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What Is An ACH Transfer?

Hunter Brock
Hunter Brock
Hunter Brock has worked as a freelance writer covering lending and personal finance since 2016. He is also an avid follower of financial markets, a fiction writer, and holds a B.A. in English from Western Illinois University.

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Table of Contents

The acronym ACH (automated clearing house) probably makes a regular appearance on your bank statement, leaving you to wonder if this payment network benefits you. For the most part, it does.

Takeaway Points

  • ACH transfers move money from bank to bank
  • Consumers use them to pay monthly bills
  • Businesses use them to pay invoices
  • Direct deposits to employees are ACH transfers
  • ACH transfers save individuals and organizations time and money
  • ACH transfers are a safe way to send money

What Are ACH Transfers?

ACH transfers pervade the modern American financial system. Virtually everyone receives money or pays bills through this method. The ACH facilitates bank-to-bank transfers within the United States through a batch processing system that automates and speeds transfers.

For instance, employers remit direct deposits through ACH transactions. Also, human resources departments process paycheck deductions through ACH transfers, such as 401(k) contributions.

Companies also employ ACH transfers to pay invoices and receive payments, while consumers use them for automated bill pay.

The number of ACH transactions per year stands at a staggering 29 billion as of 2021, an 8.7% annual increase. This includes a 24.9% increase in business-to-business ACH transfers and a 21% increase in person-to-person transactions. ACH transfers owe their popularity to speed and low cost.

What Are the Advantages of ACH Transfers Versus Paper Checks?

In the old days, individuals and businesses had to wait for paper checks to arrive in the mail. Then they had to manually deposit or cash those checks, often incurring fees.

Additionally, checks require payers to remember due dates and mail payments early enough to account for the delivery period, resulting in more frequent late payments.

Because of the delay between writing checks and account debiting, paper check senders have a higher likelihood of miscalculating and over-drafting their accounts, resulting in non-sufficient funds fees that double if the receiver submits the check twice.

But with ACH deposits, customers can see their account transactions on screen—no more pens, calculators, and checkbook ledgers. A quick online review of one’s account shows if it remains on track.

Consumers have the ACH transfer option for most bills, such as the following:

  • Credit cards
  • Auto loans
  • Utility bills
  • Mortgages
  • Rent
  • Insurance premiums

Retail customers also have the option of receiving many types of payments through ACH transfers, such as:

  • Wages
  • Self-employment income
  • Annuities
  • Social Security benefits
  • Disability income
  • Tax refunds

On the business side, before ACH transfers, accounting departments found themselves awash in paper statements and checks, requiring costly systems to sort, tally, and track credits and debits.

Now, businesses no longer need to send employees on bank runs or worry about misplaced funds or checks lost in the mail. Instead, their accounting department can focus on plans for enhancing company revenue and trimming expenses instead of rote payment processing tasks.

With ACH transfers, payments flow through the banking system without the need for reams of paperwork and manual processing. The time savings and increased efficiencies benefit everyone.

What Are the Advantages of ACH Payments Versus Wire Transfers?

Wire transfers work similarly to paper checks: They are one-time payments. However, wire transfers come with hefty fees, making them an impractical solution for recurring payments.

Banks charge at least $10 for domestic wire transfers and fees of $30 or more for international payments.

Because of this, few banking customers use wire transfers unless ACH transfers are impossible. For example, ACH transfers only work for domestic remittances, so many people sending funds overseas must use wire transfers.

How Do You Initiate an ACH Transfer?

ACH transfers offer the significant benefit of being easy to initiate. You have two options: ACH Credit and ACH Debit.

How to Set Up ACH Credit

ACH credit is a service offered through your bank or credit union, rather than an automated payment agreement you sign with the business you are paying. ACH credit provides the advantage of relieving you from the need to share your account number with a third party.

However, ACH credit only works if the receiver has registered with your financial institution. To determine if this is the case, you must search for the receiving business on your bank’s website (a drop-down menu is usually provided). Then, follow the instructions on the website to complete registration.

How To Set Up ACH Debit

You can use ACH debit, provided that the business you wish to pay offers this option. Instead of signing up with your bank, you log in to your online account for the company you wish to pay and set up the debits directly from there. Of course, this requires you to reveal your checking account number.

Before the ACH debit plan becomes effective, the receiver’s bank deposits a few pennies into your account and then withdraws them. This verifies your bank account is active. Once this process is complete, the payee deducts your remittances on the date(s) specified, unless you revoke the agreement.

Downsides of ACH Transfers

ACH transfers come with enormous benefits, but there are a few drawbacks:

  • They take several days to become effective
  • You must cancel unwanted ACH transfers before the due date
  • It’s easy to keep paying for unwanted subscriptions
  • Some banks impose limits on ACH transfers
  • Businesses may encounter stiff fees for certain transactions

Tips for Safe ACH Transfers

While ACH transfers are a safe and convenient way to pay your bills, no system is fraud-proof. You must always remain vigilant in protecting your money. Tips for secure ACH transfers include the following:

  • Safeguard your account information
  • Carefully review your bank statements
  • Report unrecognized transactions immediately
  • Close your account if your banking data is unsecure

ACH payments offer significant advantages for businesses and retail customers. They enjoy freedom from managing paper checks, worrying about mailing time, and facing penalties when checks fail to arrive by the due date. Consumers also find it easier to balance their accounts, while businesses benefit from more efficient accounting processes.

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