How ACH Transfers Work

Every time your customer gets paid or autopays a bill, they’re using ACH. It’s the technology that moves money, seemingly like magic. In actuality, an ACH transfer is a transaction on the National Automated Clearing House Network for financial service providers to send and receive money. In this blog post, you’ll learn how ACH money transfers work, how long they typically take to process and the costs associated with an ACH transfer.

What is an ACH Transfer?

ACH transfers are a way to electronically send and receive money through the ACH Network run by the National Automated Clearing House Association NACHA (What is NACHA). The ACH Network is an electronic payment-transfer system used to make direct electronic payments and automated money transfers.

You can learn more about the different ACH payment transfers, including debit and credit payments, direct deposits, bill payments peer-to-peer and business-to-business payments, and external funds transfers in the Envestnet | Yodlee blog, What is ACH?

Unlike electronic wire transfers that are manually processed by banks individually and in real-time, the ACH Network batches together transactions and waits to process them in groups, usually three different times a day. As transferred funds in each batch are processed, they’re sent out to accounts at the appropriate banks and financial institutions awaiting payment.

How Does An ACH Transfer Work?

ACH transfers are processed through either The Federal Reserve or the Electronic Payments Network where ACH operators ensure the efficient matching and processing of transactions between financial institutions.

ACH transfers begin differently depending on the type of ACH transfer that’s being made – an ACH direct deposit or ACH direct payment.

ACH Transfer

Types of ACH Transfers

ACH Direct Deposit

Any direct payment to a receiver’s account on the ACH Network is a direct deposit (also known as an ACH credit), such as wages from an employer’s bank or Social Security benefits. They are connected to a customer’s checking account and allow for a faster and easier way to get paid compared to paper checks. Other types of ACH direct deposits include tax refunds, annuity payments and interest payments.

ACH Direct Payment

Requests to move money from one account to another on the ACH Network are direct payments (also known as an ACH debit), like online bill payments for utilities or P2P transfers on various payment apps. A customer can authorize the transfer of funds from their account to make payments manually or automatically each month without the need to fill out a check or other information.

What are the Steps Needed for an ACH Transfer

All that is needed to make an ACH transfer is a client’s bank account number and routing number. As long as there are sufficient funds in the Originating Depository Financial Institution’s (ODFI’s) account initiating the payment, funds will be received within 3-5 business days or sooner, depending on the time and type of payment.

Setting up ACH transfers is easy with Envestnet | Yodlee’s Payments Solutions. Envestnet | Yodlee acts as a mediator between your business and the ACH Network, and provides an ACH processor to businesses so they can accept payments on the network.

Envestnet | Yodlee’s additional payment solutions like bank account verification provide businesses peace of mind by mitigating the risk of fraudulent payments, and are crucial to enabling a businesses’ timely access to money and transaction history.

Wire vs ACH Transfer

Electronic wire transfers are similar to ACH transfers, but require customers to provide their account number and the account they’re sending money to. They usually require action from bank employees to finalize moving money between accounts. Electronic wire transfers are processed individually, come with fees for every transfer, and cannot be canceled.

However, despite not being automatic, electronic wire transfers make up for it in payment processing speed -- usually getting settled in just a day. They’re recommended when timeliness of a payment is critical.

ACH transfers are batched and processed together, explaining why there is usually a 1-2 business day period before they’re finalized. With new regulations and advancing technology, more same-day ACH transfers are happening every day.

There typically aren’t any fees for ACH transfers, but some may apply depending on the amount and type of transfers you’re looking to make.

How Long Do ACH Transfers Take?

Timelines for ACH credits and debits vary based on rules from Nacha. Under the rules, financial institutions are given the option to have ACH credits processed and settled within one to two business days while ACH debit transactions are required to be processed by the next business day. Some same-day transactions may be available, available and there may be financial institution charges associated with them.

Since ACH transfers are electronic and processed in batches, they offer a faster and more secure way to move more money at once to various accounts compared to other payment methods such as wire transfers, and especially paper checks. Funds are often made available almost instantly as transactions are finalized.

What is ACH transfer?

Cost to Send an ACH Transfer

Most ACH transfers, including payroll direct deposits and direct bill payments via ACH credit or debit, are not accompanied with any fees. If your customers are looking to transfer money from one bank account to another at a different bank, there could be a fee of up to a few dollars, but it all depends on the financial institutions.

With the ability to automatically transfer funds to multiple accounts throughout the day with little to no fees compared to up to $30 wire transfer fees, ACH transfers are recommended for frequent and smaller payments.

Cost to Receive an ACH Transfer

Just like there aren’t typically fees for sending an ACH transfer, there aren’t usually fees for receiving them either. Some financial institutions can choose to charge consumers, but since the payments are automatic and don’t require any manual process, they’re able to remain free of fees.

ACH electronic transfers make it easier for businesses, individuals and financial institutions alike to move money faster by automating the electronic transfer process.

Benefits and Downsides of ACH Transfers

Customers appreciate ACH transfers because they’re fast and efficient, so customers can get their money sooner. Financial service providers appreciate ACH transfers because they eliminate the need for manual processing of transactions, among other benefits.

With the increased popularity and growth of the ACH network over the years, ACH fraud has increased too. As a result, NACHA strengthened their fraud detection standards, requiring ACH originators of WEB debits to use a “commercially reasonable fraudulent detection system” that includes “account validation”.

With the right account verification solution, you can meet NACHA rules for screening online payments, deter fraud, and capitalize on the benefits of ACH.

How Envestnet | Yodlee and NACHA Work Together

Envestnet | Yodlee uses the ACH Network to empower organizations with flexible ACH Payment Solutions that get people paid faster, save on costs and fees and eliminate manual processes. Our account verification and payment solutions operate within the ACH Network and Nacha framework to help increase payment flexibility and speed and reduce risk.

PayPal uses Envestnet | Yodlee Account Verification to speed up their account linking and verification process. Read about how PayPal uses Envestnet | Yodlee.