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Do you own a business that deals with recurring payments? Are you looking for a convenient transaction option to manage finances? Opting for ACH transfers can be an excellent way to automate and simplify accounting. This article provides an easy-to-understand guide on ACH transfers and why choosing them can be advantageous.
What Is an ACH Transfer?
An ACH transfer, also commonly referred to as ACH payment or transaction, is an electronic fund transfer method from bank to bank. You can make this electronic payment across banks in the United States. Payments made through ACH transfers are cleared via the Automated Clearing House (ACH) network.
In 2021, NACHA reported 29.1 billion ACH transactions with a total value of $72.6 trillion. Compared to the previous year, it showed a 17.4% increase, mainly due to business-to-business (B2B) transactions.
Basically, ACH transfers are bank transfers for sending and receiving money electronically. They are facilitated through an ACH network. It takes two to five business days for ACH transactions to process.
For example, a few common applications of ACH transfers include:
- Direct deposit of salaries
- Peer-to-peer (P2P) payments
- B2B payments
- Online payment of bills
- Receiving investment payments
- Direct deposit of tax refunds
Categories of ACH Transfers
There are two main categories of ACH transfers; these are direct deposits and direct payments.
Direct Deposits
Direct deposits involve pushing funds into a bank account and is also called an ACH credit. A payer initiates this type of ACH transfer by sending a deposit payment to the receiver or payee. For example, direct deposits include government benefits like stimulus payments, tax refunds, interest payments, and payment of employee salaries.
Direct Payments
Direct payments, also referred to as ACH debit, involve pulling funds from a bank account. The receiver initiates the ACH transfer to request payments and is granted permission to obtain them from the payer’s account. For example, ACH direct payments include recurring utility or mortgage bill payments from your bank account.
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Institutions Involved in ACH Transfers
The three parties are involved in an ACH transfer besides the Automated Clearing House network. They are:
NACHA
The National Automated Clearing House Association is the central organization that runs, manages, and oversees the ACH network.
ODFI
The Originating Depository Financial Institution is the bank involved in initiating ACH transactions and also delivering them directly or indirectly to its ACH operator.
RDFI
The Receiving Depository Financial Institution is the banking institution that receives the ACH entry from its operator directly or indirectly. It results in a debit or credit from the customer’s account.
Why Should You Choose ACH Transfers?
Choosing ACH transactions to receive or send payments can be more beneficial for businesses and consumers than commonly used transaction methods. For example, here are some of the reasons why you should opt for ACH transfers:
Convenience
ACH transfers offer a convenient solution for dealing with payments. Because they are fully electronic, they save time by reducing trips to the bank for sending or receiving money and paying recurring bills.
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Low Processing Costs
In contrast to card networks which charge fees of $10 to $35, ACH networks are much cheaper. Many bank services do not charge a fee on transactions, making the ACH transfer method economical.
Reduced Risk of Involuntary Churn
Involuntary churn occurs when there is a failure of payment attempt from the customer’s side due to the expiration of credit cards. Because ACH transfers directly involve bank accounts, it lowers the risk of involuntary churn, maintaining customer traffic and sales.
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Payment Reversals
In case of errors during payments, ACH transfers enable requesting a transaction reversal. Conversely, credit card transactions are permanent and do not allow payment reversals, thus costing you your money.
Endnote
ACH transfers are convenient for various businesses and consumers to transfer money across banks. Accordingly, choosing this electronic transfer method can be advantageous for your business and provide a well-organized accounting. Moreover, they are easy to set up and can help boost your business because anyone with a US bank account can pay through it.