The Automated Clearing House or ACH is a network that banks use to electronically process payments. ACH payments processing involves tens of billions of transactions. These transactions totaled a monetary value of $36.9 trillion in 2012. The National Automated Clearing House Association and the Federal Reserve both oversee this extremely important money exchange system that handles large volumes of debit and credit transactions in batches.
ACH Payments Processing
ACH payments processing is conducted by both the Federal Reserve Banks and the Electronic Payments Network (EPN). The Federal Reserve handles about 60 percent of commercial interbank ACH transactions, and the EPN handles the remaining 40 percent.
The Federal Reserve Banks and the EPN work together when transactions involve payment processing that is not for their customers. Customers generally have no knowledge of which entity handles their funds; they just see that the money has cleared when they check their accounts.
Advantages and Disadvantages for Businesses
ACH payment processing is generally preferred by businesses over other payment methods that do not involve cash. These payments are received and processed quickly, and the funds are deposited directly to the merchant’s account.
ACH payment mistakes are typically limited and minor. The most common mistakes occur when a customer writes the wrong amount for a check or a check is sent in late. If a bad payment is received, businesses can automate attempts to collect.
One disadvantage with ACH is that businesses have to pay for set-up costs and a fee per transaction. Generally, it is worth the cost as it offsets the expense of collection and bookkeeping. Users should also keep in mind that deposited money is not always available for use immediately. However, processing is much faster than with checks. Another disadvantage is that bounced/returned checks usually shows up in 24-48 hours where a consumer has up to 90 day to dispute an ACH transaction.
Advantages and Disadvantages for Customers
Writing checks used to be a common practice, but ACH payment processing makes it even less necessary, and customers can save money. They no longer need to buy checks or stamps, and mail delivery issues are virtually eliminated, which reduces late fees. ACH payment processing is less hassle too because customers can pay by phone or over the internet, and they can create a hands-off recurring billing schedule.
Customers do have to share information about their bank account with a business. It is not at all common, but occasionally people are billed for the wrong amount. Also, customers must keep enough funds in their account or ACH payments processing could overdraw the account, which can cause service fees.
Small Business Owners
For many small business owners, ACH payments processing offers advantages that make this payment option very appealing. It provides an easy, convenient customer payment method. It is also operationally more efficient than checks while less expensive than accepting credit card payments.
Small business operators can also use ACH payments processing to handle recurring payments including a mortgage, utility bills, and loan payments. ACH is also conducive to handling e-commerce payments and local, state, and federal tax payments.