You may have heard the term “ACH” while paying a recurring bill, setting up direct deposit through your employer, or even using payment services like Privacy’s virtual cards—but what is an ACH payment?

An ACH payment is a form of EFT, or electronic funds transfer. In simple terms, ACH payments allow consumers, businesses, and governments to move money from one financial account to another efficiently.

The ACH payment ecosystem involves multiple key players who move and settle the transactions.

What is ACH?

From a high level, the Automated Clearing House, or ACH, is the network used by banks and credit unions in the US to transfer funds between accounts electronically. This bank-to-bank transfer system may be used in place of wire transfers, card networks, paper checks, or cash. Financial apps like Privacy, PayPal, Zelle, and Venmo all use ACH.

What is the ACH network?

The ACH network is managed by Nacha, or the National Automated Clearing House Association. Nacha performs the network’s administration, development, and governance, ensuring banks remain compliant with all required regulations.

Even with the growth of new and alternative payment processes, the number of ACH transactions steadily increases each year. In 2021, more than $29 billion of ACH payments were made, marking a 9% increase in volume from the year prior. Further supporting the growth of ACH, a recent study conducted by the Federal Reserve indicated that ACH was the only one of the three core payment systems (other than checks and card payments) to materially increase in 2020.

ACH Payment Landscape

To dive further into the ACH payments landscape and help our customers understand one of the primary funding types we offer at Privacy, we cover the following in this guide:

• Key participants in ACH payment processing
• What are ACH payments?
• Types of ACH payments
• How to make an ACH payment
• How long do ACH payments take?
• Does Privacy.com use ACH?

ACH Payment Process: History and Key Participants

The need for a centralized electronic funds transfer system like ACH was recognized in the late 1960s. Bankers became concerned with the growing number of paper checks circulating between US banks, and worried that the banks would outgrow the processes and systems used to clear those checks. By using a centralized clearinghouse to supplement paper checks, the country could reduce overall labor and transportation costs associated with physically moving paper. Digitizing the process became the most viable solution.

In 1972, the first ACH association in California assembled to spearhead and handle electronic payments. As the demand for a more efficient payment system increased, additional regional ACH networks were established. By 1974, a national organization — Nacha — was formed to oversee the ACH network we use today.

What are Nacha’s rules for operating?

Nacha is responsible for setting and maintaining a set of operating rules that govern how banks and credit unions can utilize the ACH network. These rules determine when money can be moved, how much can be transferred, what guidelines each participant must adhere to, and more. Nacha periodically adjusts these rules to optimize the network's performance and broaden the clearinghouse’s capabilities.

For example, in 2016, Nacha introduced a same day ACH rule for ACH credit payments, establishing two new clearing windows, or “batch” periods, for incoming transactions. Then, in 2017, they expanded the same offering to ACH debit payments. As the name suggests, this shift allowed same-day ACH payments to be made. Every year since then, Nacha has released new enhancements to same day ACH options, expanding its updates into formal operating hours and transaction limits. For example, in 2022, Nacha increased the same day dollar limit per transaction from $100,000 to $1 million.

While Nacha handles ACH network’s administrative load and enforces regulations, it does not physically move money. The two ACH Operators, the Federal Reserve and the Electronic Payments Network (EPN) act as the central clearing entities, moving funds by processing and routing transactions between banks. By definition:

• The Federal Reserve is the central bank of the United States, and it handles ACH transactions on behalf of the federal government.
• The Electronic Payment Network (EPN) is run by The Clearing House, which is owned and operated by 24 of the largest US banks.

Additional ACH participants

To recap, Nacha oversees the ACH network’s administrative and regulatory functions while Operators (discussed below) physically move funds. Here are some essential parties in the ACH network to know and their responsibilities:

• Originator: The consumer, business, or other actor that initiates the payment to the Receiver.
• Originating Depository Financial Institution (ODFI): The financial institution that takes payment instruction from the Originator and communicates it with the Operator to process.
• Operator: The Federal Reserve and/or the EPN; this party first receives the Originator’s payment from the Originating Depository Financial Institution (ODFI), then processes the payment and delivers it to the Receiving Depository Financial Institution (RDFI), and finally, settles the payment.
• Receiving Depository Financial Institution (RDFI): The financial institution that receives payment from the ODFI through the Operator, and then initiates the payment to the Receiver’s account.
• Receiver: The consumer, business, or other agency authorized by the Originator to forward a payment to them.

What are ACH payments?

An ACH payment is an electronic funds transfer (EFT) between financial institutions using the Automated Clearing House Network. You might be required to make ACH transfers when paying your monthly internet bill or accept ACH deposits from your employer.

Recurring utility services like internet, phone, or electricity companies commonly collect payment via the ACH system. Rather than requesting your monthly payment manually, merchants may request a recurring online ACH payment option. Implementing automatic transfers via the ACH network promotes a more frictionless billing process between the merchant and customer, and can lead to fewer late fees and missed invoices. Additionally, it’s less expensive for merchants to process ACH payments than credit card payments.

Many employers also utilize ACH for payroll processing through a procedure called direct deposit because of how quick and secure the ACH network is compared to issuing paychecks. The ACH direct deposit system has replaced checks as the preferred payroll program; according to Nacha, 94% of Americans are enrolled with direct deposit through their employers.

Types of ACH payments

There are multiple ways to categorize the ACH payment process, including by direct deposit, which is an ACH credit, and direct payment, which is usually an ACH debit. How the ACH transaction type is specified depends on who transfers the funds and for what reason.

