ACH Payments: A Guide to ACH Hold, Transfer, and Transaction Time

What Is an ACH Payment, and How Does It Work?

ACH stands for Automated Clearing House, which is a financial network in the United States that’s used for electronic money transfers.

ACH payments, also known as "direct payments," are a method of electronic funds transfer from one bank account to another without using paper checks, credit or debit card networks, wire transfers, or cash.

Since first being established, ACH transfers have grown in usage and popularity—according to Nacha.org, there were 7.7 billion ACH transactions within the first quarter of 2023.

ACH transfers are common and familiar to most consumers, even if they aren't aware of the lingo. If you pay your bills electronically (rather than writing a check or entering a credit card number) or get a direct deposit from your employer, the ACH network is likely at work.

ACH transfers are increasing in popularity among businesses, too. In fact, B2B ACH payment volume increased by 15.5 percent from 2021 to 2022. ACH payment transfers are faster and more dependable than checks, allowing them to be automated and streamline accounting.

In general, ACH transfers cost less to process than credit card payments or wire transfer. The savings may be significant if you accept recurring payments as a business. (If you still want to accept credit cards, find out how to avoid credit card processing fees.)

Differences Between ACH Payments, Wire Transfers, and EFT Payments

Wire transfers and ACH transfers are both ways to move money between two accounts, but they have some differences.

• ACH transactions are between two financial institutions on the ACH Network, whereas wire transfers are direct point-to-point transfers.
• A wire transfer is often used for higher-end purchases while ACH transactions are used for everyday things like direct deposit paychecks and bill payments.
• ACH transactions can be disputed within five business days for credit transfers or within 60 days for debit transfers. Wire transactions, on the other hand, can be difficult or impossible to recall or cancel once the funds have gone through.
• A wire transfer is completed in real-time (within minutes) while ACH transactions are processed four times a day in batches. Therefore, a wire transfer can be faster than an ACH payment.
• ACH processing has more options—credit payments can be processed the same day, the next day, or in 2 days, and debit transfers can be processed same-day or next-day.
• Some payment processors charge a small fee for same-day ACH processing. A wire transfer often charges a higher rate, and they’ll charge both sides of the transaction.
• EFT payments (EFT is a type of Electronic Funds Transfer) and ACH transactions are both acceptable. They're both used to describe the same payment method.

Examples of ACH Transactions

ACH payment transfers are divided into two categories. ACH debit transactions take money from your account and make it available to you. You may use ACH credit transactions to send money to other banks (either your own or to others). Here are two real-world examples of how they work.

• Direct Deposit Payroll – Many businesses now provide direct deposit payroll. They utilize ACH credit transactions to send money to their workers' financial institutions at set intervals using a system similar to payroll deduction.
• Recurring Bill Payments – Customers who pay a business on a regular basis (for example, their insurance provider or mortgage lender) may choose to enroll in recurring payments. This allows businesses to start ACH debits at each billing cycle, taking money directly from the customer's account.

Who's Involved in ACH Transactions?

Apart from the Automated Clearing House network (which links all the banks in the United States), there are three additional players involved with ACH transfers:

• ODFI, also known as the Originating Depository Financial Institution, is the financial institution that starts the transaction.
• RDFI, also known as the Receiving Depository Financial Institution, is the banking institution that receives the ACH request.
• Nacha (previously spelled NACHA), also known as the National Automated Clearing House Association, is a non-partisan government agency that oversees monitoring and regulating the network.

When Do You Use ACH Payments?

Let’s use your monthly automated phone bill payments as an example. You provide your checking account information (routing and account number) and sign a recurring payment authorization when you join up for autopay with your phone company.

After that, when it comes time to pay your bill, the money owed is transferred from your bank account at the ODFI to the RDFI by way of the ODFI's bank (the ODFI).

The two banks then talk to one another to ensure there are adequate funds in your bank account to complete the transaction. If the payment is approved, it is sent to your phone company's bank account and the money is transferred.

What Are Typical ACH Payment Processing Times?

ACH credits can be processed as same-day, next-day, or 2-day payments, while ACH debits can be processed as same-day or next-day payments.

Payments are processed in batches using the ACH network. The receiving bank can hold the transferred funds for a holding period after they’ve been received. In addition, payments are only settled when the Federal Reserve’s settlement service is open.

Depending on the timeline selected for the payment processing, the procedures of the receiving bank, and the Federal Reserve settlement office hours, your ACH transfer may be available for withdrawal within a few hours or a few days.

Why Are Some ACH Transfers Rejected?

If an ACH payment is denied, your bank or financial institution will issue a reject code that explains what went wrong. These refusal codes are essential for letting consumers know why their money was rejected.

The following are the four most frequently used refusal codes:

• R01 Insufficient Funds — The customer's account funds were insufficient to cover the debit entry. When you see this code, it's very probable that you'll have to repeat the transaction process after the consumer transfers money into their account or uses a different payment method.
• R02 Bank Account Closed — Customers often must call their bank and resubmit deposits. This occurs when a customer's previous account had been closed. It's probable they forgot to notify you of the modification. To process the transaction, they must provide you with a new bank account for the ACH transfer to go through.
• R03 No Bank Account / Unable to Locate Account — When an ACH transaction is processed, this code is triggered if the data supplied (the account number and name on the account) does not match bank records or if a nonexistent account number was input. The consumer will need to verify and resend their banking information.
• R29 Reject — If a bank refuses to allow a company to withdraw funds from a specific account, you'll receive this rejection code. In this situation, the customer must give their bank their ACH Originator ID so that your business can make ACH withdrawals. Then the ACH transaction must be rerun.

Are There Any Penalty Fees with ACH Rejections?

Unfortunately, a penalty fee may be incurred if an ACH payment is rejected. As a result, if you receive a reject code, it's critical to correct the problem as soon as possible to avoid paying extra for each billing cycle.

It may be worth limiting your business's acceptance of ACH payments to only those from trusted clients in order to avoid the hassles of unwinding ACH rejects.

What Is ACH Security?

The ACH network is regulated by the federal government and Nacha. ACH payments do not need to adhere to the same PCI compliance standards as credit card processing. Instead, ACH transactions have their own regulations.

To comply with Nacha regulations, all parties involved in ACH payments (including businesses making the payments and third-party processors) must put procedures, processes, and controls in place to safeguard sensitive data.

Nacha rules also state that any banking information (such as a customer's account and routing number) must be transmitted using “commercially reasonable” encryption technology.

This includes sending or receiving bank data via email or website forms—these must be encrypted, and websites need secure (https) pages. If you want to use a third party for ACH payment processing, make sure it has implemented technologies with state-of-the-art encryption technologies, like Clarity Payment Hub.

Under Nacha standards, originators of ACH payments are required to use “commercially reasonable” methods to verify the validity of client ID and routing numbers and to detect fraudulent activity.

The majority of third-party ACH processors should have these capabilities but double check before committing with anyone. It's also a good idea to work with an IT or security expert to make sure your company is sending ACH payments securely.