What is the Automated Clearing House (ACH)?

Automated clearing house (ACH) is a type of electronic payment method and Nacha-regulated ACH Network payment system used by U.S. banks and credit unions to make domestic bank account-to-bank account electronic direct deposits and direct payments. 

Unlike paper checks, ACH payments are EFTs processed electronically via the ACH Network, although ACH debits are sometimes called eChecks.  

An example of an ACH is recurring payments for payroll, which leverages direct deposits (or direct payments) to send funds to an employee's bank account. Direct deposits are a type of ACH. 

Who uses ACH?

Businesses use ACH for B2B to pay suppliers, receive customer payments, and for consumer transactions. Also, government agencies, non-profit organizations, and individuals use ACH payments and ACH direct deposits. 

Investors also use ACHs to send money to businesses they are investing in. For example, a startup with a newly signed term sheet will likely use ACHs to receive funds from an investor once an agreement is signed.

What are the benefits of using ACH deposits for payroll?

Using ACH deposits for payroll provides several benefits:

1. Cost-Efficient: ACH transactions frequently have lower costs than other payment methods, providing financial savings for businesses.
2. Promptness: Due to quick processing times, using ACH ensures businesses can maintain timely payroll operations, contributing to employee satisfaction.
3. Simpler Management: ACH deposits eliminate the need for physical checks, streamlining payroll processes and reducing the chance of human error.
4. Increased Security: With transactions conducted through a secure ACH Network, businesses can reduce the likelihood of fraud, as opposed to paper checks which can be potentially altered or stolen.
5. Privacy Protection: Businesses can keep sensitive information such as account and routing numbers private during ACH transactions, in contrast to paper checks where such information is visibly printed.

By opting for ACH deposits for payroll, businesses can reap benefits in terms of cost savings, operational efficiency, security, and privacy protection.

What are the drawbacks of ACH?

While ACH provides a safe and efficient method for electronic money transfers, it also comes with drawbacks, particularly compared to other Electronic Fund Transfers (EFTs). 

These include:

• Reduced float time: ACH operations result in faster clearance of checks, which can diminish float time - the time frame between when a check is written and when the amount is subtracted from the account.
• Slower settlement time: Unlike EFTs which can process in real-time, ACH payments can require several hours (for Same Day ACH) or even up to three business days to settle, delaying the availability of funds.
• Limitation on transaction amounts: Each Same Day ACH transfer has a limit of $1 million. There are no limits to traditional wire transfers, which may be a more suitable option for larger transactions.

Now that we've covered ACH's primary drawbacks let's delve into the specifics of ACH deposits, including their mechanics and illustrative examples.

What is an ACH deposit?

An ACH deposit is an “ACH credit” electronic funds transfer (EFT) via the Automated Clearing House Network to push money as a withdrawal from the payer’s bank account and transfer to the receiver’s bank account as a deposit. 

ACH credit means “push” transaction where the payer, as the sender, requests an electronic funds transfer (EFT) originating from its bank account to the recipient payee’s bank account through the ACH Network.

An example is a paycheck deposit from an employer into each employee’s bank account. 

What are network administration fees?

Nacha (National Automated Clearing House Association) charges ACH Network Administration Fees to its financial institution members through annual and per-ACH transaction fees to recover the costs of running the ACH Network. 

How ACH deposits work

ACH deposits may be set up as recurring or one-time transactions, using either a designated checking account or savings account for the payer and payee to accomplish the bank transfer using Nacha file batches through the ACH processing facilitators, including the ODFI, the RDFI, and the ACH Operator. 

Here are common steps involved in processing ACH deposits:

1. The payee initially provides the payer's bank account number and routing number.
2. The payer (Originator) (or their third-party payment processor) sends a standard Nacha file with payee bank information and batch payment details to its bank. This is a request for a ”push” funds withdrawal via ACH credit from their designated bank account for the ACH batch amount.
3. The payer’s bank or credit union serves as the Originating Depository Financial Institution (ODFI) in the transaction and sends all of its batches of payment requests to the ACH Operator. 
4. The ACH Operator (Federal Reserve or The Clearing House) sorts all payment files it receives and sends them to the payee's bank, known as the Receiving Depository Financial Institution (RDFI). 
5. The RDFI deposits the funds in the payee’s bank account and credits the Receiver’s (payee’s) account. 

Two types of ACH transfers are Same-Day ACH transactions (settled the same business day), limited to $1 million per transaction per business day, and next-day ACH, which are regular ACH transactions that take one to three business days to settle. It usually takes ACH deposits one business day to go through unless it is Same-Day ACH processed within hours. 

Did you know? Same Day ACH payments are free to process with Rho.

ACH deposit examples

ACH deposit examples are: 

• Paycheck direct deposits for employees
• Government benefits, including Social Security
• Tax refunds
• Annuities
• Depositing interest payments 
• Employee travel expense reimbursements
• Supplier invoice payments via ACH credit 

ACH transactions are ACH deposits (ACH direct credit) or ACH direct debit payments. A financial institution (bank or credit union) can serve as the ODFI or RDFI in these ACH transfers between the payer and the payee’s bank account. 

