1. What is an ACH payment
2. How do ACH payments work
3. How to set up ACH payments
4. Benefits of ACH bank transfers

Making payments is a crucial part of running any business. Though this seems obvious, choosing the correct payment method for a business can be an enormous benefit to the efficiency and budget of a growing company. Smart business owners seek payment methods that provide fast, convenient, cost-effective means of getting payment into their accounts. Which is where ACH bank transfers come into play.

ACH–or Automated Clearing House–bank transfers are a type of electronic bank-to-bank payment that gives businesses a speedy and cheap way to send money between accounts outside of payment systems like credit cards or wire transfers. But, like all things involving payment and payment processing, there’s a lot to know about ACH bank transfers and how they could be an appropriate, even beneficial payment method for your business.

To help better understand what ACH bank transfers are we’ve put together this guide. In it we’ll discuss what exactly the ACH payment method refers to (and what ACH actually stands for), the differences between payment by ACH and payment by wire transfer, how ACH payments work, how to actually set-up an ACH payment and what the benefits of doing so might be.

Let’s get started by just discussing what exactly an ACH payment is.

What is an ACH payment?

ACH payment processing is an increasingly popular means of paying for goods or services electronically. 7.5 billion ACH payments adding up to nearly $18.9 trillion were processed in the fourth quarter of 2021. If you know it or not, you’re probably using the ACH payment method to either pay or get paid for some portion of your business’s budget. So, what exactly is an ACH payment?

An ACH payment is a way of transferring money between financial institutions that uses the ACH financial network to quickly move money between bank accounts. They’re often used because they’re quicker and more consistent than other traditional forms of payment and provide an easy step to streamlining, and evening automating, your accounting. Even better: they can be much cheaper than credit card payments and other forms of money transfer.

What does ACH payment stand for?

When you use the ACH payment method your money is being electronically transferred from bank-to-bank with the help of an “ACH” or an Automated Clearing House network. This is a system that operates solely to send and receive batched credits and debits between the financial institutions participating in the ACH payment service.

ACH payment processing includes everything from online ACH payments for customers, businesses and various religious groups to government organizations of every stripe. Payments by ACH are made almost entirely in the United States with most of the US colonies–Guam, U.S. Virgin Islands, American Samoa amongst others–also included.

The way the ACH payment service functions is that participating institutions pay “Network Administration Fees” to a governing body–the National Automated Clearinghouse Association (NACHA)–that are used to cover administration costs. The ACH network currently includes 10,000 participating institutions.

What is the difference between bank transfer and ACH?

The main difference between the ACH payment service and typical bank transfer is that ACH payment processing is completed through a clearing house, and provides the ability for direct deposit or direct payment. Bank transfers on the other hand are initiated between a person and a bank through a passing of specific information. The bank uses this information, deducts the required funds from the account and then passes it along to the receiving participant.

When it comes to making a decision between using the ACH payment method or a bank transfer, the differences are small, but important. The purpose of your payment can affect what you decide to pay using. An ACH payment is commonly used for direct deposits, paychecks, benefits provided by the government and tax refunds amongst other things. Wire transfers are often used for the secure transfer of large amounts of money, though ACH transfers can also be used.

Beyond that, the speed in which funds are transferred and the associated costs are some of the important differences between the two payment methods. You can almost always count on free ACH payment processing, but the time it takes to pay for something using an ACH payment to be processed can be several days. On the other hand bank transfers are faster but can come burdened with high cost fees, with the fees jumping in price if you need to make a bank transfer internationally.

Security for both the ACH payment method and bank transfers is high. But if someone is looking to scam you, they’ll usually try to do so via a bank transfer because it’s more of a person-to-person interaction with the bank playing financial middleman.

How do ACH payments work?

The ACH payment method is, simply put, a form of bulk digital mail that is passed between.

Step 1: The merchant requests a specific amount of funds for the goods and services being purchased by the customer. This is, in layman’s terms, referred to as a “sale.”

Step 2: The customer authorizes the merchant to use their preferred payment method to initiate the ACH payment method to make payment.

