7. ACH Payment: What is the ACH transfer| Automatic payment solution| Massive development in payment technology

What is ACH payment

ACH stands for Automatic Payment House, an American financial network used for electronic payments and money transfers. Also known as “direct payment”, ACH payment is a method of transferring money from one bank account to another without using paper checks, credit card networks, wire transfers, or cash.

There are two types of ACH payments. Money is “withdrawn” from your account in an ACH debit transaction. ACH credit transactions allow you to “deposit” money in various banks (or for your own or others). Here are two examples that will help you understand ACH payment properly.

Types of ACH Payment

There are mainly two types of ACH payments.

Direct deposit transaction

Many companies offer direct deposit payroll. They use ACH credit transactions to push money into their employees’ bank accounts over a specified pay period. (Employees must provide a zero check or a checking account and routing number to set it).

Recurring Bill Payment

Consumers who pay a business at certain intervals can sign up for recurring payments like Insurance, Mobile recharge, Bill payments, etc. This gives the business the ability to initiate an ACH debit transaction on every billing cycle, which withdraws the outstanding balance directly from the customer’s account.

What is the difference between Wire transfer and ACH payment

ACH payment and wire transfer are both ways of transferring money between two accounts, there are many differences between them. Unlike ACH payments, wire transfers are processed in real-time, processed in batches three times a day. As a result, wire transfer funds are guaranteed to arrive on the same day, while ACH funds may take several days to process. Wire transfers are also more costly to compare ACH payments. While some banks considered a charge for wire transfers, in some cases, they could charge customers up to $ 60.

Wire transfer and ACH payments both are types of electronic funds transfer

Wire TransferACH Payment
Wire transfer speed faster than ACH TransferIt takes about 3 to 5 days to complete the ACH payment.
Wire transfer more expensive compare to ACH transferACH transfer is less expensive
A wire transfer can be sent internationallyACH transaction is around the only country network
Wire transfer generally less secureACH transaction is more secure
Wire transfer is less use in B2B or B2C ACH transaction is ideal for a business that process payment in bulk

Difference between ACH trasnfer and EFT (Electronic fund transfer)

ACH payment is the type of electronic funds transfer, EFT is used to transfer money from one bank account to another bank account without doing paper work.

How ACH transaction Works

Apart from the automated clearing house network (which connects all the banks in the country), the ACH includes three other players:

1. Originating Depository Financial Institution (ODFI)

The financial institution from which the transaction is initiate during the transaction of money is known as ODFI. That is, the bank account from which money withdraws.

2. Receiving Depository Financial Institution (RDFI)

The financial institutions that receive ACH payment request while making a transaction are known as RDFI.

3. National Automated Clearing House Association (NACHA)

The National Automated Clearing House Association (NACHA) is a non-governmental governmental entity responsible for the supervision and regulation of the ACH network.

So let’s know how ach payment works

Pay your automatic monthly phone bill as an example. When you sign up for an autoplay with your phone company, you provide your checking account information (routing and account number) and sign the Recurring Payment Authority.

Then, when your service provider hits your billing cycle, your phone company’s bank (ODFI) sends a request to your bank (RDFI) to transfer the outstanding funds. The two banks then communicate to ensure that your bank account has sufficient funds to process the transaction.

If you have sufficient funds in your account, the transaction is processed and the money is sent to your phone company’s bank account.

What are the typical ACH payment processing times?

According to the guidelines set by NACHA, financial institutions can select ACH credits processed in a day or one to two days. ACH debit transactions, on the other hand, should be processed by the next business day.

After receiving the transfer, other banks can also hold the money transferred for the holding period. In all, you are looking at an average of three to five days of processing time for ACH payments.

Why are some ACH payments rejected?

If ACH payment is declined, your bank (OFDI) will provide a reject code that explains what happened. These declined codes are important to provide your customers with correct information about why they were not paid. Here are the four most common reject codes:

R01 Insufficient funds.

This means that the customer does not have enough money in their bank account to cover the amount of debit entry. When you receive this code, you are probably requested by the customer to deposit more money into their account or to resume the transaction after providing a different payment method.

R02 Bank account closed.

This happens when a customer already had an active account that they closed. It is possible that they have forgotten to notify you of the change. They will have to provide you with a new bank account to process the transaction.

R03 No bank account/unable to locate account.

This code is triggered when some combination of given data (account number and name on the account) does not match the bank’s records or no bank account located with the account number was entered. The customer has to double-check and provide his banking details.

R29 reject.

If a bank does not allow withdrawal of money from a particular bank account, you will get this denial code. In this case, the customer has to provide his bank with his ACH originator ID to enable ACH withdrawal by your business. Then you need to run the transaction again.

Penalty fee with ACH payment?

A declined ACH payment can cost your business a penalty. So if you receive a reject code, it is important to fix the problem quickly to avoid imposing additional charges on each recurring billing cycle. To avoid the hassle of rejecting ACH, it may be worth accepting only ACH payments from trusted customers.

Advantage of ACH payment processing

  1. Lower processing costs
  2. More convenient for you or no paper work
  3. More convenient for your customers
  4. Fewer declines due to expiration

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