What is ODFI?

An ODFI is an Originating Depository Financial Institution using the Automated Clearing House Network to initiate and send ACH transactions. 

What is RDFI?

An RDFI is a Receiving Depository Financial Institution using the ACH Network to receive ACH transfers. 

What makes ACH different from other payment forms?

What makes ACH different from other payment forms is that ACH is processed electronically in the U.S. only for Nacha-member financial institution customers through the ACH Network. 

ACH is a type of electronic funds transfer (EFT) between the bank accounts of different bank account holders. 

Payment forms, besides ACH, are other types of EFTs and paper checks. We cover the differences between ACH deposit and (1) wire transfer, (2) direct deposit, (3) ACH direct payments, and (4) ACH transfers, then compare ACH vs. EFT. 

ACH deposit vs. wire transfer

ACH deposit vs. wire transfer: An ACH deposit is an electronic bank account transfer processed through the (domestic U.S.) Automated Clearing House Network.  Example: An American business in North Carolina depositing funds into a US-based employee’s bank account. 

A wire transfer may be a domestic or international electronic cross-border payment processed via the U.S. Fedwire or the SWIFT network internationally.

ACH deposit vs. direct deposit

Both ACH deposit and direct deposit represent ways of electronically transferring money into a recipient's bank account (ACH credit transactions). However, the terms are often used in different contexts.

Direct deposit, a form of an ACH deposit, usually refers to specific transactions such as the deposit of employee payroll and government payments, including Social Security and tax refunds.

On the other hand, the term ACH deposit serves as a broader category, encompassing not just payroll and government payments but also ACH credit payments received from various sources, such as payments to suppliers.

ACH deposit vs. ACH direct payments 

ACH deposit isn’t the same as ACH direct payments because ACH deposit is an ACH credit transaction with funds pulled from the payer’s account, but ACH direct payments may be ACH credit or ACH debit transactions. In an ACH debit transaction, funds are pushed from the payer’s bank account to the payee’s bank account. 

In contrast to ACH credits, ACH debits include utility bill payments and recurring subscription payments. 

ACH deposit vs. ACH transfers

The difference between ACH deposits vs. ACH transfers is that an ACH deposit is always an electronic ACH credit type of bank transfer through the ACH Network. In contrast, ACH transfers are all types of ACH transactions, including direct deposits, credit payments, or direct debit payments.

What's the difference between ACH vs. EFT?

ACH is an EFT transaction processed through the Accredited Clearing House Network, whereas EFT (electronic funds transfer) is an umbrella term for all electronic payment methods. 

EFTs include ACH, wire transfers, debit cards, and credit cards, PayPal, Zelle instant payments, money transfers, pay-by-phone, real-time ATM, and P2P digital wallet transactions. 

FAQs: ACH deposits 

Do all bank accounts accept ACH payments? 

All U.S. banks and credit unions allow electronic ACH payments, whether they originate or receive ACH payments through the ACH Network as a Nacha member financial institution or don’t make ACH transactions but only receive ACH payments from member financial institutions.

What does ACH mean on a bank deposit?

ACH on a bank deposit means that an electronic funds transfer processed by financial institutions through the Automated Clearing House Network (ACH Network) has been deposited in your bank account. 

Why did I get an ACH deposit?

You may receive an electronic ACH deposit for a paycheck, Social Security benefits, tax refunds, or supplier payments from a customer. 

How do I know if my checking account is ACH?

Any domestic checking account (or savings account) can be used for making and receiving electronic ACH transactions through banks and credit unions in the U.S. through the Automated Clearing House (ACH) Network. You can specify a checking account for an ACH transaction like bill pay or payroll.

Who can receive ACH payments?

Businesses, non-profit organizations, consumers, and government agencies can receive ACH payments in the United States at any bank or credit union where they have a bank account. 

What is the difference between an ACH and a bank transfer?

ACH is a type of bank transfer of funds between different payers and payees with bank accounts through the ACH Network. But bank transfer is a broader term that refers to any type of movement between bank accounts—whether it is an internal transfer between accounts held by the same person or organization or a different kind of bank transfer like a wire transfer. 

Conclusion: Enjoy fee-free ACH payments with Rho

In summary, ACHs are a common type of electronic payment used by businesses for activities like payroll or invoice processing. 

While ACH fees are typically low-cost, processing fees can add up quickly depending on your payment volume. When that occurs, you want a reliable business banking partner and an easy-to-use platform to manage all your business banking needs. 

With the Rho platform, customers enjoy fee-free Same Day ACH and wires and a seamless user experience where they can manage all their payments, banking, and spending in one place. Interested in trying out the Rho platform? Schedule a demo today. 

Banking services provided and cards issued by Webster Bank, N.A., Member FDIC. All Rights reserved. © 2019-2024 Under Technologies, Inc. DBA Rho Technologies. Rho is a trademark of Under Technologies, Inc. Rho is not a bank. Rho partners with FDIC-insured banks to offer banking products and services.