Money was made of metal for a few thousand years. Then it was paper. Today it largely exists as ones and zeroes in a vast network of wires and electrical signals.
Those signals include digital money transfers such as ACH payments.
You probably use ACH payment transfers already in some form. Fortunately, ACH bank transfers are easy to use and to understand, at least at a consumer level.
What Does ACH Stand For in Banking Terms?
The acronym ACH refers to the Automated Clearing House Network, a nationwide US banking network. This network, created by the National Automated Clearing House Association (NACHA, which now goes simply by Nacha) in 1974. It allows for electronic transfer of money between bank accounts.
Over 10,000 financial institutions participate in the ACH network: basically every bank, credit union, and fintech company in the U.S. Nacha continues to govern it to this day.
While ACH transfers typically go through checking accounts, you can also send and receive money in savings accounts. You can even receive money on a reloadable debit card, if you’re underbanked and don’t have a checking account.
The ACH network is how Americans send electronic funds transfers (EFTs). You may see EFT used as a synonym in the US, and in other countries such as Canada they use the term EFT exclusively.
Types of ACH Transactions
While the distinctions get a little technical, there are a few types of ACH transactions. The two most important are ACH payments and ACH transfers.
You can either send or receive money via ACH. Depending on that context, people use different terminology to refer to ACH payments.
In the context of receiving money in your bank account via ACH, people use the term direct deposit.
The vast majority of employers offer direct deposit as an option for receiving paychecks. Many government institutions also encourage you to sign up for direct deposit for payments or refunds. For example, the Social Security Administration pushes direct deposit for Social Security benefits, as does the IRS for income tax refunds.
When you go to pay a person or organization by ACH transfer, you typically describe it as a direct payment or bank transfer, since you’re sending money rather than receiving it. But the process uses the same underlying ACH network to transfer the money electronically.
To set up a direct payment by ACH, you simply enter your banking details, such as your bank routing number, bank account number, and the name on your bank account in order to transfer money from your bank account to your recipient’s.
There are two types of ACH transfers: credits and debits. The difference lies in whether the sender or recipient initiates the transfer.
When the sender initiates a transfer, bankers refer to it as an ACH credit or a “push” transfer. You, as the account holder, push the payment out to the recipient.
Direct deposit payments operate as ACH credits, where your employer pushes the money to your account. If you initiate a funds transfer to someone else with an account at your bank, that also works as a push transfer.
The recipient can initiate an ACH transfer as well. This is known as a debit or “pull” transfer. The payer must authorize these payments before they can proceed through the ACH system.
For example, when you set up automatic monthly payments for a utility bill, you authorize your servicer to pull money from your bank account each month as an ACH debit.
Pros & Cons of ACH
As a payment method, ACH comes with far more upsides than downsides. But you should understand both, as someone who likely uses ACH as both a payer and recipient.
Pros of ACH
Payments by ACH come with a wide range of advantages:
- Ease. For both the sender and receiver, ACH payments are simple. Whoever initiates the transaction needs only a few basic banking details, and the recipient doesn’t need to lift a finger. The money simply appears in their account. No paper checks, no cash, no deposits — just money in your account.
- Security. Paper checks, money orders, and cash can get lost or stolen. When you transfer money by ACH, it goes directly to the recipient’s bank account, with no risk of wandering off along the way. Just make sure you enter the correct recipient bank account information, and that you have sufficient funds, to ensure your payment doesn’t fail.
- Minimal Cost & Resource Use. Some financial institutions offer ACH transfers for free. Others charge a small fee, such as $0.75. Either way, it often costs less than mailing a check, and doesn’t require wasting paper or fuel for transit. Note that ACH payments cost far less than wire transfers, which often cost $15 to 50.
- No Paper Records Necessary. You don’t have to worry about keeping paper records in bulky filing cabinets, or holding onto old checks after mobile deposits. It all takes place electronically.
- Speed. Technically, ACH payments can take place within the same day — far faster than mailing checks or waiting for deposits to clear. In reality, ACH payments sometimes take 2-5 business days, as Nacha and banks verify transfers.
- Automation. You can set up recurring ACH payments, such as bill payments or employer’s direct deposits.
Cons of ACH
No payment method is perfect. Make sure you understand the drawbacks of ACH payments before using them.
- Limits. Some banks place limits on the ACH transactions you can make. These could be transfer amount limits, or limits on the number of transactions you can make in a day, week, or month. Make sure you understand these limits to avoid bank fees.
- Savings Account Penalties. The Federal Reserve may limit certain types of withdrawals to six per month. If you exceed that with ACH transfers, you could trigger fees and penalties from your bank.
- Risk of Delays. Banks process ACH payments in batches, and each one imposes its own limit for when a payment must be initiated in order to go out that day. Also, different payment processing services place different time delays on ACH payments to verify them. If you have an urgent payment due that must arrive within the next day or two, ACH transfers may not move fast enough.
Have questions about the quirky world of banking transactions? Here are a few common ones about ACH payments.
How Long Do ACH Payments Take?
In recent years, more payment services have started offering same-day ACH transfers. But that kind of speed remains the exception, not the rule.
Most often, expect ACH payments to take two to four business days before completing.
How Much Do ACH Payments Cost?
As with speed, it depends.
Many banks or payment processors offer free ACH payments. Some charge a small flat fee, up to a few dollars. For small businesses looking to collect payments via ACH, some merchant services providers go so far as to charge a percentage of the transfer amount. As a small business owner myself, I would urge you to find a merchant services company that charges a small flat fee, such as Worldline.
Can You Send Money Overseas With ACH Payments?
While you can’t send money internationally over the ACH network, some transfer platforms such as Wise use them for the US portion of the transaction. Remember, the ACH transfer system only covers U.S. banks.
To send money internationally, you’ll need to use the international banking system. You can send wire transfers internationally, for example. Just expect to pay a pretty penny for them, perhaps with hidden costs such as unfavorable currency exchange rates.
What Are the Alternatives to ACH Payments?
The classic alternative to ACH payments is wire transfers. They’re expensive but usually fund within the same day — faster than ACH. The recipient can also access wired funds immediately upon them hitting the bank account. In contrast, ACH transfers sometimes show as “pending” and unavailable for a day or two.
Wire transfers can’t be reversed, while ACH transfers sometimes can be. Wire transfers can move money internationally as well; ACH transfers can’t. And banks process wire transfers individually, whereas they process ACH payments periodically in large batches.
Peer-to-peer payment services like Paypal and Venmo have also emerged over the past few decades as fast, simple ways to transfer money. But guess how they move money from your bank account to your digital wallet account? By ACH, of course.
When paying bills, you can often use credit cards or debit cards. But many billing services charge a convenience fee to pay by credit card rather than ACH.
Or, as a hyper-modern alternative, you can send money with cryptocurrencies. Just watch out for the dizzying volatility in coin values.
Of course, you can also use 20th century payment methods like checks, money orders, and cash. While you’re at it, send a bearer bond by carrier pigeon.
Electronic payments via ACH blend traditional banking with modern digital money transfers. They’re secure, easy, and increasingly fast.
They also cost far less than wire transfers, and many third-party U.S. payment services rely on them to move money between individuals or businesses. You probably already use ACH transfers more than you realize.
Consider ACH payments one more tool in your repertoire for transferring money and paying bills.