Am sure you have been hearing of ACH very frequently. Do you know what it stands for? If you don’t know, let’s get to know it now. This article will help you put to an end the question “What is an ACH Payment or What Does ACH Stand For”.
What is an ACH Payment
In banking, ACH stands for Automated Clearing House. This is a network that coordinates electronic payments and automated money transfers. With this, individuals can easily move money between banks without using paper checks, wire transfers, credit card networks, or cash.
However, a reference to ACH can mean a lot of things. It all depends on where you see it. Let’s consider places you can see ACH below;
On bank Statements
When you see ACH on bank statements or in your transaction history, it means that an electronic payment has been made to or from your account using your checking account details. However, for any ACH transfer to move funds to or from your account, you must provide your bank account and routing number. Lastly, you must authorize those transfers. Keep these in mind.
On Your Bills
If you see ACH when viewing a bill, it means that you can pay your bills electronically. Also, you may see other terms like eChecks, EFT, or AutoPay. Just supply your checking account details and pay directly from your account Instead of writing a check or entering a credit card number all the time. With your permission, your biller can automatically pull funds from your account when it is due. Please be very careful when you are doing this.
What Does ACH Mean?
Let’s define the terms one by one.
Here, the ACH system consists of computers working together to process payments automatically. This makes payments very fast and easy.
Usually, the network makes use of two central “clearinghouses.” They are the Federal Reserve or The Clearing House. With any of the clearinghouses, there is an effective matching and processing among numerous financial institutions.
Examples of ACH Transactions
You can not complete the talk about What is an ACH Payment without mentioning ACH transactions. On daily basis, a lot of people and businesses use ACH for everyday transactions such as:
- Transferring money from your brick-and-mortar bank to your online bank
- Payments from businesses to vendors and suppliers
- Direct deposit of your wages (from your employer to your bank account)
- Automatic payment of recurring bills like energy bills, insurance premiums, and Homeowners Association (HOA) dues. When you provide a voided check to your biller, you’re setting up ACH.
Even though ACH is very useful, it also has its own shortcomings. What are the pros and cons?
PROS FOR CUSTOMERS:
- Automating bill payments to avoid late fees and missed payments
- Reduce paper records that carry sensitive banking information
- Fast and easy with an automated payment, and without waiting for a check to clear.
- Make online purchases without having to use a credit card or check.
- It makes online payment easy, fast, and cheap.
- Permits employee payments without printing checks, stuffing envelopes, or paying for postage.
- Quickens regular customer payments without having to transport actual paper checks to the bank.
- Also, it has lower fees than credit card payments.
- It makes vendor and supplier payments easier and faster while keeping electronic records of all transactions.
- Lastly, an automated transaction is less prone to error than a manual monthly task.
- To start with, auto payments are usually deducted whether or not you have the funds in your account. This usually causes overdraft fees. You may not be comfortable with this.
- It makes companies have direct access to your bank account.
- It permits other companies to have a direct link to your bank account.
- Here, customers can reverse their payments, but not as easily as with a credit card.
- You MUST monitor the transactions for fraud. This is because business accounts have fewer protections than consumer accounts.
- Lastly, a lot of companies may need to buy software and invest in training to process ACH payments.
What ACH does for Consumers
ACH does the followings for customers:
- It helps you get paid by your employer quickly, safely, and reliably. You don’t need to wait for your paycheck to arrive or deposit the check at your bank.
- For those who may forget to make payments, there is no problem as the payments are automatic.
- You can easily make payments online without using your credit card or check. No need for credit card processing fees.
- It reduces the chances of fraud.
However, it is important to know that setting up ACH provides businesses with direct access to your checking account. This simply means that they take the money to pay your bills whether you’re ready to pay or not.
What ACH does for Businesses
The list below shows what ACH does for businesses:
- Firstly, It gets customer payments easily, quickly, and regularly. There is no room for cash-flow crunches dependent on when you can get to the bank.
- Cheap and easy way to transfer money.
- It easily pays employees without the need to print checks or pay postage.
- Its processing fees are lower than credit card swipe fees.
- Lastly, The whole process is safe and easy to track.
On the other hand, businesses face the issue of customers reversing charges and taking back payments. Also, it’s harder to reverse an ACH payment than to reverse a credit card payment.
Business owners must be very vigilant in monitoring for fraud. Business accounts do not receive the same level of protection customer accounts enjoy.
Lastly, businesses usually need to purchase software or invest time and resources into transitioning to ACH transfers. Usually, they recoup those costs easily over the long run.
Computers That Talk
Am sure you already know by now that the ACH system is a network of computers interacting with one another to make payments happen. Two sets of computers are at work for each payment:
The request creation side
ALso, This side is responsible for making requests.
Let’s take a direct deposit for instance; an employer creates a request to send money to an employee’s account. Here, the employer is the Originator, and the employer’s bank is the Originating Depository Financial Institution (ODFI). Now, the request goes to an ACH Operator, which serves as a clearinghouse that gets numerous requests throughout the day, and then routes the request to its destination.
The bank taking the deposit is the Receiving Depository Financial Institution (RDFI) usually adjusts the account of the final account holder (the employee receiving pay, in this case, is the Receiver)
Types of Transactions
ACH transactions occur in two forms:
They include requests to pull funds from an account. For instance, it includes; direct payments for utility bills.
At the moment, instead of ACH transactions, banks use “batch processing” to process the entire day’s worth of requests at once. This only means that you don’t get paid immediately after your employer authorizes payment. Rather, it takes one or two business days to move through the system.
Do you like the ACH methods? Would you want it to run the transactions within 24 hours and very easily? Keep your views in the comment section.