What is an ACH payment method?

An ACH payment method is a form of electronic bank transaction payment.

Also referred to as "direct payments", ACH payments facilitate the transfer of funds between bank accounts without the need for paper checks, credit card networks, wire transfers, or cash.

Read on to learn more about the ACH payment method,  how it works, and what the benefits are. 

What is an ACH payment method?

Let’s start with the basics: What does ACH stand for?

ACH is an acronym that stands for Automated Clearing House, which is a financial network that facilitates money transfers and electronic payments. 

ACH payments are governed by the National Automated Clearing House Association (NACHA), a not-for-profit organization that sets rules and standards for ACH transactions. 

These guidelines ensure the safety, efficiency, and reliability of the ACH network, and help to protect consumers and financial institutions from fraudulent activities.

There are two main types of ACH transactions: Direct deposit and direct payment.

• Direct deposit is a transaction initiated by the payer to transfer funds directly to a receiving account. For instance, when an employer uses ACH to pay wages to an employee.

• Direct payment, on the other hand, is a transaction initiated by the recipient to request funds from the payer. A common example of direct payment is when a company uses ACH to automatically collect payments for recurring bills from its customers.

What are the benefits of using an ACH payment method?

There are several benefits of using ACH payments:

Convenience 

ACH payments offer a convenient way to make electronic payments and transfers without the need for paper checks or cash.

Because ACH payments are processed electronically, they can be scheduled in advance and processed automatically without requiring any manual intervention. 

This can save time, as well as reduce the risk of errors associated with manual processing.

Cost-effectiveness

Compared to other payment methods (like wire transfers or credit card transactions), ACH payments are generally less expensive.

The merchant account provider sets the prices to process ACH payments. 

Certain ACH processors levy a fixed fee, usually between $0.25 to $0.75 per transaction, while others apply a fixed percentage fee ranging from 0.5 percent to one percent per transaction. 

Providers may also impose an extra monthly fee which can impact ACH pricing.

Security

ACH payments are highly secure and are protected by various layers of encryption and authentication, helping to protect sensitive financial information and reducing the risk of fraud.

Speed

ACH payments are usually processed quickly, often within one to two business days, which is much faster than traditional paper-based payment methods. 

Automation

ACH payments can be set up to occur automatically—making it easy to schedule recurring payments, such as monthly bills.

Environmentally friendly

By eliminating the need for paper checks and physically going to a bank, ACH payments help reduce paper waste and the carbon footprint associated with travel. 

Additionally, electronic systems consume less energy and require fewer resources than physical systems, such as printing and mailing. 

ACH payment processing time: How long does it take?

The processing time for ACH payments can vary depending on the specific circumstances of the transaction. In general, ACH payments are typically processed within one to two business days of being initiated.

However, there are some additional factors to consider. Because ACH payments are typically processed in batches, the timing of the transaction can affect when it’s processed. 

Moreover, the processing time can also depend on the banks or financial institutions involved in the transaction and their internal processing procedures.

How does an ACH transaction work?

An ACH transaction works by electronically transferring funds from one bank account to another through the Automated Clearing House (ACH) network. 

What follows are the standard steps involved in an ACH transaction.

Authorization

The person or business initiating the ACH transaction must first obtain authorization from the account holder whose funds are being transferred.

Authorization is typically approved via a signed agreement or an online authorization.

Payment information

Once authorization is obtained, the payment information is gathered, including the transfer amount, the recipient’s bank account number, and the routing number.

Initiation

The ACH transaction is initiated by the person or business making the payment—either through online banking or via a third-party ACH processor.

Transmission

The payment information is transmitted through the ACH network to the receiving bank.

Settlement

The receiving bank processes the ACH transaction and the funds are transferred from the sender’s bank account to the recipient’s bank account.

Confirmation

Both the sender and recipient receive confirmation of the ACH transaction, either through online banking, email, or another method.

Provide convenient payment options with the ACH payment method

Offering the ACH payment method encourages faster and easier collection of payments. 

PandaDoc’s payment collection software features enable you to quickly automate the entire payment process—from invoicing and payment collection, through to automated payment reminder emails.  

You can choose to charge a specific percentage or collect an initial payment during the document signing stage, effortlessly speeding up contracts and transactions.

And, thanks to the ACH payment method, funds will clear quickly without you having to cash a check.

Learn more about how your business can benefit from PandaDoc by scheduling a 15-minute demo today!