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ACH Transfers: How They Work, What Are They, Should I Use Them?

ACH Transfers: How They Work, What Are They, Should I Use Them?

If you have sent or received money in the past, there is a good chance that an Automated Clearing House was involved. If you receive a transfer that isn’t instant or where you have to wait overnight, then an Automated Clearing House (ACH) was probably involved. When an ACH is involved, the process will always take at least one night to complete. If the payment is sent on a non-business day such as a Saturday, Sunday or bank holiday, then the payment will take longer. Direct deposits all work because an ACH is involved. Here is what you need to know about transfers involving an Automated Clearing House.

An Electronic Network For Sending Money

Think of ACH transfers as a form of payment. Other forms include wire transfers, checks, cash, and electronic funds transfers. When you pay somebody with an ACH transfer, you are using an electronic payment network to move money from one location to another.

The electronic network is governed by the National Automated Clearing House Association. They are like the network’s police. They monitor the system to be sure that all the rules are followed. The rules and regulations are set by the Federal Reserve and NACHA.

When you consider the names involved, you can understand why many people view ACH transfers as one of the most secure payment systems in the USA.

The network has ACH payment/transfer operators. These people use the electronic network directly. Around 60% of operators are Federal banks, and the other 40% are big companies and banks. If you do not run a very large company, then you will probably not be allowed access to the ACH electronic network. You will have to conduct your ACH payments through a bank.

Who Uses ACH Transfers and ACH Payments?

Man pointing at you because you use ACH

Anybody can set them up and use ACH transfers. It is mostly banks that are network operators, but anybody can use ACH transfers by arranging a transfer through an operator.

The operators are the ones who put the transfers through on the ACH electronic network, but you do not have to be an operator to use ACH payments or send ACH transfers.

For example, Jeannine pays her water bill every month. It costs her $66 per month, and she pays it manually on the third of every month. On the third of every month, she hops onto her computer, logs into her bank account on the Internet, and sends the money to her water company via an electronic funds transfer.

Jeannine then receives a verified email from her water company (a real one, not a scammer) saying that they will give her a 10% discount if she signs up for recurring ACH payments. She fills out the online form, e-signs it and submits it. Now, on the third of every month, $66 is paid to her water company from her account automatically via an ACH debit transfer.

Let’s Define A Few Terms Before We Move On

As you read on, you will notice how ACH payments seem to sound very similar to other types of payment. So, here is a quick definition list to help you understand what each means.

EFT – Electronic Funds Transfer

It is an umbrella term for the movement of money from one account to another.

ACH – Automated Clearing House Transfer

It is a US American network that moves money from one account to another with direct debits or direct credits.

Direct Debit

An agreement allowing another entity to remove varying or set amounts from your account on a recurring basis.

Direct Credit

An agreement instructing your bank to move a certain amount of money from your account to another account on a recurring basis.

Direct Deposit Payments

They are the same as direct credits. An agreement instructing your bank to pay some of your money into another account.

Wire Transfers

Some people think that wire transfers and EFTs are the same thing. However, wire transfers are often instant, they may be sent overseas, and are very difficult to reverse.

Moving Money With The Use Of An ACH

When an ACH is used, you are not directly responsible for its use. Banks, credit unions, financial companies and large businesses are the ones who have contact with the Automated Clearing House network.

Think of an ACH as a tool that banks, credit unions, financial companies can use to send money. They use their ACH network instead of direct wire transfers because it is often cheaper to use an ACH.

The few occasions where it is not cheaper is if the money is going overseas, or if there is a currency conversion of some type. Unless there are special circumstances, ACH transfers do not include a currency conversion and do not go overseas.

Some senders will not use ACH if they need the money sent quickly because ACH will take at least overnight. It can take less than 24 hours, but you will have to wait at least one night for an ACH transfer to complete.

What Is An ACH Payment?

An ACH payment refers to any form of money movement through an Automated Clearing House. In the US, there is a very large ACH network that banks, building societies, businesses, financial institutions and money companies use to move money cheaply. The fact the payment method is so popular is one of the reasons it is cheap.

