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How an ACH Transfer Works, for Small Businesses

ACH transfer is one of the main ways banks transfer money electronically

If you ask a random person whether they’ve heard of an ACH transfer, they’ll probably answer no. But if you ask if they’ve ever used paycheck direct deposit or paid a bill online from their bank account, they’ll probably say yes. The fact is, these are all ACH transactions going by other names. ACH transfers are so prevalent in today’s banking that, in 2021, it was used 29.1 billion times to transfer $72.6 trillion dollars.

But most people don’t know what an ACH transfer is because it works in the background, silently but reliably moving money around the US. So, why do you, a small business owner, need to understand ACH transactions? It’ll still be there and still work even if you don’t understand it, right?

Technically, you don’t need to understand it. Your business will survive whether or not you understand how banks perform an ACH pull or ACH push. But if you do understand how ACH works, it might save you some operating costs if you’re running certain types of businesses. ACH tends to cost less than credit or debit card payments and a lot less than wire transfers. Reading this article can help you understand under which circumstances it’s better to use ACH transfers and under which circumstances it’s not.

So, we think it’ll be well worth the few minutes of your time to read through this article.

Let’s start with the basics.

What is an ACH Transfer?

An ACH transfer is a type of money transfer used by ordinary consumers, businesses, government agencies, and, most importantly, banks. ACH stands for Automated Clearing House.

An ACH transaction goes through a network of computers. The computers send each other messages using a specific, pre-agreed way. In computer networking lingo, this is called a communications protocol. Most people are familiar with protocols like 5G, WiFi, and Bluetooth. In addition to being a communications protocol, ACH rules also govern how and when money is exchanged among financial institutions.

An organization called Nacha takes care of making and enforcing the rules related to ACH transactions. They also market to and educate businesses and consumers on ACH. For their efforts, they take a small fee for each ACH transfer.

Who Uses ACH Transfers?

Whether they know it or not, pretty much everyone uses ACH transfers. As an individual, you’ve probably at least heard of paycheck direct deposit. You may have paid your electric bill, your mortgage, or your monthly credit card statement from your bank account. You may also have transferred money to someone at another bank through Zelle or taken money out of your Venmo account and put it into your bank account. On all of these, ACH works in the background to send the money.

As a business person, you may have received money from your credit card sales. These are ACH transfers. When you’re paying your monthly or quarterly taxes, you’re usually using ACH. When you transfer your PayPal sales into your bank account, you’re using ACH. If you use a sales platform like Etsy or a service platform like Upwork to provide goods or services, when you take your money out, you’re using ACH.

And, as for banks in the US, ACH is one of the main forms of money transfer between them. (The other is wire transfer.) Even when you, the consumer or the business owner, call the money transfer by another name like paying by paper check, when the banks actually move the money, it’s typically as an ACH transaction.

So, whether you know it or not, everyone uses ACH transfers.

ACH Transfer Limitations

Here are the big limitations in using ACH transfers:

  • Mostly only for US domestic transfers
  • Can transfer only 4 times a day
  • For moving $1 million or less

Although lots of money transfers are done through ACH, ACH does have some limitations. For instance, ACH transfers are mostly used for US domestic transfers. There is something called an international ACH, but it is used less often.

There are also daily timing and amount limitations to an ACH transaction. As of this writing, same-day ACH transfers happen three times a day, with the windows closing at 10:30 a.m., 2:45 p.m., and 4:45 p.m. Eastern time. For next day ACH transfers, the window closes at 2:15 a.m. Eastern each day. If you miss one of these windows, you’d have to wait until the next window to transfer the money. Here’s a chart from Nacha with the details.

Throughout the years, the daily ACH transfer limit has gradually increased. As of March 18, 2022, the daily limit is up to $1 million per day. This puts ACH transfer amounts into the territory of traditional wire transfer amounts. Of course, this is Nacha’s daily limit. Your bank might set lower daily limits.

Two Types of ACH Transactions: Push and Pull

There are two types of ACH transactions. Sometimes they’re called ACH Credit/ACH Push and ACH Debit/ACH Pull.

