What is an ACH Transfer and How the Process Work

How an ACH transfer work

Not too long ago, you must wait for your check to manually move through the mail system before you get paid or before you pay your own bills. But these days, your paycheck is most likely to be processed electronically through ACH transfer or a network known as the Automated Clearing House.

Annually, Trillions of dollars move through the ACH as more people and businesses turn to this network for a quick and reliable payment solution.

Its gradually replacing credit and debit card payments as the preferred payment method.

Businesses benefit from having alternative payment options since it offers their customers the flexibility of choosing how to pay. ACH transactions are some of the most cost-effective and convenient ways they can accept payments.

Clearly, ACH transfers offer several benefits to individuals and businesses alike. But what exactly are they and why would you want to use them for your business or personal transactions?

What is an ACH Transfer?

It is the movement of funds electronically from one bank account to another bank account.

It is referred to as an ACH transfer because it is passed through the Automated Clearing House.

Automated Clearing House is an electronic version of the old check clearing system that people and financial institutions have been using to accept and make payments since the banking system has been in existence.

As the modern world migrates online, financial institution and consumers increasingly use these payments methods. Currently, the ACH moves about $43 trillion annually through payments like government and social security benefits, payroll direct deposits, mortgage payments, bill payment, and online banking transactions.

Payments you regularly make through Paypal, Venmo, Squarecash, etc. all pass through the ACH. Therefore, you most likely have been using ACH without being aware.

If you want to do an ACH transfer through your bank, first check your banks’ rules around these transactions. Banks usually place a cap on the amount of money you can move in a day or in a month. You may also be penalized, and the transaction reversed if your account is not sufficiently funded for the transfer. You cannot, however, send money internationally through ACH.

To use ACH transfers and move funds between you and a vendor or business, you have to be set up on ACH debit or credit. Debit transfers are when money is moved from your account to a designated beneficiary’s account while a credit transfer let you receive payment into your account. Once both parties have set up the transfers securely, the funds can be moved between them.

How Does an ACH Transfer Work?

The process is very similar to the way that a direct paycheck deposit works. We can, therefore, use this example to illustrate how a payment moves through the ACH network.

Let’s look at the steps involved before you receive your paycheck from your employer into your bank account.

Step 1

The process starts with the originator who initiates the ACH transaction. This originator could be an individual or a company. In this example, the originator is your employer. They simply request to make a transfer of a sum of money from their bank account to yours.

Step 2

The ACH transfer request flows to the originator’s financial institution, or Originating Depository Financial Institution (ODFI). Which, in this case, is your employers’ bank. The ODFI collects all ACH requests and transmits them electronically to an ACH operator. The operator then sends the request to the Receiving Depository Financial Institution (RDFI) which is your bank. The RDFI will then credit the funds to the receiver’s account which is your account. As a receiver, you must have already set up direct deposit on your account by authorizing the transaction and supplying your bank with your account details.

Step 3

Once your bank receives the transfer instructions, it settles it into your account within a day or two since its a credit transaction. But debit transactions are settled in one business day only. The electronic transmittal of information happens instantly. It’s just the settlement of funds that take a few days to complete.

ACH Transfer Process

What Does an ACH Transfer Operator Do?

The operator is an intermediary that processes all transactions moving through the ACH. It accepts transfer requests from the ODFI and sorts and distributes them accordingly to the appropriate beneficiary institutions. There are just two ACH operators in the US – the FedACH, and the EPN. The FedACH or Federal Reserve Banks Automated Clearing House is the collection of all the Federal Reserve Banks. They handle most of the ACH transactions between commercial banks in the U.S. while the EPN or Electronic Payments Network is a private-sector ACH operator.

Who Uses ACH Transfers?

You may not be very familiar with ACH transfers, but it’s very likely you have been using them to process electronic checks, pay bills online or pay a vendor online.

I for one have been using ACH since I started trading stocks. I used it when I transfer money from my bank to my brokerage account and vice versa. A few other times I’ve used it was when I rolled over my IRA account from my previous employer to my stockbroker.

