How ACH Transactions Works, And Why You Should Care

Are you wondering what ACH transactions are? ACH transactions are electronic payments through the automated clearing house (ACH) network.

When you incorporate ACH payments in your business, you benefit from increased flexibility and profits.

There are two types of ACH payments: direct deposits and direct payments.

Direct deposits deliver funds into a bank account as credit and are used for tax and payroll refunds and employee expense reimbursement. A direct warranty covers all deposit payments from businesses to a consumer.

When you undertake direct deposit through ACH, you enjoy fewer fees, increased convenience, no paper checks, and faster tax refunds.

On the other hand, direct payments take funds from accounts either via credit or debit and are used for paying bills. ACH payments make the payment process easier for customers as opposed to writing a check, which makes it easy to convince them to make a purchase. When you have a subscription business and need to collect recurring payments, ACH payments are automatic. This means your customers don’t need to worry about receiving and paying a bill, as the money is automatically deducted and paid to the bank.

How an ACH transaction happens.

Whether you are undertaking a deposit or a payment, they all go through the same process that begins with the money in one account and ends with the money arriving in another account.

Step 1: ACH transaction starts

The ACH transaction begins with the originator (payer) requesting the transaction. The originator is the business in most cases, but the customer can also sometimes be the originator. The transaction can be a deposit or payment.

Step 2: Originating financial institution submits an entry

Once the transaction initiates, the bank or payment processor (such as https://paymentcloudinc.com/accept-payments/ach/) handling the first phase of the ACH transaction offers an entry.

The payment processor or bank is the originating depository financial institution (ODFI).

Step 3: ODFI sends ACH entry batch

The financial institution sends ACH entries in batches, usually 3 times during regular business hours. The ODFI sends the batches to the ACH operator on a predetermined schedule through the ACH network.

Step 4: ACH operator sorts the entries

Once the operator receives the batch, they sort the entries into payments and deposits. The payments are then sorted into ACH credit and debit payments. The purpose of doing this is to ensure that the money is transferred in the right direction.

Step 5: ACH operator sends entries

After the sorting, the ACH operator sends the entries to the destined bank or financial institution, usually known as the receiving depository financial institution (RDFI).

Step 6: RDFI verifies that there are enough funds

If the ACH transaction involves moving funds out of the payment processor or bank’s account, the RDFI checks the account to verify sufficient funds to cover the transaction.

Step 7: RFDI debits or credits the originating institution

If there is enough money in the account, the receiving institution credits or debits the receiving bank account, depending on the nature of the transaction.