merchant account. Your company will have a unique merchant account so that your business can access the ACH network. To set up a merchant account, you’ll need documentation from your business, which may include the following: 

  • Federal Tax ID
  • Owner’s valid ID
  • Certificate of incorporation
  • Estimated ACH processing volumes
It’s important for your bank or payment processor to confirm what they require to set up your merchant account.

Step 3: Get customer authorization

After you set up your business’s merchant account, you’ll need to get authorization from your customers to begin withdrawing ACH payments. This authorization can be a verbal, recorded phone conversation, a signed, written order form, or an online payment form. ACH fraud detection is important to protect customer payments.

Step 4: Set up payment

Once you get customer authorization, you’ll need to collect a few more pieces of account information to set up the payment. But you’ll only need to collect this information once. These include the customer’s bank name, account type (checking or savings account), bank account number, routing number, and customer name. You’ll then make sure to pass this information to your bank or payment processor to get the payment set up. This process may take a few business days to complete. To confirm the ACH information, trial deposits and withdrawals may be initiated with small amounts of money.


How much do ACH transfers cost?

Now that you know how to implement ACH transfers for your business, you might be wondering about the costs associated with ACH transfers. Much like credit cards, costs vary based on who processes your ACH payments as well as your total transfer volume. However, using ACH transfers can save your business in fees over the long term. Most ACH transfers are a flat fee based on the transfer amount, so costs may range from $.20 per transaction to $1.50 per transaction. Contact your bank or payment processing company to learn more about their costs.

ACH transactions vs wire transfers

Now, you may wonder what the difference is between ACH transfers and wire transfers. While each one is considered an electronic funds transfer (EFT), there are some important distinctions between ACH transactions and wire transfers. 

Direction of payment

While ACH transactions can both send and receive money, wire transfers are used only to send funds.

Completion type

When it comes to completing each transaction, wire transfers are manually completed by bank employees, while ACH payments can be automated and don’t require any human interaction.

Speed of transfer

While ACH payments can take 3-5 business days to complete, wire transfers instantly send money from one account to another, completing the transaction in real-time.

In conclusion, ACH payments are a great way to accept recurring payments while decreasing processing costs. After reading through this article, you should be ready to accept ACH payments at your small business.

Ready to start but need a partner to handle your ACH and payment processing needs? 

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind.