Automated Clearing House (ACH) payments have become popular payment methods for modern businesses, offering a fast, convenient way to send money. ACH transactions are often referred to as "direct payments" since they simply transfer funds from one bank account to another.
Accepting ACH payments can expand the number of electronic payments you offer your customers. If your business plans to accept ACH payments, we can help you get set up and ready to go with this guide.
What is an ACH payment?
An ACH payment is an electronic funds transfer (EFT) designed to transfer funds directly between bank accounts. This is accomplished using the Automated Clearing House (ACH) network, eliminating the need to make payments using paper checks or credit card networks.
You may hear the terms "EFT payments" and "ACH payments" used interchangeably since both phrases describe the same payment mechanism.
How do ACH payments work?
The ACH network connects all of the banks in the United States. This is the primary way that ACH transactions are processed. But an ACH payment is also dependent on several other key "players," including:
- An institution to initiate the transaction (the originating depository financial institution or ODFI)
- An institution to receive the request (the receiving depository financial institution or RDFI)
- The National Automated Clearing House Association (NACHA), the governmental agency that oversees the ACH network
Chances are that you've sent or received an ACH payment before and didn't even realize it.
There are two common types of ACH transactions: deposits and payments.
An ACH direct deposit is typically made from a business or governmental agency. The most common direct deposit is the paycheck you receive from your employer, which might be deposited directly into your bank account on a scheduled basis.
But other types of deposits can include:
- Work-related payments
- Government benefits
- Interest payments
- Tax refunds
- Annuity payments
In other words, a transaction in which you receive ACH payments is known as a direct deposit. This may likely be recorded on your bank statement as an "ACH credit," which means you're receiving money from another party.
When you send money through the ACH network, it's known as a direct payment. You might do this when you're sending money from your bank account to another company or governmental agency.
For instance, you can set up recurring billing with your utility company or cable provider to maintain a payment schedule. You're also making an ACH payment when you electronically submit your annual income taxes.
But some ACH payment processing systems allow individuals to transfer money from one bank account to another. If you've ever sent someone money using an app such as Venmo or Zelle, you've been making a direct ACH payment.
This is known as an ACH debit transaction. It will usually be recorded as such on your bank statement.
Advantages of ACH payments
ACH payments offer business owners several distinct advantages. These include:
- Lower processing costs
ACH payments offer some of the lowest processing fees of any form of payment, beating out wire transfers and even most credit card payments. If you use a provider with a flat rate, you'll also have more predictable costs than the fluctuating percentage fees that come from processing credit cards.
- Greater convenience
While ACH payments may not have the immediacy of a debit card payment, they're still significantly faster than processing a paper check. Plus, customers may appreciate the convenience of setting up recurring payments to establish a regular billing schedule.
- Time-tested security
The ACH network is tightly controlled and offers several layers of security. In some ways, processing an ACH payment is more secure than accepting a credit card payment, especially since you'll have access to your customers' banking details during processing.
How to accept ACH payments
Accepting ACH payments will add another payment method for your small business customers. Here's how you can get set up.
1. Assess your business needs
First, you'll need to decide whether your business can benefit from accepting ACH payments. For instance, if you handle smaller, one-time transactions, the setup process might be too cumbersome for your current needs.
But ACH payments might be ideal for businesses that:
- Have customers who need to set up recurring payments
- Serve customers who don't use credit and debit cards
- Handle a lot of B2B transactions
In these cases, ACH payments can be an ideal solution for both you and your customers.
2. Choose an ACH provider
Next, you'll need to find an ACH processing platform. You may be able to process ACH payments through your existing bank account, but even if that's the case, you'll need to compare the rates of their ACH transaction fees against third-party payment processing services.
As you compare ACH payment processing services, consider two critical areas. First, you'll want to consider the cost of processing ACH payments. Your ACH fees will be separate from any fees associated with credit card processing. In most cases, you'll pay an additional ACH fee for chargebacks and non-sufficient funds (NSF) fees.
Secondly, you'll want to consider the ease of use. Processing ACH payments should be a smooth, seamless process, and it should also be easy to set up recurring purchases for your customers. Check to see whether your ACH provider offers customer service support and other resources to help you in the early days of receiving ACH payments.
3. Set up an ACH merchant account
Next, you'll have to set up an ACH merchant account. Merchant accounts grant your company access to the ACH network and give you a way to request funds from your customers' bank accounts.
Your merchant account provider will ask you to provide several pieces of information, including:
- Company name
- Your company address
- Your personal ID (to verify ownership)
- Foundational documents (certificate of incorporation, partnership agreement, etc.)
