What are ACH payments and how do they work?

Did you ever wonder how bank-to-bank transfers are processed in the US? Similar to the Bacs scheme in the UK, the United States have their own clearing house, responsible for processing bank-to-bank electronic payments across the country. In this article, we will explain you ACH payments in more detail and answer some of the most popular questions around this topic.

What are ACH payments?

ACH payment is a type of bank-to-bank transfer made via the Automated Clearing House, or ACH, in the US. The Automated Clearing House is a network used for moving money between banks without the involvement of card networks (such as Visa and MasterCard). So, whilst a traditional payment is processed through card networks, a ACH payment is processed through ACH.

The ACH network is managed by Nacha, the National Automated Clearing House Association. Because it only runs in the US, ACH payments are only available in the US as well. However, each country typically has their own “automated clearing house”, so, their own network to clear bank-to-bank transfers. In Portugal, for instance, that network is called SIBS, in the UK it is called Bacs Payment Schemes Limited, and in Australia it is called BECS (Bulk Electronic Clearing System).

Note that whilst ACH is managed by Nacha, all ACH payments are either processed by the US Federal Reserve (central bank) or The Clearing House, a private institution owned by the largest banks and financial corporations in the US. Traditionally, the Federal Reserve processes about half of all ACH payments, with The Clearing House processing the other half.

Types of ACH payments 

The ACH network is used to process two types of payments:

ACH credit

ACH credit represents the movement of money being pushed from one bank account to the other (payers push their money to the payee). This includes direct deposits and direct payments. Direct deposits are electronic bank-to-bank transfers from companies to individuals. They can be used by companies to, for instance, pay salaries or expenses to their employees.

Direct payments, on the other hand, are electronic bank-to-bank transfers that can be made by individuals or organisations. Direct payments can be used to pay a bill online or send money to a friend through payment apps such as Venmo.

ACH debit  

ACH debits represent the movement of money being pulled from one bank account to the other (the payee pulls their payment from the payer). Debit payments includes direct debit, so any recurring payment set up by a company you ordered services from. With your authorisation, this company schedules recurring payments that will automatically be debited from your account every month. Direct debits are used for bills or subscriptions.

Advantages of ACH transfers

ACH is relatively low-cost when compared to card payments, as it avoids card network fees. It is also a fast and reliable payment scheme that doesn’t require much time to set up. As with any other electronic payment scheme, ACH is heavily regulated to avoid fraud, and it is known to be much safer than paper checks. Understandably, ACH transfer are amongst the most popular payment schemes in the US, moving around  $43 trillion every year.

How long do ACH payments take to be processed?

ACH payments are settled four times each working day. The ACH network actually offers three different plans: same-day, next-day and two-day payments. It is up to the payer to choose which plan works better for their situation. Though ACH payments may be processed during the weekend too, they can only be settled when the Federal Reserve is open.

The Federal Reserve is open on every business day from 7:30am to 6:30pm, and closed on the weekends and bank holidays. Therefore, should you initiate a payment outside these business hours, or close to a weekend, the payment settlement may be delayed. You should also take into consideration your own bank’s cut-off times, and these may vary from bank to bank.

Is there a transfer limit?

Same-day ACH payments currently have a limit of $100.000. However, Nacha has approved the increase of this value to $1 million, which will be effective as of March 2022. Banks also impose a transfer limit to their customers, and the values vary widely. Bank of America, for example, has an ACH transfer limit of $2,000/day or $5,000/month for next-day transfers, and Chase has a limit of $10,000 per transfer, or $25,000 per day.

Some banks such as Bank of America, SunTrust and Citizen’s Bank also charge a transfer fee of up to $10 for ACH payments, and other may not allow using ACH for international transfers. It is worth checking the transfer limits and additional fees with your bank before making an ACH payment.

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