An Automated Clearing House or ACH is a system that allows businesses to transfer funds electronically between accounts at other financial institutions. This type of transaction is usually done through electronic data interchange (EDI).
EDI is a term often associated with banking transactions, so you might already know what it means. In addition to transferring money, ACH also allows businesses to pay bills and send invoices.
How Does an ACH Work?
ACH is a network of banks that allows companies to move money from one account to another without having to physically go to the bank. Savings in terms of both time and money are the primary advantages of ACH.
ACH transactions are processed through two parties: the originating depository financial institution (ODFI), and the receiving depository financial institution (RDFI). This is how it works:
The employer or business provides the payment originator with a set of preselected payment options using an ACH portal. These may include one-time, recurring, or automatic payments.
The payment amounts are transferred electronically into the ACH system.
A bank connection is created through the ACH network between the employer's bank and the Originating Depository Financial Institution (ODFI).
The Payment System Information Center (PSIC) aggregates payments and transmits them to an Automated Clearing House (ACH) operator.
A bank account is linked to an employee's ACH account by an ACH operator. The banks, receiving RDFIs, then post the payments to employees' bank accounts.
What Employee Details Are Required for an ACH Payment?
Employers must receive these details to make an ACH payment to an employee's bank account:
The name of the employee’s bank or financial institution through which the employee receives his/her paycheck.
The type(s) of account(s) the employee wants his/her paychecks to be deposited into (savings accounts, checking accounts, etc.).
An employee's bank's ABA routing number. A bank in the United States can be identified by this 9-digit number.
Account number of an employee. Individuals' bank accounts are identified by this 8-12 digit number.
What Is the Processing Time for an ACH Payment?
ACH payments usually took 3 to 5 days for deposits to reach their destination. As the number of merchants accepting ACH payments continues to rise, so does the demand for faster ACH processing times.
In response, NACHA developed a new service called Same Day ACH Payments. This service allows merchants to receive their payments within 24 hours.
When NACHA started same-day ACH transfers, it opened up two additional clearing windows:
The deadline for ODFI submissions is 10:30 AM ET. The payment transfer will take place at 1:00 PM on the same day (in the RDFI's local time).
Afternoon ODFI submissions must be received by 2:45 pm ET. It will occur the same day at 5 PM (local time for the RDFI).
Can You Cancel an ACH Payment?
ACH payments can be canceled within three business days before the scheduled payment date by contacting your bank or institution that initiates the payroll. Your organization's name and payment amount are required.
A reversed ACH payment can only be made if these conditions apply:
The payment amount was incorrect.
The account number is wrong.
There was a duplicate transaction.
The reverse payment must be appealed within five business days.
ACH vs EFT vs Direct Deposit
ACH, ETF, and direct deposit are three types of electronic payments. Payments by direct deposit and ACH are both forms of electronic funds transfer (ETF). While EFT refers to all types of digital payments, ACH refers to a particular type of EFT. That’s the main difference.