An Automated Clearing House payment covers many different types of payment. For example, you can wire money to a friend with your bank and have your friend receive the money instantly, or you may create a person-to-person money transfer with a money company and it will be completed by an Automated Clearing House so that your friend receives it tomorrow.

Many bill payments happen with the use of an ACH payment. For example, if you follow the instructions on your bill and give your bank details to the company. They may take out the money and transfer it by submitting it to an ACH.

Almost all types of direct deposit from employers will use some sort of ACH payment system because it is cheaper than wiring the money to each employee. Almost all types of government benefit are paid via an Automated Clearing house.

Credit Transactions And Debit Transactions

There are two ways that an ACH transfer works. A credit transaction allows you to push money into the accounts of other people. The money sits in your account, and certain amounts are sent from your account to the account of different people at one time. Direct credits are your instructions to your bank to move money. They are often used by employers to pay their employees. They are also known as direct deposits.

A debit transaction is where money is pulled from your bank account. Typically, this sort of system is used for recurring bill payments. Utility companies prefer that you pay with direct transactions because they allow the company to remove varying amounts of money instead of one single amount. Direct transactions are also known as direct debit payments.

Do you need to know the difference between a debit and credit transfer? Not really, just make sure that if you are sending ACH transfers that you have the money to pay for them. If the company asks that you have money in a certain account, then make sure it is in there. If the company is drawing money from your bank account, then make sure the money is your bank before the payment date.

How Long Do ACH Transfers Take?

The shortest amount of time it takes is overnight. The Automated Clearing House receives all of its instructions at the end of the business day. It then processes the transfers overnight and usually the money is in the recipient’s accounts by the morning. If the money is being paid into your bank, then you may be able to see the payment pending in your bank the day before it arrives.

The delivery of an ACH transfer can take several business days. There are many variables to take into account. ACH network operators process transfers three times a day in big batches, with the last one being at the end of the business day.

In my experience, if a transfer is recurring, then the transfer takes just one night. However, it may take several business days, which is why you should use a wire transfer company if you want money transferred quickly.

How Long Do Credits And Debits Take?

As I said earlier, I don’t want to bog you down with information that doesn’t matter to you. Just have your money ready in the correct account before the transfer is processed.

With a credit transfer, the money is often sent within one or two business days. Debit transfers usually appear overnight the next business day. The National Automated Clearing House Association is a trade group, and they oversee the ACH network. Their rules insist that debit transfers are actioned to appear the next working day, and that credit transfers are actioned within two business days.

Why May It Take Several Days To Receive Money?

Money being handed over

If the National Automated Clearing House Association has rules saying that transfers must happen within one or two days, then why may it take several days?

There are many reasons, but the most common are due to the days of the week. If a transfer request is placed on Friday evening, the money will not appear in the recipient’s bank until Monday or Tuesday morning.

The other reason is that the sender’s bank is tardy about actioning the debit. Another reason is that the assigned credit account doesn’t have enough funds to make the transfer.

Another reason is that the recipient’s bank is slow to clear the money. The ACH operator may have actioned the transfer and the money may have been sent. But, the recipient’s bank account may not have picked it up or cleared it yet. They may have added it to the recipient’s bank balance, but have not turned it into “Available Funds” yet.

The recipient’s bank may also slow things down because of technical issues, because of slow administration, or because of extra security checks.

How Much Do ACH Transfers Cost?

If you are a business and you wish to pay suppliers all at one time, or you wish to pay employees all at one time, then you should consider ACH. If you are making one-off payments or payments to a single person/company/entity, then try a third-party online wallet transfer, a bank transfer, or a wire transfer.

In most cases, ACH payments and transfers are free. They may cost a small amount of money if you want your transfers to occur quickly. Some banks may also charge a small processing fee, but you can shop around for a god deal.

If you are using a payment company to pay your employees, then you may be able to negotiate a better deal if they are using the ACH network to pay your employees (because the ACH payments they send are free).