Direct Deposit and Direct Payment

There are two types of ACH payments: direct deposit and direct payment. Direct deposit is primarily used for payments from businesses or the federal government to a consumer. In practice, payroll processing, the issuing of a tax refund, and the issuing of a government benefit are all examples of direct deposit.

Since a direct deposit involves the movement of funds to a consumer account, it’s considered an ACH credit. When your employer or the US government transfers money to your account or credits it, they are initiating a direct deposit via ACH credit.

On the other hand, direct payment refers to any transfer initiated by a consumer. Since the consumer’s account is being debited for a transaction, this type of payment is considered an ACH debit. Direct payment is typically used when a consumer is paying a bill, using a peer-to-peer app to send money to a friend, donating money to a non-profit, or transferring funds between one’s own accounts.

Essentially, ACH debit and ACH credit illustrate the same process from two different angles. ACH debit transactions refer to the “pull” or the Originator’s request to draw funds from the Receiver’s account. ACH credit transactions refer to the “push” or request to move money from the Originator’s account to the Receiver’s account.

ACH Payment vs. Wire Transfer

The differences between ACH payments and wire transfers come down to costs, processing times, and geographic locations of the sending and receiving parties.

While there is typically no cost to consumers associated with ACH transfers, wires can cost up to $30 for domestic transfers and up to $50 for international transfers. However, wires can be processed within hours, while ACH payments are subject to a settlement period. Additionally, wire transfers can be made between international banks, while ACH is a US-based network.

ACH payments and wire transfers are also operationally unique. ACH payment processing relies on a clearinghouse (Operator) to move funds from one account to another, while a wire transfer is made directly between banks.

Both ACH and wire transfers are types of electronic funds transfer and each are beneficial for different purposes. For example, if you need to send money to a relative overseas today and are okay with paying a fee, a wire transfer might be the most efficient method.

How to make an ACH payment

Most banks offer ACH transfer functionality through their online banking portals, but you can also visit a branch to initiate an ACH payment. Similarly, ACH payments can be made through third-party applications, like PayPal, Zelle, or Stripe.

An ACH routing number is required to identify the origin and/or destination of the money. You can quickly identify your ACH routing number by looking for the nine-digit number at the lower left corner of your check, ahead of your account number. You can also locate this number through your bank’s online portal. While your routing number is unique to your bank, meaning other account holders at your financial institution share the same routing number, your account number is unique to you only. Both routing and account numbers are necessary pieces of data for the ACH payment process.

If you are initiating an ACH debit payment, you will need to provide your routing and account number to the party you’re transferring the funds to. It’s important to double-check the number because providing incorrect information could cause the payment to fail or result in other issues. Relatedly, any party making an ACH credit payment will need the account and routing number of the recipient.

When making an online ACH payment through a third-party app, you may need to provide your account and routing number. However, many institutions have bypassed the need for this information by leveraging data network services like Plaid to connect to your checking account. A token provided by Plaid permits the application to transfer money via ACH on your behalf.

ACH transfers are subject to limits determined by the respective bank. Limits can be set per day, transaction, or month. For example, Chase typically limits ACH transfers to $25,000 per day while Citibank usually imposes a $10,000 daily limit.

How long do ACH payments take?

In general, ACH payment processing can take up to five business days, although most transactions settle sooner, and timing can vary from bank to bank. Since ACH transactions are processed in batches and are subject to settlement periods, ACH payments cannot be made instantly. The settlement period is the time required to clear the funds, when the sender is credited and the party on the receiving end is debited. In other words, settlement is when the funds are actually moved from one account to another.

It’s important to note that ACH credits, like direct deposit, aren’t subject to this settlement period like ACH debits are. So, if your employer initiates your direct deposit on a Friday, funds will typically be available in your account by 9 AM that day, thanks to same day ACH.

Another factor in ACH payment processing time is returns. For any reason, if the Originator cannot proceed with the agreed-upon payment during this process, the ACH transfer will be sent back to the Receiver with a return code to identify the reason for this error. For example, the return code R01 indicates the Originator did not have sufficient funds to complete the transaction. Sometimes, banks will penalize their customers with a fee for “overdrafting” their account.

So, if you don’t have enough money to cover a payment, if you provided an incorrect account number, if your account is closed, or if the transfer cannot be completed due to some other error, your bank will return the transaction to the receiving party.

Slow ACH payment processing times have historically been one drawback of this system. However, ACH is still quicker than paper checks and is regularly updated by Nacha to make it more efficient. Plus, with the introduction of same day ACH, most transfers can be processed in less than a day.

Does Privacy.com use ACH?

ACH is an integral component of our product at Privacy. In this guide, we aimed to answer the question, what is an ACH payment? We would also like to outline how Privacy uses ACH to facilitate our service.

Like many other payment services, Privacy leverages the ACH network to enable customers to make purchases on their virtual cards without interruption. A Privacy user first connects their checking account via the ACH network. Then, each time a transaction on a Privacy Virtual Card is processed, we securely move funds from the user’s checking account to Privacy’s. After the ACH payment is processed, our users see the transaction post to their checking accounts later that day or the next business day.

Privacy Virtual Cards protect your payments. Users can generate unique 16-digit virtual card numbers used to mask your true credit or debit card information when shopping online. Because they also lock to the first merchant they’re used at, Privacy Virtual Cards can’t be manipulated by fraudsters anywhere else. Privacy users can also close, pause, or unpause their virtual cards at any time, making it easy to control when a merchant can or can’t charge the card. Want to shop securely online? Start by generating Privacy Virtual Cards today!