What is ACH?

ACH stands for Automated Clearing House, a network that facilitates electronic funds transfers between domestic banking institutions, also known as ACH payments. NACHA (National Automated Clearing House Association) is the organization that oversees ACH payments.

The Automated Clearing House network is a popular funds transfer option for businesses to send and receive money because it is typically cost-effective, fast, transparent, and helps limit fraud. In addition, ACH payments are handled in batches, which is optimal for businesses with high payment volume.

ACH payments stand in contrast to paper checks and wire transfers in a few ways:

• ACH vs paper checks: Paper checks involve a physical aspect of the payment process (i.e., the check).
• ACH vs wire transfer: ACH is for domestic EFTs only, has a lower maximum payment allowed, and is typically cheaper than wires, which help facilitate international EFTs.
• ACH vs EFT: ACH is a type of EFT. However, not every EFT (like a wire) is an ACH.

In terms of speed, one popular type of ACH is the Same Day ACH, which can process payments in as fast as one business day. While some banks charge for the service, Same Day ACHs are free for businesses using Rho.

Automated clearing house (ACH) credit meaning

Since we know ACHs are electronic funds transfers (EFTs) between domestic, US-based financial institutions, what are ACH credits?

A simple way to think about it is that ACH credits are initiated by the payer, which then leads to money being transferred from a payer’s bank account to the payee’s account.

This is in contrast to ACH debits, which also involve the transfer of funds between these accounts, but they are initiated by the payee who collects (or takes or withdraws) money from the payer’s account.

Another phrase used for ACH credits is that a payer is “pushing” the money to the recipient’s account. For this reason, when you hear about 'direct deposit', know it's another term for ACH credit and a type of ACH deposit. On the other hand, ‘direct payment’ is another term for ACH debits.

Similar ACH credit examples include employers depositing salary into an employee's account, a local business sending a refund to a customer, or administering government benefits like tax refunds and social security to citizen bank account.

To appreciate the impact and prevalence of ACH transactions, consider that the ACH Network securely handled 31.5 billion payments valued at $80.1 trillion in 2023.

How does ACH credit work?

To successfully execute an ACH credit transaction, the payer must have access to the recipient’s business bank account number and routing numbers.

When sending an ACH, the payer would provide this information using the interface provided by the payer’s bank (Originating Depository Financial Institution) when confirming payment.

How it then works on the back end is that the ODFI sends this information to an ACH Operator (there are two - The Federal Reserve and The Clearing House), who then sends the transaction to the recipient's bank (otherwise known as the Receiving Depository Financial Institution or RDFI).

Upon receipt, the RDFI credits the recipient's (payee's) account, which would be considered an ACH credit transaction.

Note: Standard ACH transactions typically take 1-3 business days to settle, while Same Day ACH processing can settle on the same business day as initiated.

What is an ACH return?

If an ACH credit transaction fails to process successfully, then an ACH refund (or ACH credit refund) occurs. An ACH refund is a reversal of funds initially transferred through the ACH network.

There are a few reasons why this might happen:

1. R01 (Insufficient Funds): The funds in an account being drawn aren’t enough to cover the full amount needed for the ACH credit.
2. R02 (Account Closed): This occurs when the recipient’s bank account has been closed either by the customer or the RDFI.
3. R03 (No Account/Unable to Locate Account): This could occur for a few reasons, but essentially the account number structure is valid and passes an initial check. However, the account number doesn’t correspond to the individual identified in the entry or it isn’t an open account.

If any of these situations occur, the Receiving Depository Financial Institution (RDFI) sends the transaction back to the Originating Depository Financial Institution (ODFI), creating an ACH return.

For example, let’s say you don’t have a debit card or credit card handy, and instead, you want to send money to a vendor using PayPal.

If you enter an incorrect or inactive bank account while setting up the payment, your bank will return the funds to your account due to an 'R03 - No Account/Unable to Locate Account' error.

Benefits of ACH credit

The benefits of ACH credit are generally those of every type of ACH transfer: They are cost-effective, especially when dealing with large volumes, and faster than traditional methods like paper checks.

Electronic ACH credit payments are also generally safer than paper checks, which introduce an element of theft potential given it is a physical object.

Who uses ACH credit?

ACH credit is used widely by businesses that send money to vendors, employees, or other entities.

