How an ACH transfer works: a complex process explained

A helpful guide to understanding how ACH transfers work, how long they take, and how much they should cost.

October 07, 2021

Tom Sullivan Pic
Tom Sullivan

Tom is a writer at Plaid. He's passionate about the freedom that the union between financial services and technology can create.

In 2020, $62 trillion changed hands in the US via the ACH network, spread over a total of 27 billion electronic transactions. This was nearly 11% more than in 2019, led by a 42% increase in peer-to-peer transfers sent through ACH using apps like Venmo and Cash App. When money needs to move between bank accounts, ACH transfers are the dominant way this happens.   

What is an ACH transfer?

An ACH transfer is any movement of money over the Automated Clearing House (ACH) network, which enables bank transfers between hundreds of millions of personal, government, and commercial accounts across ~11,000 financial institutions in the US.

There are two kinds of ACH transfers: 

1. ACH Debits — Requests for the ACH network to “pull” money from an account that the requestor (“originator”) doesn’t control, say for a pre-authorized bill payment.

2. ACH Credits — Requests to “push” money on the originator’s behalf, often for payroll or distributing government benefits (often referred to as “direct deposits”).

The network is ubiquitous: roughly 94% of American workers receive their pay via ACH transfers. Initially created to replace the hassles of the paper check, ACH transfers offer individuals, businesses, and governments an easy and inexpensive way to transact using only a few basic pieces of data (name, bank account number, and bank routing number).

See file name above

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How does an ACH transfer work?

ACH transfers are a type of bulk digital mail. Each transfer request is packaged as a message within a larger bundle (“batch”) of outgoing mail by the bank making the request, also called the originating depository financial institution (ODFI). The ACH network then re-bundles these messages by recipient and passes them on to the bank receiving the request (the receiving depository financial institution, or RDFI) at five regular intervals each business day. As of March 2021, those intervals are 6am, 12pm, 4pm, 5:30pm, and 10pm ET.

How this works mechanically depends on several factors:

  • Whether it’s a debit or credit request

  • Which processing partner the originator uses 

  • Whether the originator has paid for same-day service

  • Whether the initial request returns one of 69 possible error codes

A typical ACH transfer works like this:

  • 4:00pm ET Monday - ABC Company submits their payroll info to a processing partner.

  • 10:00am ET Tuesday - The processor works in conjunction with ABC’s bank (the ODFI) to submit a file to the ACH network with all ABC’s individual payroll ACH credit requests.

  • 10:30am ET Tuesday - The ACH network begins to break down all files received since the last window, repackaging them by recipients. All new files received past this cutoff won’t get processed until the next window.

  • 12:00pm ET Tuesday - The ACH network delivers this latest round of files as ACH credit requests to every bank where ABC’s employees have an account (the RDFIs).

  • 1:00pm ET Tuesday - For any transactions where same-day processing was requested, the RDFI has an hour to process the request and settle with the ODFI (where they’ll make a joint request to the Federal Reserve to credit/debit their accounts based on a tally of all their net transactions that window).

  • 1:30pm local RDFI time Tuesday - This is the cutoff by which transferred same-day funds have to be made available to the end recipient (i.e., when the employees get their money).

  • 8:30am ET Thursday - This is the maximum cutoff by which all remaining (i.e., non-same-day) transactions must process and settle if no error or reversal message has been received.

  • 9:00am local RDFI time Thursday - Final funds need to be made available to recipients by this time.

How long does an ACH transfer take?

ACH transfers typically process and settle in anywhere from hours to a few business days. Their speed depends on:

  • The time of day they’re initiated

  • Whether the originator paid for same-day service

  • Whether and/or when a given transaction returns an error code

Same-day processing is available for about $0.05 in network fees for all transactions received within the three middle settlement windows each business day. Otherwise ODFIs generally default to 8:30am the following business day for debit requests, and 8:30am the second business day for credits.

