What is the Automated Clearing House (ACH)?
Automated Clearing House (ACH) is a type of electronic funds transfer (EFT) facilitated by a domestic U.S. network system of the same name and regulated by Nacha (National Automated Clearing House Association).
ACH enables businesses to quickly and securely send money to vendors, employees, and customers via bank account transfers between each party’s depository financial institution.
Businesses typically use a business bank account to execute individual ACH transactions. Doing so is relatively simple as long as you have the necessary bank account details, including the recipient’s ABA (American Bankers Association) routing number and the bank account number.
However, for a more complex transfer of funds – like a batched ACH transaction to facilitate payroll via ACH deposit – businesses use Nacha files or an automated payments platform that eliminates the complexity of managing these files.
Lastly, two distinct types of ACH transactions depend on who initiates the transaction.
- An ACH debit (ACH direct debit) is a “pull transaction” requested by the recipient payee to pull funds from its payer’s bank account. Example: A utility vendor pulls an amount due from the customer’s account.
- An ACH credit (ACH direct credit) is a “push transaction” the payer requests the recipient payee to push funds out of their bank account. Example: An employer deposits funds into an employee’s bank account.
Benefits of ACH
Here are a few reasons why businesses use ACH payments.
Like other EFT methods, ACH payments are handled electronically, providing electronic checks and balances that eliminate many of the risks associated with paper checks that lead to paper check fraud.
ACH also benefits from rules and standards set by Nacha, authentication of recipient bank information to initiate a transfer, data encryption, reversibility, consumer protection laws, and regular monitoring conducted by banks and financial institutions monitoring for unusual activity.
Batch ACH payments require you to submit Nacha files to one of two ACH Operators – The Federal Reserve or the Clearing House – a time-intensive process that provides control totals, formatting, and trace numbers that contribute to the data's integrity.
Unlike wire transfers, ACH transactions can be reversed in specific scenarios. For example, in the event of an error or invoice fraud, there is a chance your business banking provider can help you initiate a reverse ACH to recover funds.
Each ACH payment can be easily tracked with Trace IDs for the source and destination banks if it isn’t completed by the expected time, allowing follow-up by the payee’s bank.
Business banks typically charge ACH transaction fees that are typically lower than wire transfers and other EFT methods – although this depends on your business banking provider’s pricing.
However, if your business has a high volume, these fees can add up, which is why many companies enjoy Rho’s fee-free ACH and domestic wire transfers.
Rho also has no Rho add-on fees for international wire transfer transactions (which may have bank, intermediary, miscellaneous, and currency exchange fees).
Recurring payment options
ACH transactions are easy to set up for either one-time or recurring payments.
ACH recurring payments are ideal for automatically billing and making SaaS subscription payments or other recurring bill payments.
Same Day ACH
For quicker ACH transfers than standard ACH, Nacha offers Same Day ACH with a limit of up to $1 million per transaction.
Same Day ACH has three submission windows, with settlement and funds availability on the same business day. Nacha has an additional submission window for standard ACH, taking one to three business days until completion.
According to Nacha, 80% of ACH payments are settled in one banking day or less for standard ACH or the Same Day ACH.
Note: Many banks charge a fee for Same Day ACH transactions. Rho does not currently charge fees for Same Day ACH transactions – another reason many businesses consider switching their banking to Rho!
Drawbacks of ACH
ACH transactions do have some disadvantages: They can be slower than other types of EFTs, batched ACHs require Nacha files that can be complex to fill out, and there is a chance businesses can be defrauded into sending ACHs to bad actors.
Other disadvantages include:
- Nacha file batches for ACH must be submitted within specified scheduled time windows.
- ACH transactions are subject to dollar limits per transaction and an ACH return for erroneous, fraudulent, or incomplete transactions.
Note: Rho offers free Same Day ACH payments and AP automation, making batched ACH payments to vendors easy.
Fees associated with ACH
Potential associated with ACH consist of two types: (1) ACH transaction fees charged by banks or other payment providers that ACH payers pay and (2) Nacha association member fees paid by depository financial institutions.
With the latter example, Nacha uses membership fees to maintain the Nacha Operating Rules for ACH transactions. Besides banks and credit unions, payment processing companies are also Nacha association members who must pay fees.
Generally, ACH transfer fees charged by banks to their customers are lower than wire transfers, another type of EFT. However, for Rho’s online business banking platform users, ACH payments are free.
Who is ACH best for?
ACH is best for businesses making a high volume of vendor or supplier payments and paying employee paychecks with direct deposit into their bank accounts for recurring payroll expenditures.
It’s a relatively simple way for companies to send money - from small businesses to Fortune 500 enterprises. Even government entities use ACH to pay bills, receive tax payments, issue tax refunds, and pay benefits and claims like Social Security and Medicare.
