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ACH or Automated Clearing House Payment Processing originated in the 1970s to process paper checks. However, with the widespread adoption of electronic payments, the system has evolved to handle direct deposit, tax payments, tax refunds, and many other financial transactions.

ACH helps your small business process payments quickly, securely, and cost-effectively. ACH payment processing costs less than credit card processing since payments bypass the credit card brand networks and their associated interchange fees and are paid directly from a customer’s bank account. Understanding how ACH payments work will help you know how you can leverage ACH payments for your business.

Understanding ACH  and ACH Payments or Transfers

ACH payments also know as transfers in the industry are classified as either ACH Debits or ACH Credits.

ACH Debit Transfers

When the money is pulled from a bank account, it is called an ACH debit transfer. It means that the customer (the payer) is allowing the business merchant (the payee) to take funds from their account.

For example, when you set up a recurring payment (monthly, annually, etc.), ACH debit is the method used to debit the payment from your account automatically.

ACH Credit Transfers

On the other hand, when the money is pushed into an account, it is known as an ACH credit transfer. In other words, the customer (the payer) triggers the money to be sent to the business merchant (the payee).

For example, as a customer, when you set up a payment through your credit card or bank to pay a bill, it will be categorized as an ACH credit.

Different Types of ACH Debit Transfers

When it comes to the ACH network, there are many types of debit transfers.  We’ve laid them out here:

Back Office Conversion (SEC code: BOC)

This is when the in-person purchase of services or products is made through a check, and which will be processed later in the back office. It allows a check to be converted into a digital ACH transfer. Note: SEC code stands for Standard Entry Class code, and it is used to represent specific ACH debit cases.

Accounts Receivable Conversion (SEC code: ARC)

This is when a payment is received for an account receivable via a check. It allows the check to be converted into a digital ACH transfer.

Corporate Trade Exchange (SEC code: CTX)

This is when you (the business owner) specifically receive funds from another business. It allows the merchant to add several addendums to the money, so it becomes easier to cover multiple invoices without losing crucial information.

Cash Concentration or Disbursement (SEC code: CCD)

This is when you are receiving funds from anyone, like family members or businesses. This is typically done for the purposes of cash management.

International ACH Transaction (SEC code: IAT)

This one applies to all financial collection transactions where the end beneficiary is a business based abroad (non-US).

Point of Sale (SEC code: POS)

This is used when the debit starts at a computerized terminal for a point-of-sale payment.

Point of Purchase (SEC code: POP)

Point of Purchase is applied when converting a paper check that’s been provided to the business at a manned bill payment location, or at the point of purchase, and is processed immediately.

Machine Transfer Entry (SEC code: MTE)

This is used when the debit originates at a computerized terminal.

Represented Check Entry (SEC code: RCK)

This is when collecting a debit from a check that was earlier returned due to insufficient funds.

Prearranged Payment and Deposits (SEC code: PPD)

This is applied when the debit originates after the authorization of the customer (paper-based)

Shared Network Transaction (SEC code: SHR)

This one is used when the (one-time) debit originates at a computerized terminal for a point-of-sale transaction.

Check Truncation (SEC code: TRC/TRX)

This is when a debit originates under a Check Truncation Program.

Telephone Initiated Entry (SEC code: TEL)

This is when the debit is authorized over a phone call or message.

Internet Initiated Entry (SEC code: WEB)

This is when the debit is authorized over the internet.

Generally, in case of recurring payments (like mortgage payments or bill payments), the following types of ACH debit transactions are used:

  • Prearranged Payment and Deposits
  • Telephone Initiated Entry
  • Internet Initiated Entry

How Long Does ACH Transfer Take?

The ACH transfers can, in theory, take several business days due to the fact they are processed in batches by a network operator only 3 times a day, unlike wire transfers which are processed in real-time.

However, a bank can choose to have ACH credits processed and delivered within 1 or 2 business days. And the ACH debit payments have to be processed within 1 business day. Which is the norm for ACH transfers.

According to the NACHA guidelines, banks can process transfers the same day they are made, if they want. However, a bank is also permitted to charge an extra fee for expediting the transaction.

ACH Debit vs. Direct Deposit

Generally speaking, all payments made through the ACH system can be classified as Direct Payments or Direct Deposits. As the name suggests, a direct deposit is a payment that’s made via the ACH system.

The main difference between ACH debits and Direct Deposits is that the former have money being pulled out of an account, while the latter have money being pushed into an account.

Why Choose ACH Transfers?

There are substantial benefits for U.S. based small businesses for using ACH payments, such as:

Higher retention: In the case of ACH transfers, the bank account is the source of funds. So, there is not much risk of involuntary churn, which is guaranteed with debit and credit cards since they expire.

Reduced cost: ACH payments are usually a cheaper way to transfer funds electronically because they are not routed through the relatively expensive card networks.

Easy access: Any individual or company that has an American bank account can pay through the ACH network.

ACH Transfer or Wire Transfer: Which is Preferable?

If you want to move a substantially large sum of money around, or you want the transaction to be faster, wire transfers might be recommended. They work for the U.S. as well as global transactions.

However, if you don’t have a big urgency, and you want to avoid paying heavy transaction fees (such as in the case of wire transfers), an ACH transaction offers outstanding benefits.

Image Credit: © Piotr Swat |