ach-processors-explained

ACH Processors Explained

What Is an ACH Processor? 

An ACH Processor is a type of payment processing software businesses must use if they want to directly send and receive payments on the ACH Network. ACH processors act as virtual terminals businesses can use to accept payments through their computer, tablet or smartphone for an anytime, anywhere payment gateway. 

Businesses who use an ACH processor are given access to intuitive processing platforms that make managing payments easier. Funds in an ACH transfer can be received from a checking account or saving account, and only require a customer’s bank account number and routing number to make direct deposits or set up automatic bill payments. 

For businesses with frequent recurring bills, having an ACH processor can save them time and money better spent elsewhere growing their business. 

What Is The ACH Network? 

The ACH Network is the electronic payments system that directly transfers funds between two banks or other financial institutions. ACH, or Automated Clearing House, comes from the role of traditional clearing houses that were created to “clear” paper checks. The ACH Network was created to help alleviate the amount of paper checks clearing houses needed to process with a low cost and efficient electronic payment option. 

The ACH Network has come a long way since its inception in the 1980s, with more than 100 billion payments being made on the network in 2019. You can learn more about the basics of ACH in Envestnet | Yodlee’s blog, What Does ACH Mean?  

How Do ACH Transfers Work?

ACH transfers use a batch processing system that delays the time for ACH deposits or direct payments to fully settle. 

In every ACH transfer, there is a sender of payment, or the Originating Depository Financial Institution (ODFI) who sends ACH credit or ACH debit payments over the network. The bank account receiving payment is known as the Receiving Depository Financial Institution (RDFI). Before funds are transferred between financial institutions, a clearing house, most commonly The Federal Reserve or other approved clearing houses, act as an intermediary and oversee the processing of payments.

When an ACH transfer is initiated by an ODFI, funds are stored to be processed in regularly scheduled times a day in regulated file formats containing transfer amount, and an RDFI’s bank account number and routing number. A clearing house ensures the accurate and appropriate distribution of funds to receiving accounts. Once the ACH payment is delivered to the RDFI, they either debit or credit the account in the transfer, and effectively settle the transaction. 

How Long Does an ACH Transfer Take?

Because of the use of the batch processing system and the overseeing role of clearing houses, ACH transfers can take 3-5 business days to fully settle, but are increasingly advancing to same-day and even real-time payment settlement options thanks to innovating technology in the FinTech sphere. 

While ACH transfers may take a few days to settle, they often do so in the background, with funds made available in RDFI accounts the same day of payment for ACH credits, and up to 3 business days for ACH debits. These time frames have been mandated and implemented by Nacha, the nonprofit organization that serves as the governing body of the ACH Network. 

Credit card processing and wire transfers may be faster than an ACH processor since the transfer of funds happens same-day, but that timeliness comes with a price. Depending on the financial institution, credit card processing and wire transfer fees can quickly add up, especially if you’re making a frequent amount of payments. ACH processors aren’t free, but making payments on the ACH Network typically is, and let businesses save on payment processing costs. 

 

Are ACH Processors Secure?

ACH processors are also a more secure option since all they require of a customer to initiate payment is their banking information. With one time setup, customers do not have to worry about inserting information other than the amount being transferred every transaction. Credit cards are often the target for fraudulent activity, so customers may need to change their card numbers more often than they would direct bank account information. 

Most payments conducted by ACH processors are protected under federal law if there is an error with the payment system. You can easily track payments via an ACH processor, and get updates on whether or not a sender’s account has insufficient funds, or if the account even exists at all. 

The Difference Between ACH and EFT

Automated Clearing House (ACH) and Electronic Funds Transfer (EFT) are synonymous terms often used interchangeably. EFTs refer to all digital payments in digital banking while ACH payments are a single type of EFT. 

Benefits of an ACH Processor

Businesses that use an ACH processor can help make payment processing faster, simpler, and more secure than other forms of both traditional and electronic forms of payment. 

  1. Cost-Effectiveness

ACH processors typically do not require fees like credit card processing, wire transfers or paper checks, saving your business money for every payment you make.

  1. Automation

ACH processors can leverage artificial intelligence and machine learning technology to set up automatic bill payments. 

  1. Quick Processing Time 

ACH payments are increasingly able to settle same-day transactions depending on the time of day and day of the week you make payment via your ACH processor. 

  1. Easy-To-Use Platforms 

Businesses don’t have to worry about operating a complicated payments system - ACH processors are designed with customer experience in mind, giving you all your payment processing needs all in one place. 

ACH Processing With Envestnet | Yodlee

Envestnet | Yodlee’s flexible, reliable and secure ACH payments solutions help enable businesses to start accepting ACH transfers, mitigate fraud, and give consumers and companies peace of mind. 

As a Nacha Preferred partner, Envestnet | Yodlee is committed to following Nacha compliance rules as a FinTech innovator improving the digital banking experience for all.