While RDFIs may have the transaction data in-hand to process non-same-day credits faster, they may wait if they perceive any risk of the transaction being returned—since they haven’t actually received any money yet from the ODFI. For smaller amounts, they may advance the funds earlier as a low-risk customer convenience.

Errors can also slow things down. For debits, returns for insufficient funds are the most common error. While this is less common for credit transactions, they’re still susceptible to problems like wrong account numbers, wrong amounts, and mismatching names. 

Historically, errors led to an extra day or two delay while the banks determined if the transaction could be salvaged. In order to reduce errors, fraud, and delays, Nacha, the organization that oversees the ACH network, recently put a new rule into effect. The rule requires that before initiating an online ACH debit, originators must verify that the account is open, valid, and can receive ACH transfers. Plaid is a Nacha preferred partner and Plaid Instant Auth is a user-friendly, fast, and easy solution for this new rule. 

Another complication is that the system works on a “no news is good news” basis, where no transaction is ever explicitly confirmed (meaning that it can later be reversed). If a transaction fails, the RDFI typically has up to 48 hours to report it. In some situations, a debit transaction that’s already been processed and settled may not stay that way if it’s reported by the RDFI as a failed transaction later on. Consumers also have up to 60 days from the issuance of any statement containing an ACH debit transaction to dispute it.

What’s the difference between an ACH transfer and a wire transfer?

Wire transfers are direct, irrevocable, and expensive. ACH transfers are batched, recallable, and inexpensive. This makes each better for different use cases.

As for speed, while it’s true that wire transfers are certainly faster on average, there are exceptions. Domestic wires can take as long as a few hours, or overnight if a cutoff is missed. ACH transfers can be as fast as ~2.5 hours if the file is sent right before a same-day transfer window shuts. 

For more in-depth information, see our guide on ACH vs wire transfers.

Nacha’s 2021 account validation rule: Is your business compliant?

What’s a typical ACH transfer fee?

The base price for an ACH transaction is the network fee, which is fractions of a penny. Though most parties use processing partners, who typically add flat fees ranging from $.20 to $1.50 per transaction. Higher-value payments may also see a small percentage-based surcharge (0.5% to 1.5%), but those fees typically max out at $5.

$51.2 trillion was transferred by ACH in 2018 (the latest year in Fed data for credit payments), compared to roughly $7 trillion over all US card networks, largely because of the cost differential. A $5,000 debit transaction made by ACH would cost the originator a maximum of perhaps $5, whereas a typical credit card would charge 2% - 3% ($100 - $150). In almost all cases, ACH is significantly cheaper than card-based solutions.

Which banks allow ACH transfers?

All banks in the US can use ACH, as all that’s needed to receive an ACH transfer is a valid bank account and routing number. Additionally, payment processors like Square, PayPal, and Stripe also use ACH. Because every bank in the US can use ACH, Plaid can connect accounts from 11,000+ financial institutions for ACH transfers.

What further enhancements will make ACH better?

Asked this question, Plaid’s product manager Brian Wey said that he expects “the gap between ACH and real-time products to continue to narrow as innovation continues.” While solutions like payment cards once uniquely made real-time authorization possible, Brian pointed out that “technological advances have allowed ACH to now replicate most of those advantages while retaining a far more attractive cost base.”

An example of this is Nacha’s commitment to expanding Same-Day ACH, which they recently announced would increase its transaction limit from $100,000 all the way up to $1 million. This increase, set to take place in 2022, will make it an appealing alternative to wire transfers for larger transactions.

There’ll be some co-evolution here too. The Clearing House, a collection of banks who jointly operate half of the ACH network, released their Real Time Payments (RTP) product in 2017, which resembles an instant wire transfer. And the Federal Reserve, which operates the other half of the ACH network, has their own equivalent product launching in 2023. While ACH is less expensive and will continue to grow as it improves, it will be one strong option among several. 

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