In 2022, the ACH network moved more than $72 trillion in the United States, an increase of more than 5% over the previous year. From social security benefits to paychecks, ACH transfers have become one of the most reliable ways to move money. Why? It's partially due to the safety and security of ACH transfers. Plus, new innovations in the field, like same-day ACH, are making ACH more accessible and convenient.
Understanding what ACH is and how it works is crucial to understanding what payment options you should use, what your customers want—or even if your own money is safe. This guide provides an in-depth look at ACH transfers including what they are, how they work, and how much an ACH transfer might cost.
What is an ACH transfer?
An ACH transfer is an electronic transfer of funds from one bank account to another over the ACH (Automated Clearing House) network. This includes everything from person-to-person transfers and bill payments to direct deposits.
Common uses of ACH bank transfers include:
Payroll
Paying bills online
Unemployment payments
Social security benefits
Tax refunds or payments
There are two kinds of ACH money transfers:
1. ACH debits are requests for the ACH network to "pull" money from an account that the requestor doesn't control, such as an auto-bill payment.
2. ACH credits are requests to “push” money from the requestor’s account. This is the type of ACH transfer used for payroll or government benefit programs (often referred to as “direct deposits”).
There are three main entities involved in an ACH transfer—the ACH Operator (either FedACH or the Electronic Payments Network), the Originating Depository Financial Institution (ODFI), and the Receiving Depository Financial Institution (RDFI).
Above those entities, the Automated Clearing House acts as the central authority that facilitates ACH transfers. This nationwide network processes and clears ACH transfers between participating financial institutions. The ACH works with both sides of the transaction to ensure the secure transfer of funds and maintains the integrity of the system by enforcing regulations governing ACH transfers.
The ODFI is the financial institution that places the ACH request, while the RDFI is the financial institution accepting the request.
ACH transfers were created to overcome the hassles of the paper check, offering an easy and inexpensive way to move money with just a few pieces of information (name, bank account number, and bank routing number). Today, roughly 94% of American workers receive their pay via the ACH network.
How does an ACH transfer work?
ACH transfers work by using the ACH network to facilitate the transfer of money from one bank account to another. ACH transfers can be thought of as digital mail sent out in bulk. Each transfer request is packaged as a message within a batch of outgoing mail by the bank making the request (the ODFI).
The ACH operators then re-bundle each message into a batch destined for the bank receiving the request (the RDFI). This happens every business day at set intervals.
Several factors determine the mechanics of the ACH process:
Whether it’s a debit or credit request
Which processing partner the originator uses
Whether the originator has opted for same-day service
Whether the initial request yields one of 69 possible return codes
A typical ACH transfer works like this:
Monday, 4:00 PM ET - Company X submits its payroll info to a processing partner.
Tuesday, 10:00 PM ET - The processor works in conjunction with X’s bank (the ODFI) to submit a file to the ACH network. This file includes each of X’s individual payroll ACH credit requests.
Tuesday, 10:30 PM ET - The ACH network begins to break down all the files received since the last interval, repackaging them by the recipient. Any file received after this cut-off won’t get processed until the next interval.
Tuesday, 12:00 PM ET - The ACH network delivers this latest round of files as ACH credit requests to every bank where X’s employees have an account (the RDFIs).
Tuesday, 1:00 PM ET - If same-day processing was requested on any transfers, the RDFI has an hour to process those requests and settle with the ODFI
Tuesday, 1:30 PM local RDFI time - Same-day transferred funds must be processed and settled by this time (meaning the employees get paid) for transactions posted by 7:30 AM PT. Other same-day windows have other requirements (11:45 AM PT = 5:00 pm settlement and 1:45 PM PT = end-of-day settlement).
Thursday, 8:30 AM ET - All remaining (non-same-day) transfers must be processed and settled by this time, so long as no error or reversal message has been received.
Thursday, 9:00 AM local RDFI time - Transferred funds must be made available to recipients by this time (meaning the remaining employees get paid) for transfers within the first three windows. However, a transaction originated on Tuesday can settle on Wednesday, and usually will.
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How long do ACH transfers take?
ACH transfer times take anywhere from a few hours to three business days, depending on the time of day the payment is initiated and whether same-day processing has been requested. ACH debits, such as bill pay or withdrawals, generally take 1-3 days to process, while ACH credits, such as direct deposits or vendor payments, generally take just one day to process.
ACH transfer times take anywhere from a few hours to three business days, depending on the time of day the payment is initiated and whether same-day processing has been requested. ACH debits, such as bill pay or withdrawals, generally take 1-3 days to process, while ACH credits, such as direct deposits or vendor payments, generally take just one day to process.
