What is an ACH Payment? A Beginner’s Guide

You’ve likely seen the term ACH payment on a bank statement or other financial document, but what is an ACH payment? A time not long ago, most payments both by consumers and businesses were done via cash and checks. It didn’t matter if you were a person paying your electric bill or a multi-million dollar corporation paying suppliers and employees.

This was difficult for people and businesses to keep track of payments, and they wanted something simpler and more efficient. We created this guide on ACH payment to help you understand what they are and how they impact your financial decisions.

What is an ACH Payment?

The term ACH stands for an automated clearing house, but that doesn’t say much about it. An ACH payment is an electronic payment. It uses a computer network to transfer funds from one account to another.

Traditionally, a payment required a physical item such as a check or cash. The bank takes the check or cash and deposits it or removes funds from the account. ACH does not have a physical counterpart and is done completely via electronic transfer.

This makes tracking payments easier since there is no check or cash to be lost in the process. It is one of several new payment channel options available today. There are even ACH payments for savings accounts.

Types of ACH Payments

There are two primary types of ACH payments: debit and credit. An ACH credit moves funds from the checking or savings account into another account, with the sender controlling how much goes out.

This is incredibly secure because there is no risk of losing a physical object such as a check sent by mail. Companies commonly use ACH credits to pay their employees. It requires the sender to have an account and also know the account of the recipient.

With an ACH debit, the funds are pulled from one account at a specific time and then sent to the recipient. For example, paying bills online. Your request to pay your electric bill directly from your checking account at a certain time each month, and it sends the money from your account to the power company’s account.

ACH and Other Electronic Funds Transfers

An ACH is a subset of electronic funds transfers, and this is how ACH payments work.

You first authorize the payment, and the processor, the bank, submits it. The bank sends the entry in batches to an ACH operator, and the operator sorts the batches. Once it’s sorted, the ACH operators send the funds to the receiving institution, and it validates the funds.

People often confuse ACH payments with wire transfers. They’re both electronic funds transfers that are safe for businesses and people. ACH payments take a little longer to process, about 2-3 days, but wire transfers generally transfer within a day.

The major difference is ACH payments are free, but wire transfers cost a minimum of $15.

ACH Payments Are Common

People and businesses use and accept ACH payments regularly. It’s one of the most used electronic funds transfer methods. We hope you now understand what is an ACH payment and can decide if it’s right for you.

If you want more information on ACH payments, please explore our site.