You almost certainly use ACH payments in your day-to-day life. Is your mortgage or car payment set up for auto-payment? Perhaps you use Venmo to pay your friends or get paid via direct deposit.
These are all forms of the ACH transfers that have become so commonplace in our world. But, what exactly is an ACH transfer? And what is the Automated Clearing House? More importantly, how can ACH transfers benefit your business?
What Is an ACH Payment?
ACH payments (Automated Clearing House payments) enable the transfer of funds between two accounts through the use of an electronic network. The electronic network uses the Automated Clearing House (described below) to process payments in batches.
Instead of handling payments individually, a number of transactions are grouped into batches and processed all at once. Money is removed from one account then transferred into another account after processing by an Automated Clearing House institution.
What is the Automated Clearing House?
The Automated Clearing House (ACH) is a nationwide network of depository institutions set up and maintained by the Federal Reserve. The ACH was created to facilitate electronic credits and debits in batch. ACH transfers are processed by various Automated Clearing House institutions that receive files of ACH payments, edit and sort the payments, and deliver payments to receiving financial institutions. Finally, the ACH institution settles the payments by crediting and debiting the applicable financial institutions’ settlement accounts.
Are ACH Payments Different Than Bank Transfers?
In short, it depends on what you mean by “bank transfer.” Generally speaking, a bank transfer refers to the transfer of money directly from one bank account to another. But, bank transfers vary by cost, speed, and requirements depending on the nature of the bank transfer.
- Internal, personal bank transfer: Internal, personal bank transfers refer to a transfer within the same financial institution (internal) between a single person’s accounts (personal). For example, if you use a bank transfer to move funds from your checking account to your savings account at the same bank, that bank transfer is most likely an internal, personal bank transfer. Generally, this type of bank transfer is quick (if not immediate) and free of charge.
- External, personal bank transfer: External, personal bank transfers refer to a transfer between a single person’s accounts (personal) that exist in separate financial institutions (external). If you use a bank transfer to move funds from a checking account at given bank to another checking account at a different bank, the bank transfer is most likely an external, personal bank transfer. The speed and costs associated with external, personal bank transfers are fully dependent on the policies implemented by the banks involved in the bank transfer.
- Wire transfer: A wire transfer is used to send money from one bank account directly to another bank account. While the end result is similar to an ACH transfer, a wire transfer functions differently. Unlike an ACH transfer, a wire transfer is a deposit transaction where the party that wants to pay another party initiates the withdrawal from its own account for deposit into the other party’s account. There is no intermediary (e.g. the Automated Clearing House) in a wire transfer, and wire transfers are one of the quickest bank transfer methods. However, this speed and lack of intermediary comes at a cost. Wire transfer fees vary from institution to institution, and can be dependent on the amount of money being wired.
Bank transfer is a generic term for a variety of transactions that aim to move money from one bank account to another without the use of a check, cash, or other physical instrument.
Why Do Businesses Love Getting Paid via ACH?
If you don’t accept ACH transfers from your customers, you may want to consider this option. ACH transfers are attractive to business owners because of their efficiency, accuracy, benefit to customers, and cost.
ACH Payments Are Efficient
Auto-payments are often set up using ACH transfer. Is there a better way to ensure payment than having your customers set up on auto-payment? Further, if customers are on auto-payment through ACH transfer, there is less month to month manpower involved in the billing and collection process (e.g. no paper invoices, no cutting/depositing checks, no collection calls, etc.). ACH transfers with QuickBooks automates the entire process.
ACH Payments Are Accurate
If you can automate the billing process with QuickBooks, and automate payment with ACH transfers, you can greatly increase accuracy through the removal of human error. With no humans crafting invoices, drafting checks, mailing checks, depositing checks, etc., the likelihood of the human element screwing up a transaction goes away.
ACH Payments Are Customer Friendly
Assuming your customers can afford to pay you on time, customers like ACH transfers. For multiple years in a row, the number of ACH transfers has grown by more than a billion transactions each year. Additionally, ACH transfer is a more secure method than alternatives. For example, checks are physical instruments contain bank account information. Checks pass through many intermediaries before deposit with your bank. The entire process is open to security breach. The Automated Clearing House provides a government-instituted and regulated structure that ensures security and standardization. Finally, ACH transfers are cheap (and sometimes free) for customers when compared to wires, checks, and credit card payments.
How Much Do ACH Payments Cost?
As mentioned, ACH transfers are attractive to customers for their low cost. If you use QuickBooks, customers can pay you via ACH transfers for free.
Outside of QuickBooks, ACH transfers are not entirely free, but they are generally cheaper than other methods. Credit cards and wire bank transfers charge a fee for each transaction. The charges associated with ACH transfers are related to the annual fees depository institutions are charged by NACHA (the network that administers and facilitates ACH transfer for the Automated Clearing House). Institutions are able to spread the fees over their many users, or eat the cost entirely as a cost of doing business. Whether an institution charges a nominal fee, or offers ACH transfers for free (like QuickBooks), ACH transfers are one of the cheapest methods to move money.
How to Get Started with ACH Payments
Ready to start taking ACH transfer for payment? The easiest way to get started is to sign up for a QuickBooks account. Signing up is easy, and as mentioned, ACH transfers are completely free!