Most Americans receive an ACH credit two or three times a month without knowing they’ve done so. The ACH system is a great unsung part of America’s financial plumbing, and even frequent commercial ACH users can fall behind the pace of new solutions being built atop the underlying infrastructure.
Despite not being a household name, ACH credit payments are quietly ubiquitous. Often referred to by informal names matching popular uses cases (e.g., “direct deposit” and “peer-to-peer payment”), the ACH network powers tens of millions of credit transactions every day.
What are ACH credit payments?
An Automated Clearing House (ACH) credit payment occurs whenever someone instructs the ACH network to “push” money from their account to someone else’s.
This could be an employer (often via some processing partner) pushing payroll to their employees, or a government agency pushing cash payments to eligible citizens. It could also be a consumer digitally paying a bill, buying something online, or initiating a peer-to-peer transfer to a friend through a service like Venmo or CashApp.
ACH credits essentially move money from one bank account to another in an easy and inexpensive way—from as fast as a few hours to as long as a few business days—all with just a name, bank account number, routing number, and basic transaction details.
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How do ACH credits work?
For the person sending funds, an ACH credit transaction is the digital version of a paper check. Instead of filling out a piece of paper for the payee to bring to their bank, the payer instructs the ACH network to move money between their accounts directly.
Here is how ACH credits work mechanically:
The payer or their processing partner gives an Originating Depository Financial Institution (ODFI) the payee’s account information, the amount to be sent, a categorization code, and a target settlement date.
The ODFI or an approved processing partner passes on these requests to the ACH network in periodic batches.
Five times each business day, the ACH network breaks down these incoming bundles into individual messages (transactions) and rebundles them into new batches for immediate delivery to each Receiving Depository Financial Institution (RDFI) that holds payee accounts.
Each RDFI then imports their incoming batches into their system, executes all the transactions they can based on the processing window requested, and sends back any error codes with their next regular batch.
If no error/return code is received by the requested settlement time, the ODFI and RDFI settle the transaction using their balances at the Federal Reserve.
Funds for settled transactions are then released by the RDFI to the payee.
For more on timelines, see our in-depth guide on how an ACH transfer works.
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What’s an ACH credit refund?
While all ACH credit transfers are meant to be definitive, certain mistakes require that a refund be issued. The National Automated Clearing House Association (Nacha), the main governing body over the ACH system, allows for credit transaction reversals in four situations:
1. The payment was for the wrong amount
2. The payment was deposited in the wrong account
3. There was a duplicate deposit
4. An incorrect settlement date was listed
In most cases, the Originating Depository Financial Institution (ODFI) has up to five business days from the requested settlement date to deliver a refund request. Though there’s not always a guarantee that the funds in question will still be there. Credit transactions typically settle by 8:30am ET on the second business day after the request is processed, meaning that the money may have already been made available for the recipient to spend or withdraw before the refund request. While the RDFI will work with the recipient to restore the funds in those cases, it may take some time for them to do so, and they won’t always be successful.
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What’s the difference between ACH credit and ACH debit?
In an ACH credit transaction, the originator requests to transfer money from their account to the recipient’s account. This is often referred to as a “push”. In an ACH debit transaction, the originator is requesting to withdraw money from the recipient’s account to their own, which is often called a “pull”. The two transaction types are the inverse of each other.
Examples of consumers initiating ACH credit transactions include making bill payments through an online banking portal or sending peer-to-peer payments through an app. Though in most other cases for both debits and credits, either a company or a government agency acts as the originator, making it a credit or debit relative to their perspective. If they’re pushing money towards individuals via the ACH network, it’s an ACH credit. If they’re pulling money for payment via the ACH network, it’s an ACH debit.
What’s a typical fee for an ACH credit transaction?
ACH credit fees from the network itself are typically measured in fractions of a penny. Additional fees charged by processing partners can vary from tens of cents to as high as $1.50.
Some factors that can impact costs:
How many transactions are being processed per month
How large those transactions are
How likely they are to be returned
Whether the transactions are marked for same-day processing
Which account validation method is being used
While the smallest businesses may see direct costs of over a dollar per transaction, these costs quickly come down with scale.
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What does the future look like for ACH credit?
Though ACH credit transactions already total over $40 trillion per year—having increased by 10.8% from 2019 to 2020 alone—they’re likely to grow further in both number and value. Businesses will continue to switch over to ACH from paper checks, and innovations like instant account validation and identity verification will continue to make ACH more attractive.
This same innovation is also spurring the development of both complementary and competing products. The banking consortium that operates the ACH network for private banks (The Clearing House) has developed a product called Real Time Payments (RTP), and the Federal Reserve has announced their plans to launch their own real-time product called FedNow in 2023. The future will be rich with choice, as a variety of products—some built atop the ACH network and some running parallel to it—serve an ever-widening variety of needs.