Transferring funds through the ACH is fast becoming the preferred mode of payment. According to a2016 AP study, 83 percent of companies and businesses have used them. This is mostly due to the security and ease of usage offered by ACH. It also helps them to save money since the costs of processing physical checks are eliminated.

They are used by businesses to process and pay invoices, by vendors to receive payments and by online companies to receive and send funds.

How Long Does the Process Take?

ACH transactions are not instant.  That is, you do not get the money credited to your account immediately when someone initiates a transfer to you.

I’ve used it many times in the past and it usually takes about 24 hours to show up on my bank account, which is perfectly fine with me.

This is because ODFIs don’t send transfer request as soon as they get them. Instead, an ODFI collects several requests and forwards them electronically in a batch to the operator. The operator then collects and processing all the transfer request for a given day before distributing them to the appropriate RDFI.

As a result, the process usually takes a couple of business days to pass through the system. But plans are underway to make the transfers move in real-time or even, instantly. Rapid progress is being made in that direction. In 2017, the NACHA established new regulations that make it possible for ACH transactions to be processed the same day. This same-day processing may attract additional fees but businesses have a lot to benefit from on same-day transfers.

Any error in your bank account details or the sender’s information will lead to a reversal of the transaction which will further increase the processing time. The RDFI must notify the Federal Reserve if any payment is returned. While the ODFI is obligated to check with the Federal Reserve for returned payments if any.

Who Manages the ACH?

The ACH is an electronic fund transfer network run by NACHA. NACHA, formerly known as the National Automated Clearing House Association is a not-for-profit organization.

They are, however, not directly involved in ACH transactions. But they manage and administer the ACH network which includes all the participating institutions. All the institutions in the ACH pay yearly fees and pay per transaction. These fees are used to run the ACHs administration.

Why Use ACH Payments?

Electronic payments have the edge over other payments made with the time-tested physical checks. Compared to paying with checks, ACH payments are cheaper, faster, more secure and more reliable.  The costs associated with printing and processing checks are eliminated.

You don’t have to wait for checks to crawl from the payer through the postal system to you – and possibly be lost or damaged in transit. Also, frauds are relatively unheard of with ACH transfers.

With time, ACH transfers have been enhanced to make them easier for businesses and consumers. More people are settling their bills online through several bills paying platforms. All you need do is to link your online account for the particular platform to your checking account. And you can easily set-up account payments. However, it’s in your best interest to watch your expenses so you can track your finances rigorously.

When an ACH transfer fails, maybe because of insufficient or unavailable funds, the beneficiary is alerted instantly. This is not the case with other methods of fund transfer. Recipients are not sure if the funds they have received are genuinely settled and uncontested. As a result, businesses may have issues managing their cash flow, or even worse, may have funds it has already received and spent reversed out of their account because of a dispute.

They are generally cheaper than checks and paying with your credit card. For individuals, most of the transactions you carry out are free. Although, some financial institutions may apply a small fee of about 3 dollars per transaction. It’s even cheaper for businesses – usually between 25 and 50 cents.

Recently, more people are increasingly using them for person-to-person transactions. Payment services providers like Paypal, Square Cash and Venmo, enables you to make payment to others seamlessly without using checks, credit or debit card or physical cash


In summary, ACH transfers refer to electronic payments. And as the world becomes increasingly digitalized, ACH transactions have become the standard for moving funds. Therefore, you won’t have to go through the stress of writing a check to settle your rent and sending it through the mail. You can send some money to your stranded brother, and he’ll get it almost instantly. It has made sending and receiving payment faster, easier and safer.

Although they are very secure and inexpensive,  they can be slower than other funds transfer alternatives. As a businessman or individual, you should consider the best options – ACH transfers, checks, cash and wire transfers that best suits your needs at the time.

Founder, writer, thinker and digital marketing addict. He is passionate about self-development, personal finance, and the stock market. He believes that financial knowledge combined with self-discipline is the key to achieving financial freedom. An avid golfer and a 15 handicapper.

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