Same-day ACH, which typically requires an additional fee, processes the same business day. For regular ACH payments, ODFIs generally settle at 8:30 AM the following business day for debit requests, and 8:30 AM the second business day for credits.
What can slow down ACH bank transfers?
Banks that receive payments via ACH may anticipate the risk of an ACH return. Because of that, they may not provide funds availability to the receiver until the transaction successfully settles (which may be a few days later than when the bank first receives notice of the payment). For smaller amounts, they may advance the funds earlier as a low-risk customer convenience.
Errors can also slow the ACH process down. A return for insufficient funds is the most common error for debits. Credits, on the other hand, are more susceptible to things like incorrect account numbers, erroneous transfer amounts, closed accounts, and names that don’t match.
To reduce errors, fraud, and delays for payments authorized over the internet, Nacha (the organization that oversees the ACH network), put a new rule into effect in 2021. This rule requires originators of WEB transactions to verify the recipient's account is open, valid, and able to receive ACH transfers—before initiating an ACH debit that was authorized by a consumer online.
Further complicating things, the system works on a “no news is good news” basis, meaning no transaction is ever explicitly confirmed—and thus 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 to dispute unauthorized or incorrect ACH debit transactions.
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How to do an ACH bank transfer
The process for performing an ACH bank transfer can vary based on who initiates the transfer, whether it's a debit or credit, and which platforms are used to ensure security. For this example, we'll assume a consumer is paying a bill online and wants to use ACH.
Verify Amount: The consumer will verify the amount of the payment and select to pay from their bank account. They may or may not even realize they are paying via ACH.
Enter information: The consumer will add details to complete the ACH transfer, such as their bank routing number, account number, and their name.
Verification of Funds: The merchant will verify that the account is open and can also choose to check to see if funds are available. This is done automatically with Plaid Transfer, which uses a single API to verify the account, review risk, and move the money.
Batch and Send to ACH: If the transaction is approved, the information about the payment will be batched and sent to the ACH network, along with other ACH transfer requests.
Transfer Request to Consumer's Bank: ACH network will send the request to the consumer's bank to initiate the transfer.
Payment Posted: The payment will process in 1-3 days, depending on the type of ACH transfer, risk assessments, and whether an error or return code is returned.
Most of the ACH process happens behind the scenes. For most consumers, ACH transfers only require entering a few pieces of information into a website or app. In fact, ease of use is one reason ACH is such a popular payment option.
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.
While wire transfers are faster on average, exceptions do exist. Domestic wires can take as long as a few hours, or overnight if a cutoff is missed. ACH transfers can be as fast as approximately 2.5 hours if the file is sent right before a same-day transfer window shuts. Overall, it’s important to remember that the wire network processes transactions in real time, while the ACH network processes transactions at set intervals.
For more in-depth information, please see our guide, "ACH vs wire transfer".
What’s a typical ACH transfer fee?
The base price for an ACH transaction is the network fee, which is fractions of a penny. However, most parties use processing partners who typically add a flat fee per transaction (anywhere from $0.20 to $1.50). While higher-value payments may also see a small percentage-based surcharge (0.5% to 1.5%), those fees usually max out at $5.
ACH has gained payment market share over credit cards and checks in recent years. This is largely due to the difference in cost. A $5,000 debit transaction made by ACH, for example, would likely cost the originator a maximum of $5. A typical credit card, on the other hand, would charge 2% to 3%—or between $100 and $150. In almost all cases, ACH is significantly cheaper than card-based solutions.
Some institutions may have limits in place for ACH transfers from certain types of accounts. Others may charge fees for more than six transfers or withdrawals per month.
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Which banks allow ACH transfers?
All banks in the United States 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.
ACH transfer usage continues to grow
Enhancements to ACH are narrowing the gap between ACH and real-time products. One example is Nacha’s expansion of Same-Day ACH. In March 2022, Nacha announced that it increased its transaction limit from $100,000 all the way to $1 million. This increase makes ACH an appealing alternative to wire transfers for larger transactions.
Co-evolution is happening, as well. The Clearing House, a collection of banks that serves as one of the two operators of the ACH network, released its Real Time Payments (RTP) product in 2017, which resembles an instant wire transfer. Meanwhile, the Federal Reserve—the other operator of the ACH network—recently launched FedNow, its own equivalent product. This means ACH will be one strong option among several types of electronic payment methods.