What are ACH payments and how do they work?
An Automated Clearing House (ACH) payment is a payment that is sent using the ACH of electronic funds transfer system. Using direct deposit of payroll as an example, the employee provides their employer with their bank account name, account number, and the bank's routing number. The employer would input this information into the ACH system to generate an ACH electronic transfer and the payroll is direct deposited into the employee's bank account.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgages, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
Apply for Membership at CU SoCal Today!
What is the Automated Clearing House (ACH)?
The Automated Clearing House (ACH) system is a nationwide network through which depository institutions, such as credit unions and banks, send each other batches of electronic credit and debit transfers. The direct deposit of payroll, social security benefits, and tax refunds are typical examples of ACH transfers. According to the U.S. Bureau of Fiscal Service, financial institutions that participate in ACH follow operating rules developed by the Electronic Payments Association (Nacha), to transfer funds electronically. Nacha is not a government agency.
What is an ACH payment?
The Reserve Banks and Electronic Payments Network (EPN) of the United States are the two national ACH operators. As an ACH operator, the Reserve Banks receive files of ACH payments from originating depository financial institutions, edit and sort the payments, deliver the payments to receiving depository financial institutions, and settle the payments by crediting and debiting the depository financial institutions' settlement accounts.
While ACH financial transactions are often used to deposit money into someone's account, the ACH system can also be used to set up and make automatic withdrawals from your checking account to pay recurring monthly bills, such as mortgage payments, utility bills, and phone bills.
How does an ACH payment work?
ACH funds transfer generally follows a process involving the following parties:
Originator. To initiate an ACH money transfer, the request originates with an individual or business. For example, if you sign up for payroll direct deposit you would provide your employer with your bank account name, account number and bank routing number.
Originating Depository Financial Institution (ODFI). This is the financial institution or bank that originates the payment transfer. In the example above, your employer’s bank would be the originator.
Receiving Depository Financial Institution (RDFI). This is the financial institution or bank that will receive the funds.
Nacha. Nacha governs the ACH Network, the payment system that drives Direct Deposits and Direct Payments with the capability to reach all U.S. bank and credit union accounts.
ACH operator. The Reserve Banks and Electronic Payments Network (EPN) are the two national ACH operators.
Third-party payment processor. Third-party senders act as processing intermediaries between a financial institution and ACH payment recipient banks.
Receiver. This is the individual or business that will receive the ACH payment by deposit into their account.
Types of ACH payments
The two types of ACH financial transactions executed by the ACH system are credits and debits.
ACH credit. Examples of ACH payments that credit an account include employer direct deposit, IRS tax refunds, and Social Security benefits.
ACH debit. Examples of ACH debits include, utility bill payments, phone bills, mortgage payments, and credit card bill payments.
Advantages of ACH payments
There are several benefits of receiving ACH payments, such as direct deposit of payments owned to you.
Convenience. Once your credit union or bank receives the funds, the money is available in your account immediately. This process is typically faster than depositing a traditional check, which requires time for the funds to clear.
Cost-efficient. There is no cost to receive ACH payment into your account.
Secure. ACH payments are safer than receiving a paper check. Paper checks can get misplaced in your home, lost in the mail, or lost on your way to the bank.
Disadvantages of ACH payments
There are several disadvantages related to ACH financial transactions:
Transfer limits. Credit unions and banks may put daily frequency limits on how many ACH transactions an account holder can do in one day or in a statement cycle.
Amount limits. Credit unions and banks may put daily dollar limits on how much an account holder can send via ACH.
Cutoff times. Financial institutions may have cutoff times for submitting an ACH transfer request, and the transactions could be slowed by bank holidays.
International transfer restrictions. ACH payments may be used to transfer funds to individuals or businesses in the United States or abroad. However, some credit unions and banks may impose dollar amount restrictions on the amount that can be sent.
Fees. If you have set up automatic bill payments and do not have sufficient funds in your account, you may be charged a fee if the payment cannot be processed.
How do ACH payments compare to wire transfers?
Here are several considerations when comparing ACH payment (such as direct deposit) to wire transfers:
Availability.
ACH: Receiving direct deposit saves time, because you won't need to make a trip to the bank to deposit your check. Once funds have been deposited into your account the money is available to your account immediately.
Wire Transfer: Speed and ease make wire transfers ideal for one-time payments, if you don't mind paying the fees. Most credit unions and banks offer online and mobile banking services so you can do wire transfers online or from your mobile device.
Speed
ACH: Once you set up direct deposit, the time it takes to process a direct deposit payment depends on the time the funds reach your bank and your bank's processing policy. Generally, direct deposit is completed in one to three days, and before 9 a.m. on the day you're scheduled to be paid, unless the payday happens to fall on the weekend or on one of a federal holiday recognized by the United States Government.
Wire Transfer: Transferred money is usually available in the receiving account within hours of the request being made.
Cost
ACH: Free to set up at most credit unions and banks.
Wire Transfer: A fee is charged based on the amount being sent and whether the wire is domestic or international.
Limits
ACH: According to the Federal Reserve, the same day ACH dollar limit is $1 million per payment. The increased dollar limit applies to all eligible same day ACH payments, including credits and debits for both businesses and consumers.
Wire Transfer: There is no set limit on wire transfer amounts; however, credit unions, banks, and wire transfer service providers may set daily limits on the amount that can be transferred.
Reversals
ACH: Nacha, which governs the ACH Network, states that reversing payments may be initiated for the following reasons:
• A duplicate payment
• Payment sent to a receiving account that was different than the intended account
• Incorrect payment amount
• A debit payment processed earlier than intended, or a credit payment processed later than intended
Wire transfer: Generally, wire transfers cannot be reversed.
FAQs
How do I make an ACH transfer?
Transfers can often be set up online or by completing a form. The process varies depending on if you are sending the funds or the receiver of funds.
What information is needed for an ACH transfer?
Typically, you'll need to have already opened a checking or savings account, or other financial account into which the money will be transferred into or out of. You'll need to provide the name of the financial institution, your account number, and the credit union or bank's routing number.
Do ACH payments cost money?
Receiving money though an ACH payment, such as direct deposit of your payroll or tax refund, is free. Sending an ACH payment may come with a small fee or service charge.
Are ACH payments secure?
Yes, receiving pay though the ACH system is safer than receiving a paper check, which can get misplaced in your home, lost in the mail, or lost on your way to the bank.
Is an ACH payment the same as a direct deposit?
Direct deposit is a financial transaction that uses the ACH payment network system.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
Apply for Membership at CU SoCal Today!