- Federal tax ID number
- Estimated processing volumes
You can usually use a bank statement to confirm your business name or address. Having these documents ready can prevent any roadblocks, allowing you to get your account set up and ready to receive payment.
4. Choose your preferred payment methods
Most of your ACH payments will occur online. Your recurring payments will be fully automated from the moment they're set up. However, these aren't your only options for processing ACH payments, and you may want to explore a different payment method entirely.
For example, retailers can use point-of-sale (POS) hardware to scan paper checks, allowing you to receive funds from your customer's checking account without physically depositing the checks. Not every sale needs to be converted to an ACH transaction, but having the ability to do so can give you greater flexibility in how you process payments.
5. Request authorization from customer
You'll need explicit customer authorization before you can accept an ACH payment. This authorization serves the same function as a signature on a paper check, though it can take several alternate forms, including:
- Verbal authorization (phone messages count)
- A signature on a written form
- Submission of an online payment form
Once you receive authorization, you'll be able to proceed with the rest of the transaction.
6. Verify your customer's bank account
Next, you'll need to verify your customer's bank account and set up the transaction. This will usually occur at the same time that you receive customer authorization, though you'll also need to enter your customer's account details to complete the sale.
This means you'll need payment details such as:
- Customer's name
- Bank name
- Bank account number
- Routing number
If you're setting up recurring payments, you'll only need to enter these details once. From then on, ACH transfers will proceed automatically between bank accounts.
7. Submit the payment details into ACH system
Finally, you'll enter these details into the ACH system using the ACH provider chosen in step 2. The entire process takes three to five business days before funds clear and become available in your bank account.
Troubleshooting the ACH process
ACH payments provide a helpful alternative to credit card transactions, though they are not entirely worry-free.
In some cases, the ACH transfer can fail because your customer's payment is rejected by your bank. When this happens, you'll receive an error code that you can use to determine what went wrong.
Here are some of the most common codes:
R01: Insufficient funds
This code indicates the customer doesn't have enough money to cover the purchase. You can't rerun the transaction. You can use a different payment method.
R02: Bank account closed
This happens when your customer changes financial institutions and forgets to tell you, which can disrupt your recurring billing cycle. When this happens, you'll have to enter their new bank account details and set up the ACH billing details again.
R03: No bank account/unable to locate account
This code indicates that something about the customer's account doesn't match the bank records. This can happen when bank account numbers are given or recorded incorrectly. When this happens, you'll have to double-check your customer's account number and routing number to ensure that your bank accounts are connected.
This indicates that a bank doesn't allow you to make an ACH withdrawal from that specific bank account. Your customer will need to provide the bank with your ACH Originator ID in order to enable ACH withdrawals from your company. After this, you can rerun the transaction.
A new way to do payments
Invoice2go, a Bill.com company is already well-known for our cutting-edge invoicing solutions, but did you know we also provide banking services that can help your business to accept ACH payments? When you accept payments through our payment gateway, you'll have quick access to cash. You'll also get a debit card that you can use to make purchases or withdraw funds from one of 55,000 ATMs nationwide.
You can see many of these features in action when you sign up for a free, 30-day trial. Our banking platform allows you to invoice clients and get paid faster than ever before, changing the way you do business.
Frequently asked questions
Many of our customers have questions about ACH payments. Here are a few of the most common questions we hear.
Is there a fee to accept ACH payments?
Just as you would pay a fee when processing credit cards, certain ACH charges accompany each transaction.
In some cases, you'll be charged a flat rate for processing each transaction, which can make ACH payments a bit more predictable. This is usually a percentage fee, roughly 0.05% per transaction. However, in other cases, you can expect to pay an ACH charge that ranges from $0.50 to $0.75 per transaction.
These aren't the only ACH charges you can potentially pay. Some providers charge a monthly fee for the use of their payment gateway. These fees depend on the company you rely on for your ACH transactions.
Are all banks able to make ACH payments?
Generally, most major U.S. banks can send and accept ACH payments. However, international banks cannot be relied upon to make or receive ACH transactions, which can hinder your business if you operate in a multinational setting.
Additionally, not all banks are the same. Transaction fees can vary widely between financial institutions. When you're setting up your ACH account, you'll want to compare rates with other banks and third-party providers.
How long does an ACH deposit take?
An ACH deposit usually takes three to five business days, though some companies (like Invoice2go) offer next-day bank transfers, giving you access to your funds sooner.
Some banks will not process an ACH transaction after business hours. If it occurs on a Friday, you might have to wait until Monday before your payment is processed, which could leave you waiting even longer. This is another reason to rely on innovative companies that can streamline the way you do business.