How an ACH transaction works

Learn more about how an ACH transaction is processed, what it is used for, and what risks are involved

An ACH transaction happens when funds are deposited in or debited from a user’s bank account electronically. The transaction occurs through the Automated Clearing House network, which connects more than 25,000 financial institutions across the United States.

What kinds of ACH transactions are there?

An ACH transaction can be either a credit or debit transaction.

Credit ACH transaction. A credit ACH transaction occurs when an Originating Depository Financial Institution (ODFI) sends funds to a Receiving Depository Financial Institution (RDFI). These ACH transactions are initiated by an Originator, which is often a business or an individual. For example, a company paying its employees through direct deposit would initiate a credit ACH transaction to deposit the funds in employees’ bank accounts on payday. When a merchant pays a utility bill by sending the payment electronically, that is also a credit ACH transaction. Direct deposit and online bill pay are two types of credit ACH transactions that are usually free for the Originator. A third type of credit ACH transaction is an electronic funds transfer, which sends funds from one individual’s account to another’s and usually comes with a small fee.

Credit ACH transactions have traditionally taken up to two business days to process. In September 2016, however, NACHA, the organization that oversees the ACH network, introduced Phase 1 of Same Day ACH, which guarantees faster processing times. Phase 1 allows financial institutions to settle credit ACH transactions on the same day they are initiated, allowing for faster payroll and urgent bill payments. Phase 2 of Same Day ACH will be implemented in September 2017 and will grant banks the ability to process ACH debit transactions on the day they’re initiated. Phase 3 will finish off the implementation in March 2018 by making sure that all transactions are settled by 5:00 PM at the local time of the RDFI.

Debit ACH transaction. A debit ACH transaction is made when an ODFI requests funds from an RDFI after receiving authorization to pull funds from the recipient’s account. For example, a debit ACH transaction occurs when a customer makes online purchases or pays bills directly on a merchant’s or biller’s website. By providing the relevant bank account information, the customer authorizes the debit ACH transaction.

A debit ACH transaction generally takes one business day to settle and is usually free.

What is an ACH transaction used for?

In 2015, more than 24 billion ACH transactions were made on the network, and more than $41.6 trillion were transferred. Thirty eight percent of commercial ACH transactions were credits and 62 percent were debits.

ACH transactions fall into the categories of peer-to-peer (P2P), business-to-business (B2B), consumer-to-business (C2B), and business-to-consumer (B2C). ACH transactions in all of these areas are expected to grow dramatically over the next few years, largely due to increased accessibility and users’ expectations of speed and convenience. For example, P2P payments are forecasted to reach $17 billion in 2019, compared to $5 billion in 2015.

According to NACHA, nearly half of ACH transactions each year are payroll direct deposits and bill payments. The number of ACH transactions increased by more than 5 percent from 2014 to 2015—an indication that increasing numbers of businesses are paying their employees through ACH and increasing numbers of customers are using ACH to pay for utilities, insurance, mortgages, loans, and other payments. ACH transactions are particularly popular with businesses that allow recurring payments set up via the ACH network and customers’ bank accounts.

How is an ACH transaction processed?

Businesses that accept ACH as a method of payment process an ACH transaction through a merchant account provider. (A merchant account provider can also connect businesses with credit card companies.) Alternatively, businesses can use a bank or an ACH processor to accept and settle ACH transactions. Processors like Stripe, Apex, and Braintree increase efficiency and security when making ACH transactions and often remove much of the friction in the process. Processors usually charge a small fee—either a flat rate of less than $1 per transaction or a percentage below 1 percent—but it amounts to far less than the fees for processing credit cards, for instance.

What risks are involved in an ACH transaction?

Although non-sufficient funds (NSF) fees are often associated with debit cards and checks, they are also possible with ACH transactions. NSF occurs when there are not enough funds in a user’s bank account to cover a payment or transaction. Because ACH transactions take a few days to settle, there may be funds in the user’s account when a debit is authorized, but they may be gone by the time the money is actually withdrawn. On the other hand, according to a Plaid study, most ACH transactions that do not clear due to NSF are those processed in one business day. As Same Day ACH increases in popularity, it also increases the likelihood of NSF.

NSF often results in a fine from the user’s bank, which can be levied for every attempted transaction during the NSF period. Merchants and businesses can also experience NSF risks. For example, if a merchant accepts an ACH transaction, which results in an NSF for the customer, the merchant’s bank may also charge the merchant a similar fee as for a bad check.