Are You Being Charged For Being Paid?

Though it is not directly related to ACH transfers, I feel I should add this point because I just had my PA tackle and take down a payment company for charging my staff for being paid by ACH transfers.

I spend 90% of my working week writing articles such as this one, but I also manage a stocks and bonds portfolio, and I am a part owner of a few businesses. I am a silent partner in a childcare agency. The company sends qualified early years practitioners to work in nurseries. They work as temps whenever nurseries need cover for ill staff members or staff on maternity leave.

We used a payment company that call themselves RACS. They handled all staff payments for us, and we pay them a fee for their service. They handle time sheets and payments so that I or the other two owners do not have to deal with paying the staff.

Contacted By A Boyfriend

I was contacted by the boyfriend of one of our childcare workers. He tracked me down via Google+. He said that the RACS company was purposefully making his girlfriend’s e-payslip very confusing because they were skimming cash from the childcare workers.

I asked the other two co-owners and managers about this, and they told me that the RACS company also has to factor in holiday pay, sick pay, overtime, different pay rates and standard pay rates, which is why the pay slips look so confusing. I re-contacted the boyfriend and told him what I was told. He sent me a screenshot of his girlfriend’s pay slip…and it was ridiculous.

Confusing Pay Slip

So, I set my PA on the task of fixing the problem. She is only 19yrs old with no qualifications, but she fixes every problem I have from getting the correct paperwork to my accountant, to updating my social media profiles. When I give her a task, she is like a bulldog and won’t let it go until it is fixed.

How Did The Story End?

My PA proved that the “Filing fee” the company was charging our staff was a breach of our contract. She also proved that the even with holiday pay, sick pay, and all that jazz included, that the girls were being paid less than they were promised.

She informed the other two childcare company co-owners (and managers). A manager contacted the payment company, and she was fobbed off with excuses.

My PA contacted a lawyer with my consent and discovered that we can sue the payment company for breach of contract. The lawyer contacted the payment group, who quickly repaid all the money they skimmed from the childcare workers for the last year (which is how long we have been using the payment company). The lawyer was also able to get us out of the remainder of our contract because the payment company had breached it.

We now have one of the childcare managers pay our staff by wire transfers, which costs us roughly the same as what it cost us in fees to the payment company.

I informed the ladies that work for our childcare temp agency that my 19yr old PA was the reason they each had a lump sum delivered to them. They took my PA out on the town, and I don’t know what they did to her, but she had two days off work afterwards.

The Moral Of The Story

Automated Clearing Houses are more like a tool, but instead of you using that tool yourself, you can pay another company to put the payments through.

Many companies use payment companies because they also deal with taking in time sheets and calculating how much each staff member is due. They also do the staff tax thing too.

The moral of the story is that an ACH transfer is like a tool, just like how paying with a check is like using a tool. A payment company uses these tools to pay employees. A payment company is not an ACH in the same way that a payment company is not a check.

If you use a payment company, which is what we did, then keep a very close eye on them. If their pay slips or documents are anything less than transparent, then ask them to clear things up or dump them. Also, don’t be afraid of hiring people who don’t have qualifications, they cost less, and sometimes they are worth their weight in gold.

Dog puppy sat on pile of cash

Conclusion – A Few More Things You Should Know

ACH transfers may be reversed, whereas wire transfers may not. You cannot send ACH payments overseas, but you may send them overseas with wire transfers. An ACH transfer will take at least one night and may take several days, whereas many other forms of EFT only take a few minutes. Most ACH transfers are free, and you do not have to be an ACH operator to use them. You may set them up with your bank quiet easily. Some entities are operators and you may set up your ACH to pay them, such as when you pay your taxes. Otherwise, if you are paying people or companies, then you have to send instructions to your bank to allow a credit or debit ACH payments.

About The Author

Ash The Great

After a varied career in different industries from the hospitality industry to the financial consultancy industry, Ash now spends his days working as a professional writer.


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