How Long Does It Take For Echeck To Clear Paypal

What is ACH, how does it work, and does your business need it?

February 1, 2020

What is ACH, how does it work, and does your business need it?

There are some things we know, but don't know we know. For example, if you were asked, "Have you moved money from one bank to another?," you'd likely say, "Yes." If you were asked, "What is ACH?," you'd likely say, "Come again?

What is ACH?

ACH, or "Automated Clearing House," is the name of the network that moves money and information from one bank account to another. Bill pay and direct deposit are examples of an ACH transaction. ACH is a valuable resource. It saves time, conserves resources, minimizes errors, and expedites payment.

In short, ACH is a fancy term for a money transfer from one financial institution to another.

How does ACH work?

You wouldn't make fifty trips to your house with one grocery item at a time, would you? Instead, you gather up as many as you can and make one big trip. An ACH network follows a similar line of thinking. ACH is an electronic network that processes payments in batches. The ACH network accumulates numerous transactions throughout the day, then makes all of the transfers at once.

This model makes transferring funds between banks fast and easy. As things are transferred electronically, it's also inexpensive and faster than dealing with paper checks. But what exactly is ACH used for beyond moving your money around? Well, a lot.

Uses of ACH

The ACH network is used for quite a few things, beyond bank account transfers. In fact, ACH can be a huge boon to your business. How? So glad you asked. First, let's look at the general uses of ACH.

ACH debit

Have you ever had the option to skip using a paper check and instead pay with a digital check or direct bank transfer? This form of electronic payment is known as ACH debit. With an ACH debit payment, funds are taken from your account, held by the ACH for a processing time and then released to the other party. This form of ACH payment generally requires your bank account and routing number, but no further action on your part.

ACH debit is commonly used for online bill payments, direct payment for vendors, or various other types of transactions. ACH debit payments can usually be set up as recurring payments, making them especially great for those monthly bills and services. Once a recurring payment is set up, you no longer have to provide any input, which is great if you're forgetful.

ACH debit transactions can also be a one-time deal instead of a recurring payment. These require manual input on your end to send the payment. Once you send the payment, the funds enter ACH processing and then go to the other party.

If ACH debit payments sound convenient, that's because they are. Beyond convenience, there are even more perks, including:

Convenience: Set up recurring payments or do a one-time payment, either way you're skipping the hassle of mailing a paper check.
Paper reduction: Not only do you skip the paper check, with ACH you forgo any kind of paperwork that might come with a payment.
Easier tracking in account systems: Losing something in the mail isn't unheard of. Losing something that's digital and closely tracked is difficult and unlikely.
Automated bookkeeping: All of those digital transactions can be synced up with accounting software, making ACH payment services great for accounting reasons.

As great as ACH debit can be, there are some downsides as well, including:

Potential security risk: Nothing is ever totally safe, but with ACH you are trusting online parties with your account information. This leaves you more vulnerable to a security breach.
Processing fees: ACH transfers, while convenient, aren't always free for either party. Oftentimes an ACH payment comes with a percentage-based fee or flat rate for each transaction.
Accidental overcharge: This is rare, but it's possible for the payment processor or service provider to accidentally charge you more than you owe.
Accidental overdraft: If you have a recurring payment, you might forget about it. This can lead to insufficient funds in your account and result in an overdraft.

ACH credit

Unlike ACH debit, ACH credit is simply the transferring of funds from one account to another, rather than a payment processing. This can be another financial institution, or a social security account, retirement fund, etc. In rare cases, ACH credit can also be used business-to-business, like in the event that there's some kind of transfer of funds as in a merger or purchase.

The perks of ACH credit include:

No checks: Just like ACH debit, there are no checks involved with ACH credit transactions.
Speed: Once again, like debit, ACH credit happens in near real-time with a slight processing time in most cases.
Automated tracking: Not to be a broken record, but ACH credit also maintains a digital trail, making it easy to keep track.

If you didn't notice, ACH credit shares a lot of the perks of ACH debit. The downsides? They don't even warrant a list: ACH credit can occasionally face a holding period if the sum is large enough, and in rare cases, there may be a fee. That's it.

How is ACH different from a wire transfer? ACH might sound a lot like a personal bank transfer or wire transfer. Well, it is in some ways. But as is the case with so many things, looks can be deceiving.

ACH payment processing enables efficient cash flow management by giving parties a consistent, predictable, and transparent way to send and receive money. Personal bank transfers and wire transfers, while a form of funds transfer, are quite different. Let's take a look at some popular bank transfer types.

Internal personal bank transfer

These are transfers between two accounts belonging to the same person and at the same bank. For example, if you move funds from your checking account to your savings account, and the two accounts are at the same bank, that's an internal personal bank transfer. This happens same day most of the time, unlike an ACH debit or credit that typically requires a day.

External personal bank transfer

These transactions are between two accounts that belong to the same person but at different banks. If you move money from a checking account at one bank to a checking account at another bank, the bank transfer is an external personal bank transfer, not an ACH.

Wire transfer

A wire transfer is used to send money from one person's bank account to another person's bank account. There is no intermediary (e.g. no ACH) in a wire transfer, so wire transfers are one of the quickest but costliest bank transfer methods. Unlike an ACH transfer, the payer, or customer, initiates the wire transfer for deposit into the merchant's account. Due to the lack of middleman in a wire transfer, it's possible to accidentally send your money to the wrong party. This makes wire transfers riskier than ACH debit or credit transactions.

Why accept ACH payments?

It might go without saying, but ACH payments are really convenient. Beyond this, are there additional reasons to use ACH payments at your business? You bet.

ACH payments are accurate

You can use ACH payment processing to handle automatic payments. This can prevent delays and boost your cash flow. ACH integrates with mostaccounting software, eliminates human error, paper invoices, paper checks, and collection calls. Having more accurate payments can help your company's reputation, prevent any kind of funding fiasco, and make your business more appealing in general.

Customers like ACH payments

Many billing errors are just plain old mistakes. Automation prevents that. ACH transfers are secure, regulated, and trackable. Your customers can skip going to the bank or mailing checks. Plus, they can set up auto-pay to make things even easier. That convenience alone can be the deciding factor for some customers who are torn between your company and a competitor that doesn't offer automated billing or payments.

Payment processing is faster with ACH

ACH payments should be in your account within 1-5 business days. You don't need to worry about updating your updating your accounting software, taking your check to the bank, and waiting for the deposit to clear. The ACH provides a government-instituted, regulated structure, ensuring security and standardization. Plus, ACH transfers are often less expensive than wires, checks, and credit card payments. Basically, ACH payments are faster and better for your customers.

ACH is safer than a traditional payment

While ACH systems leave your account information more vulnerable to cyber threats, they're still safer than sending a check. In fact, 71% of companies report that check fraud has been attempted or successfully committed at their business. Checks can be intercepted when they're mailed or even when they're in the hands of your business. A digital transaction requires more technical know-how, and even then, can often be prevented or mitigated once a breach is detected.

ACH payments: Better for you, better for everyone

Move funds faster, keep your — and your customers' — information secure, and go paperless. That sounds pretty great, right? ACH is modern, efficient, and useful for you and your customer base. If you're ready to get set up with ACH payments, there are a number of resources you can check out. If you're a QuickBooks Payments customer, simply go to your settings to enable your ACH payments option. ACH is pretty simple and straightforward. And so are we.