ACH Credit or ACH Push

When you, the bank account holder, initiate a payment—i.e. sets how much money to send, where to send the money, and when to send the money—this is called an ACH Push payment. Usually, this is done for one-time payments on a specific date and of a specific amount. Paycheck direct deposits tend to be ACH Push payments.

Here’s a chart for the ACH push process.

ACH Debit or ACH Pull

When you, the bank account holder, gives an entity permission to take money out of your account either once or on a recurring basis, this is an ACH Pull payment. Usually, you’ll have to go to the entity’s website to give formal written permission, to set the date of the transfer, and to give your bank account information. The exact amount can vary and can be decided by the entity pulling the money. This flexibility is convenient when you’re paying, for example, a water bill which usually changes every month.

ACH Pull payments require written permission from the bank account holder to set up. The bank account holder can cancel the pull payment at any time. “Automatic payments” from bank accounts like utility payments, insurance payments, and mortgage payments tend to be ACH Pull payments.

Here’s a chart for the ACH pull process.

The ACH Transaction Workflow

To understand the ACH transaction workflow, let’s first look at the basic mechanics of how banks transfer money to each other. ACH is just a specific type of money transfer. So, once you understand generically how banks transfer money to each other, you can understand ACH transfers a lot faster.

How Banks Transfer Money to Each Other

Let’s say you want to transfer $100 to your cousin. If you both bank at the same bank, then it’s easy. The bank takes $100 out of your account (i.e. debits the account) and puts $100 in your cousin’s account (i.e. credits the account). As long as you have enough money in your account, there are no issues.

Let’s say that you want to send $100 to your cousin’s account but Coz banks at another bank. Maybe you live in NYC and Coz lives in LA and both your banks only have branches in their respective cities. There are two ways to send this money.

Correspondent Banking

The first way to send this money is for the two banks to have bank accounts with each other.

Let’s say, a while ago, Coz’s bank opened a bank account at your bank and deposited plenty of money into the account.

The steps for you to send Coz $100 work very similarly like when you both banked at the same bank, except there’s an extra step.

When you tell your bank to transfer $100 to Coz, your bank simply takes $100 from your account and puts it in Coz’s bank’s bank account. This is just transferring money between two different accounts at the same bank. Now you’re $100 poorer and, your Coz’s bank is $100 richer.

But that $100 doesn’t belong to your Coz’s bank. It belongs to Coz. So, your Coz’s bank debits its own account and credits Coz’s account in LA. Now Coz has an extra $100 from you.

And the money is now transferred. Note no money has physically moved. Coz’s bank’s account at your bank has $100 more than before and Coz’s bank in LA has $100 less than before. But, the overall asset of Coz’s bank remains the same. The “moving” of the money is all done on paper. The technical word for this sort of transfer is correspondent banking.

But what if Coz’s bank doesn’t have an account at your bank? After all, there are lots of banks in the world, and one bank can’t open an account with all of them.

Central Bank

Enter the concept of central bank. Lots and lots of banks can set up an account with the central bank. (Sometimes, this is even required by law.)

So, if you want to give Coz $100, your bank tells the central bank to debit $100 from your bank’s account. The central bank then credits $100 to Coz’s bank’s account at the central bank. Then, Coz’s bank puts $100 into Coz’s account. The net effect is you’re $100 poorer and Coz is $100 richer, but no money physically moved anywhere. Neither your bank nor Coz’s bank got any extra cash.

In the real world, the process is much more complicated. For example, once you tell Coz that you sent them $100 and Coz’s bank acknowledges that it’s about to receive $100 (called clearing), Coz might want to take that $100 out and use it right away. In reality, it might take a few hours to a few days before the central bank can move the money into Coz’s bank’s account (called settlement).

Coz might still be able to take the $100 and use it right away. But that $100 is actually fronted by Coz’s bank on the expectation that your bank will be sending the money soon.

Here’s a link to a longer article with a fascinating explanation of the process, using the proper jargons.