Step 3: The customer’s bank debits their account and sends the request for ACH payment processing to the ACH payment processor.

Step 4: The ACH payment processor sends all of the ACH payment from to the merchant’s bank.

Step 5: The merchant’s bank processes the ACH payment form.

Step 6: The agreed upon payment is deposited into the merchant’s bank account.

How long does ACH payment take?

Because ACH payment processors only process ACH bank transfers seven times a day–and only on business days (Monday-Friday)–ACH payment processing can take several days. Beyond that, ACH credits and ACH debits have different timelines with debits having to be processed the next business day and credits processed and delivered within the same day, or one to two business days later.

Though these timelines are enforced by NACHA–the governing body for ACH bank transfers–the receiving financial institution still has control over when the funds are actually credited or debited for the individual accounts. This step in the process sometimes takes an extra day or two. If a customer is inclined to pay a small fee, same-day processing can be ensured as well.

What info is needed for ACH payment?

To make payment by ACH, you’ll need some basic information:

• Your name
• The routing/ABA number
• The account number
• What type of bank account funds are being credited to (banking or personal)
• The transaction amount

Once this information is gathered, setting up an ACH payment is just a few steps away.

How to set up ACH payments?

Setting up the ACH payment method only takes a few steps:

Step 1: Gather the information you’ll need make payment by ACH

Making an ACH bank transfer requires specific information to ensure that the funds are taken and deposited in the right places. Gather the needed information–name, routing/ABA number, account number, type of bank account and transaction amount–and you’re ready to go.

Step 2: Decide between ACH debit and ACH credit

Before your payment is processed you’ll need to make a decision between ACH debit and ACH credit.

ACH debit infers a transaction is made with a payee. A customer will submit payment details to the merchant and the ACH payment process will be initiated by them. ACH credit is an ACH payment method used in bill paying. A financial institution is given permission to send payment between customer and merchant.

To ensure you’re making the correct ACH bank transfer, you’ll need to decide which of these simple options is the correct one for you.

Step 3: Make the ACH transfer

Before you make the transfer, you’ll be asked to fill out paperwork (or in most cases these days, electronic paperwork). Once this is done, this series of events will occur:

• The two accounts money is being transferred between, need to be connected by a financial institution. This will happen using the information you’ve already provided them.
• Specify if this is an ACH debit or an ACH credit
• Enter the amount of payment owed
• Ensure that the correct payment date has been entered.

Benefits of ACH bank transfers

Initiating an ACH bank transfer is a little bit complicated and, again, can take longer than a standard wire transfer. With that said, the benefits of ACH payments are great. Here’s a few of the benefits of paying by ACH.

1. It’s easier

Using the ACH payment method to transfer money directly from bank-to-bank is, on most occasions, much less complicated than using a credit card or another form of payment. Paying with a credit card online can be a laborious process of entering in all of the information required (i.e. credit card number, security code, etc.). With ACH payment processing all you need to do is enter in your specific bank information. Time saved, money transferred.

2. It costs less

Though ACH payment costs aren’t standardized (different financial institutions can charge different amounts), they are almost always cheaper than credit card fees. You can find free ACH payment processing and even if it isn’t free, the cost is minimal enough to be unobtrusive. Processors can charge additional fees, but where they run between 1 and 1.5% (with a typical cap of $5), credit cards charge between 1.5% and 3.5% and wire transfer fees can cost up to $35 dollars just to send.

3. Flexibility

The ACH payment service is just another way to pay your bills. There are times when using a credit or debit card, wire transfer or other form of payment just doesn’t work, and having ACH payment processing as an option is necessary.

4. Long lasting

Most consumers hold on to bank accounts for an average of 14 years. Meaning, once you’ve connected your bank account to the businesses you frequent, you’ll have a far longer time before you have to go through the process of reentering any of your financial information. Credit cards have a shelf life of less than three years and this means, every three years you’ll have to update every business you pay using a credit card with your new information.

Setting up the ACH payment method for your personal spending or your business needs can seem complicated, but Plastiq makes it easy. Send an ACH payment in seconds when you use the Plastiq payment platform.