Consumers also use ACH for online banking bill pay and making tax payments.
Forms of ACH
Forms of ACH by type of ACH transfer are:
- ACH payments (ACH direct payments)
- ACH direct deposit
- ACH direct debit (direct payment type)
- ACH direct credit (direct payment type)
- Recurring ACH bill payments
- B2B ACH (business-to-business ACH)
- Consumer ACH
- Standard ACH
- Same Day ACH
Some ACH examples are:
- Electronic vendor invoice payments through the ACH Network
- Direct deposit of employees’ paychecks for payrolls in their bank accounts
- Utilities and other bill pay
- Sending an ACH to your Fractional CFO
- Transfering funds into a cash management solution or treasury management account
- Opening a Deposit Account Control Agreement and moving money from it
- e-Check for bank account-to-bank account transfers
- Recurring SaaS subscription payments
- Income tax payments and tax refunds
- Social Security benefits and Medicare insurance premiums and claims payments
Now it’s time to learn more about EFT.
What is electronic funds transfer (EFT)?
An electronic funds transfer (EFT) is a digital money transfer transaction using a mobile device, computer, phone, or ATM terminal.
ACHs are a type of EFT, but other forms include wire transfers, ATM transactions, e-checks, credit card and debit card transactions, P2P payments like PayPal and Venmo, phone pay, and ATM transactions.
The Electronic Funds Transfer Act and Regulation E are U.S. regulations for consumer protection relating to all types of EFTs in which a financial institution has authorization to debit or credit a consumer’s account.Note: Regulation E only applies to consumer debit cards, not business credit cards.
The Federal Trade Commission’s Consumer Financial Protection Bureau develops rules, performs investigations, enforces EFT regulations, and provides education.
Benefits of EFT
The benefits of using EFT for financial transactions are very similar to those of ACH transfers.
Businesses have a wide choice of electronic payment methods for which speed and transaction fees can be analyzed and balanced to select the best-fit EFT type, financial control, and speed benefits from not using paper checks. Often, these other types of EFTs are speedier than ACH.
When your business uses EFTs instead of paper checks to pay suppliers and vendors, you’ll experience preparation efficiency, better security, faster payments, and fewer fraud risks, duplicate payments, and errors.
Drawbacks of using EFT
The drawbacks of using EFTs are more associated with specific types of EFTs.
With credit or debit card EFTs, there’s a risk that you lose a card, it gets stolen and contributes to corporate credit card fraud, or your employees don’t use it in a way that complies with your expense policy. That’s where having a corporate credit card expense management system can benefit your business.
Wire transfers are another type of EFT with specific challenges. These include the possibility of higher fraud risks with wire transfer EFTs, lack of reversal of wire transfers, and possibly higher transaction fees than ACH fees.
The speed, cost, and how transactions are processed are highly dependent on the specific method being used under EFT. It can range from an instant to a few business days.
Fees associated with EFT
Fees associated with EFT payments or EFT transfers vary widely, depending on the type of electronic funds transfer.
For example, ACH transaction fees are for low amounts or free. In contrast, wire transfer fees can range up to $50 or more for international wire transfers.
With wire transfers, transaction fees include fees charged to the payor and recipient by the sending and receiving banks and any intermediaries.
Your business may also face bank investigation fees for wire transfers not received and other miscellaneous wire transfer fees.
Real-time digital wallet or P2P transfers like PayPal or Venmo may be free as wallet account-to-account digital transfers or 1-3 business day ACH transfers to a linked bank account or be completed for a percentage-based or fixed payment fee.
For cross-border, international EFT payments, your business may also be charged foreign currency conversion fees that vary, depending on the specific payment processing provider.
Forms of EFT
Forms of EFT (electronic funds transfer) by types of EFT payment method are:
- SEPA payments in Europe
- Wire transfers
- Debit card transactions and credit card payments
- ATM transactions
- Payments by phone
- Digital wallet transfers and peer-to-peer (P2P) transactions
- Money transfers
Some EFT payment examples are:
- ACH direct deposit and direct payments (including eChecks)
- PayPal and Venmo payments using mobile apps or your computer
- Bank-account to bank-account money transfers in Euro currency in SEPA member countries
- Electronic money transfers made by MoneyGram and Western Union payment providers
- Online credit card transactions
- Prepaid debit card transactions
- Payments made using a phone system
- ATM withdrawals and deposits
What's the difference between ACH vs EFT?
Put simply, ACHs are a type of EFT. EFT is the broader umbrella term for all types of digital money transfers, including ACH, wire transfers, debit cards, credit cards, ATMs, and digital wallet transactions.