ACH-Specific Rules

Banks today use both the correspondent banking method and the central bank method to transfer money to each other. ACH transfers, however, only use the central bank method.

In the US, there are two central banks an ACH payment can go through. The first is the Federal Reserve. The second is a privately held computer network called the Electronics Payments Network (EPN). The EPN is owned by an entity called The Clearing House, which, in turn is owned by some very big banks around the world.

Steps in the ACH Transfer

Here’s the ACH transfer process:

  1. For a pull request (e.g. automatic payments for electric bill), the person making the payment usually goes on the website of the entity that receives the payment to set up various permissions. These include permissions for the entity to pull money from a specific bank account on a specific day of the month and maybe a specific amount to be pulled.
  2. For a push request, the person making the payment sets up the payment either on the bank’s website (i.e. bill payment page) or through a payment processor. The payment instructions include sending what amount, on what date, and to which person or entity.
  3. On the day of the transfer, for a pull request, the entity to receive the money sends a transfer request. For a push transfer, the request has already been set up by the person making the payment.
  4. The bank that’s sending the money makes sure there’s enough money in the account. The bank that’s receiving money is notified and gets ready to receive the money. This is the clearing process.
  5. The bank that’s sending the money sends a message to the central bank to debit its account and credit the account of the bank that’s to receive the money. This is the settlement of the transfer.
  6. With ACH, the banks do something called netting before transfer. So, if Bank A is supposed to send Bank B $100 but Bank B is supposed to send Bank A $75, then only $25 is sent from Bank A to Bank B at the central bank.
  7. Once the payment is settled, the central bank sends a message to the bank that’s to receive the money, and the bank credits the recipient’s bank account.

Can You Reverse or Return an ACH Transfer?

ACH transfers can be reversed or returned.

ACH Returns

An ACH return is like a bounced check. There are several reasons for a return. And by “return,” we mean the bank that sent you the money wants the money back.

Some of the most popular reasons for returns include:

  • Insufficient funds
  • Account closed
  • Invalid account number
  • Unauthorized debit
  • Authorization revoked
  • Payment stopped

If any of this happens, you’d usually know about it in 2 business days. However, with some consumer accounts and for certain things like unauthorized debit and authorization revoked, the consumer has 60 days to ask for the transaction to be returned. Here’s a detailed article about ACH returns.

As a merchant, you don’t want too many returns. If your overall return percentage is 15% or more, Nacha can fine you. There are some types of returns that must be kept at an even lower percentage.

ACH Reversals

An ACH transaction can also be reversed. The reversal rules are different from return rules.

A reversal must be initiated within 5 banking days of the ACH transfer. There are only a few specific reasons under which reversals will be allowed:

  • Duplicate entry
  • Incorrect receiver
  • Incorrect dollar amount
  • Certain payments made related to termination/separation of employment
  • For pull requests, payment made at a date earlier than intended; for push requests, payment made at a date later than requested

How a Small Business Can Use ACH Transfers

OK, so maybe we convinced you that ACH transactions are a good thing, so you want to know how to set one up, how much it costs per transaction, and what you can use it for.

If you want your customers to pay you through ACH transfers, you can typically set up ACH processing with most payment processors. But, if you just want to pay your vendors with ACH, you can go to the Bill Pay section of your bank and set up payment there.

As to price, if you pay bills through your bank, it’s often free. If you want to set up something for your customers to pay you, it depends on the payment processor. Some offer fees as low as $0.20 per transaction.

But you have to remember that ACH transfers are not for every type of payment or every type of business. If your customers send you regular payments like a subscription or a monthly rental payment, then ACH might be for you. But if you want your money right away, then credit or debit card payments might work better.

We will go into more detail on ACH pricing when we talk about payment processors and different payment processing pricing models. For this article, our goal is only to explain how ACH payments work. If you have any questions, please feel free to ask on any of our social media platforms.

Interested in starting and running a small business? Here’s the beginning of our step-by-step guide: What to do right after getting that great business idea.

Questions? Comments?