When you pay bills, there are many ways to do it — with credit, debit, cash, check, or using your bank account number itself. If you’ve paid a bill online, set up automatic payments, or even had a paycheck directly deposited into your account, chances are that you’ve dealt with ACH payments. But how do these payments work, are they actually safe, and are they the right method of payment for you and your finances?
What Is ACH?
ACH stands for Automated Clearing House. The automated clearing house network is an electronic payment network that facilitates money transfers between financial institutions using the account numbers and bank routing numbers of two parties.
How can Cushion help me?
Cushion Bill Pay gives you more visibility and control over your finances than ever before. Many people get hit with bank fees—such as overdrafts and late fees—due to cash flow problems. With Cushion, you can consolidate and track all of your bills and BNPL payments in one place, plan your budget by reviewing what’s coming down the pike, and avoid overdraft fees by temporarily pausing payments that might overdraft your account and resuming them when you are ready.
What Is an ACH Payment?
An ACH payment is a transaction between two parties in which money is moved from one bank account to another using the account numbers and bank routing numbers of the sending and receiving financial institutions.
ACH payments, also known as ACH transfers, can happen from business to business, customer to business, business to employee, government entity to consumer, and so on. As long as the bank account information of both parties have been verified and the payment has been approved, an ACH payment can occur.
Difference Between ACH Debit and ACH Credit
There are two types of ACH payments: ACH debit and ACH credit. The difference between these two types of ACH transfers lies in whether money is being pulled out of someone’s account or deposited into it.
With ACH debits, a business or lender requests to pull money from someone else’s account. Most commonly, automatic payments are used as a form of ACH debit payment. ACH debits are also known as ACH direct payments.
When you set up autopay for recurring payments, such as a utility bill or credit card bill, you first provide your bank account number and bank routing number. By doing so, you approve a company to do an ACH transfer, withdrawing money from your account when your bill is due.
ACH credits, on the other hand, occur when a company is automatically and directly funneling money into another account. Employees of a company commonly use ACH credit payments in the form of direct deposit in order to receive their paychecks from employers.
When setting up direct deposit, an employee provides their account number and bank routing number so that when it is time for their employer to issue their paycheck each pay period, the money is transferred directly into their bank account.
How Do ACH Payments Work?
In ACH payments, the prominent players are the:
- Originator: the business that is requesting money from a customer or another business through ACH transfers. If a utility customer sets up autopay, their utility company would be the originator, as the company requests money from the customer on a recurring basis.
- Originating depository financial institution (ODFI): the bank, credit union, or other financial institution associated with the originator that initiates the ACH transfer
- Receiver: the person or business that receives the request for payment from the business. In the utility example, the customer would be the receiver.
- Receiving depository financial institution (RDFI): the bank, credit union, or other financial institution that receives the payment request from the ODFI and must provide payment
- ACH operator: the payment network that facilitates ACH transactions and processes electronic payments between the ODFI and RDFI. The Federal Reserve is a key ACH network operator.
Let’s go back to the utility company automatic payment example.
First, the customer, or the receiver, provides their bank account number and bank routing number and approves the utility company, or originator, to withdraw money from their account when it’s time to pay the monthly bill.
When the utility company initiates an ACH transaction, it sends the account information and payment amount to its partner bank, the ODFI. The ODFI applies a credit to the utility company’s account in the amount of the customer’s payment.
The ODFI batch processes ACH transfers a handful of times throughout the business day and sends the information to the ACH operator. The ACH operator disperses the requested payments to all RDFI’s.
Once the RDFI receives the electronic ACH payment request, it will add a debit to the customer’s account for the amount requested by the utility company’s financial institution. At this point, all transactions — on both the customer’s account and utility company’s account — show up as pending, but the ACH transfer is not yet complete.
Before any money changes hands between banks, the ACH operator must approve the transfer of funds between the RDFI and ODFI. Once approved, the RDFI charges the customer’s account. If there is enough money in the account to make the payment, the transaction will clear. If there are insufficient funds, the bank will receive an error message.
At last, the transaction is settled, and the payment successfully makes it out of the customer’s account and into the utility company’s.
Is It Safe to Pay With ACH?
The National Automated Clearing House Association (NACHA) governs all transactions in the ACH network. According to its website, the organization “develops rules and standards, provides industry solutions, and delivers education, accreditation, and advisory services” to ensure that electronic payments are securely sent and received between parties. NACHA has developed strict operating guidelines for participants within the ACH network.
What Is the Processing Time for an ACH Payment?
The time that it takes to process ACH transfers varies. It can depend on:
- The bank’s days of operation
- The bank’s hours of operation
- ACH cutoff times
- Payment amount
- Payment details
- ACH debit vs. ACH credit
While some transactions may be able to be settled by financial institutions by the next business day, customers should allow three or more business days for funds to be added or subtracted from their account.
Advantages of ACH Payments for Customers
ACH has its benefits for both customers and businesses. If you are making direct payments to a company for recurring bills, there are a couple of reasons why you might want to go with ACH bill payments over cash or checks.
Faster than checks
ACH transfers are seen as an alternative to checks, which also use account numbers and routing numbers to send money from one bank account to another. However, ACH payments are a much quicker way to do it.
When you are the one sending an ACH payment to another person or business, you cut out the time that it takes to write and deliver the check. You also likely have to wait a shorter amount of time for the other party to deposit the check and their bank to process it.
When you’re on the receiving end of ACH transfers, such as with direct deposit of a paycheck from an employer, there is time and effort involved in receiving your paycheck, taking it to the bank, depositing it, and waiting for it to process.
By setting up direct deposit, your paycheck is funneled directly into your account using your account and routing numbers, and typically posts to your account by the end of the business day.
An ACH transaction requires that both the sending and receiving bank accounts be verified, and the customer to authorize the payment. This helps avoid any fraudulent activity by either customers or businesses when conducting ACH payments. It also helps avoid returned payments, which could lead to fees for both parties.
Disadvantages of ACH Payments for Customers
Unfortunately, there are also downsides that come with ACH bill payments. With a little planning and attention to detail, there are ways to get around the disadvantages though.
May be slower than paying with debit
Debit cards afford the gift of speed. When someone makes a payment with a debit card, they enter their PIN or provide a signature in order to authorize the transfer of funds. While this process can have security issues, the funds are typically processed and transferred much quicker than they are with ACH payments.
ACH transfers are held by financial institutions and the ACH operator and batch processed, which adds a good amount to the processing time. With debit purchases, funds are typically transferred and available in a relatively short amount of time.
Forced to deal with autopay
Automatic payments on recurring bills are one of the most common uses for ACH payments. Unfortunately, autopay can be a blessing or a curse. On one hand, autopay is convenient, sometimes cheaper, eliminates clutter, and can help you avoid credit damage and late fees on recurring payments if you maintain a sufficient account balance.
However, setting up automatic payments also gives you less control over your spending and can lead to overdrafts if you do not have enough money in your bank account when bills are charged to your account.
Autopay can also cause you to spend more than you need to. Since your bill is automatically charged to your account with autopay, you don’t have the opportunity to review your bill or statement before you’re charged. Your biller may add charges or services by mistake; if you pay these charges automatically, you could miss the opportunity to flag mistakes or negotiate down the cost.
Finally, automatic payments keep you from reassessing your spending habits on a regular basis. With automatic payments, bills and other charges can take you by surprise, especially when it’s on services that you no longer need or use. Gym memberships and streaming services are common culprits. There’s something to be said for manually paying these expenses — you’re forced to ask yourself, “Do I really use this service enough to justify the cost?”