Two important distinctions between ACH vs EFT are important to note:
- Different governing bodies depend on the EFT used: Nacha oversees ACH transfers, while the Federal Financial Institutions Examination Council oversees wire transfers in the U.S.
- ACH transfers are typically limited to domestic transactions in the United States, whereas wire transfers can be facilitated across borders using SWIFT.
Other differences in ACH vs EFT include:
- Processing methods
- Transfer speed
- Costs & fees
- Global payments
We describe these types of differences between ACH and EFT below.
Whereas ACH goes through the ACH Network in the U.S., other EFTs use different payment rail systems, depending on the EFT type and payment processor. Domestic wire transfers are processed through the Fedwire system and CHIPS,
The Clearing House Interbank Payments System. International wire transfers use the SWIFT network.
Instant EFT payments may go through The Clearing House’s RTP (Real-Time Payments) or the Federal Reserve’s FedNow platforms.
EFT card transactions are processed through specific credit card and debit card networks. Euro-based electronic SEPA electronic fund transfers go through the Single Euro Payments Area network.
Transfer speed refers to EFT payment processing time.
The time an EFT transfer takes depends on the type of EFT. ACH transfer speed is generally the same business day or one to three business days.
Wire transfers take from hours for domestic wires to three to five business days or more for international wire transfers. Other EFT types are real-time or almost instantaneous.
Digital wallet money transfers, P2P, credit card, debit card, ATM, and pay-by-phone transactions are types of EFT instant payments.
Costs & Fees
EFT transaction fees range from free or low-cost ACH fees to wire transfer fees that range from zero for domestic wire transfers to $50 or more for international wire transfers.
Foreign currency exchange fees, lost wire transfer investigation fees, and some miscellaneous fees are extra costs.
Also, consider foreign currency exchange fees for payments in different currencies. Some credit cards charge extra foreign transaction processing fees.
PayPal charges a percentage transaction fee for some transactions and a per-country fee, whereas some PayPal EFT transfers are free.
Only certain EFTs can be used for global payments. Wire transfers are used globally, both domestically and internationally, for cross-border transactions.
ACH isn’t a global payment method because it’s restricted to domestic U.S.-only bank transfers processed through the ACH Network.
Only some credit cards can be used internationally and may incur extra foreign fees. Peer-to-peer and digital wallet EFTs usually work for making global payments.
Security depends on the EFT type. ACH transactions are considered secure and reversible. Bank account details are not viewable by ACH recipients.
Wire transfers and PayPal go through secure networks. Credit and debit card payment processors and networks are PCI DSS compliant for security. Europe has a data privacy regulation called the General Data Protection Regulation (GDPR).
The wire transfer can't be stopped if a wire transfer or PayPal payment is made to the wrong account through error or fraud. Once sent, it’s difficult to recover the funds from either wire transfers or PayPal, Venmo, etc., but report fraud to the FTC (Federal Trade Commission) and your state.
The routing number can be the same for ACH and wire transfers but isn’t always the same depending on the bank, transfer system, and countries involved.
The SWIFT network used for international wire transfers requires a specified type of routing number different from an ABA number used for routing ACH (and other bank payment methods like paper checks).
ACH vs EFT vs wire transfers
ACH and wire transfers are types of EFTs. Our latest guide explains the difference between ACH payments vs wire transfers.
EFT is a broad term for all types of digital money transfers and digital payments. EFT includes ACH, wire transfer, peer-to-peer payments, credit card and debit card payments, phone payments, ATM transactions, including e-checks, and any other types of electronic payments.
Wire transfers typically have much higher bank and intermediary transaction fees than ACH bank account transfers.
Financial institutions complete wire transfers domestically through the Federal Reserve’s Fedwire Funds Service and international (including cross-border) wire transfers through the SWIFT payment system.
Payors use ACH instead of wire transfers for lower transaction fees when transaction amounts are within ACH transaction limits, and the fastest speed isn’t required.
EFT doesn’t specifically mean ACH or wire transfer but includes both types of electronic payment methods and more. A wire transfer is always an EFT, but an EFT isn’t the same as a wire transfer. And EFT isn’t the same as direct deposit.
An EFT might be a direct deposit, such as an ACH direct deposit, but EFT includes other types of electronic payments besides direct deposit.
Conclusion: ACH vs EFT explained
ACH vs EFT: what’s the difference? ACH is a type of EFT, although other EFTs (like wire transfers) have important distinctions from ACH. Differences include processing network, speed, and cost.
ACH is a specific type of EFT for domestic transactions processed through the ACH Network (Automated Clearing House Network) in the United States. EFT is a broad term for all types of electronic funds transfer.
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