Government agencies also use ACH credit to disburse tax refunds and other electronic payments. Other notable users include credit unions, utility companies for bill payments, and retirement funds for pension disbursements.

Fees associated with ACH credit

While ACH credit offers a cost-effective solution for funds transfer, the process is not entirely free. Many banks typically charge fees (usually $10-25) for business ACH payments and additional fees for faster versions like Same Day ACHs.

Did you know that Same Day ACHs and wires are free with the Rho platform? Learn more about the Rho platform’s business banking services today.

Automated clearing house (ACH) debit meaning

The simplest way to understand ACH debits is that they are initiated by the payee. Think of a utility company that plans to withdraw the owed utility bill amount from a client using saved banking information.

How does ACH debit work?

The payee initiates an ACH debit, requiring them to have the payer's bank account number and routing number. This data is sent to the payee's bank, known as the Originating Depository Financial Institution (ODFI).

The ODFI forwards this information to an ACH Operator (either the Federal Reserve or The Clearing House), which delivers the transaction details to the paying bank, the Receiving Depository Financial Institution (RDFI).

Once the RDFI receives the debit request, the stated amount is subtracted from the payer's account, hence completing the ACH debit transaction.

Benefits of ACH debit

In the context of recurring payments, they are a convenient way to “set it and forget it” with owed payments your business knows it will need to pay.

For example, AP teams often try to improve working capital management by extending the time they have to pay a vendor to improve cash flow.

If they sign a contract where the vendor is obligated to initiate a recurring transaction on the payment deadline date, this gives the payer organization maximal time to use those funds before needing to send them to the vendor.

Having recurring ACH debits set up with vendors eliminates the dangers of missing due dates and late payment fees – it is also more efficient as it eliminates the need for writing and mailing checks.

Who uses ACH debit?

One of the most common examples of how ACH debits are used is when businesses use them to handle customer bill payments.

For example, a business bank like Bank of America may extend a business loan with lending terms that say they can initiate an ACH debit to collect a set or variable monthly amount from their customer.

Banks may also apply ACH debit for loan repayments, while non-profit organizations could harness ACH debit to manage recurring donations.

Fees associated with ACH debit

ACH debit payments are more likely to incur fees on the payer if there are insufficient funds or another type of error occurs that would lead to a reversal.

ACH credit examples

Here are a few examples that showcase how ACH credits work when

Example 1

Suppose you are XYZ Manufacturing LLC's business owner and have a loan with XY Bank. As part of your lending agreement, you initiate an ACH credit on the same day each month, sending funds to the bank.

Example 2

Let's say you're the CFO at Bob's Supermarket, and payroll is due. You could use your HR platform provider with payroll capabilities to either distribute paper paychecks or initiate electronic ACH credit transfers directly to their bank accounts.

Example 3

Imagine you’re a small business owner who wants to purchase supplies from another local small business that only accepts Venmo payments.

You initiate a transfer of the total amount using the Venmo payment service and send funds to the vendor’s Venmo account (which is tied to Venmo’s banking institution).

ACH regulations

The National Automated Clearing House Association (NACHA), which governs the network, sets ACH regulations.

Some new changes were introduced in 2023, focused on expediting the funds' availability schedule for certain Same Day and next-day ACH credits, aiming to facilitate faster payments and promote economic activity.

What are the new rules for ACH in 2023?

NACHA periodically updates and introduces new rules as the financial environment evolves. Some changes were incorporated in 2023, including modifications to ACH Rules around settlement times of ACH transfers (e.g. "Supplementing Data Security Requirements Rule”).

An example from March 17, 2023, is around Micro-Entries, which ACH Originators use to verify account information.

For more information about these changes and other evolving regulations, we recommend referring to the official website of NACHA.

Conclusion: Simplify ACH payments with Rho

ACH credits help businesses send money conveniently and cost-effectively to vendors, employees, and other entities – and it is all made possible by the American-based ACH system.

ACHs, when combined with other payment systems like credit card payments, can help businesses improve their working capital management and vendor relationships. Still, it’s important that you work with a partner that doesn’t charge excessive fees.

With the Rho platform, customers enjoy fee-free Same Day ACH payment as well as other payment methods like corporate credit cards – giving your business a holistic spend solution and real-time insights as you spend and manage your cash.

Interested in opening a Rho account? Sign up today.

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