Explainer: Understanding ACH

Team Bond
Date Published
April 3, 2023
Read Time

What is ACH?

ACH, or Automated Clearing House, is an electronic funds transfer system that enables the secure and efficient movement of money between bank accounts in the United States. It plays a pivotal role in modern financial transactions, facilitating a wide range of activities such as direct deposits, bill payments, and business-to-business transactions.

The ACH system was established in the 1970s as a more efficient alternative to paper checks. Over the years, it has evolved to become a cornerstone of the U.S. financial infrastructure, processing trillions of dollars in transactions annually.

In today's digital economy, ACH is instrumental in enabling businesses, individuals, and financial institutions to streamline payments, reduce costs, and enhance financial operations. Understanding how ACH works and how it can work for you is crucial for harnessing its benefits.

Common Use Cases for ACH

ACH transactions are versatile and can be applied to various financial scenarios, making them a preferred choice for many individuals and businesses. Here are some of the most common use cases for ACH payments:

Funding New Accounts: One prevalent use case for ACH transactions is the funding of new financial accounts. Whether it's opening a new bank account, starting an investment portfolio, or establishing a digital wallet, ACH is a preferred method for individuals and businesses to initiate the initial deposit or funding process.

Direct Deposit of Payroll: Employers use ACH to deposit employees' salaries directly into their bank accounts. This method is efficient, cost-effective, and ensures that employees have quick access to their earnings.

Bill Payments: Consumers and businesses use ACH to pay bills electronically, including utilities, mortgages, credit card payments, and subscription services. It's a convenient way to automate recurring payments and avoid late fees.

Business-to-Business (B2B) Payments: ACH is widely used for B2B transactions, including vendor payments, supplier payments, and rent payments. Businesses appreciate the efficiency and cost savings associated with ACH transfers.

Peer-to-Peer Payments: Individuals often use ACH to transfer money between themselves and other individuals, whether it's between different banks or within the same financial institution.

Recurring Expenses: From subscriptions, loan repayments and tax payments to insurance premiums, healthcare  and education expenses. ACH ensures recurring payments are processed seamlessly and can be used as a simple yet effective way to facilitate these payments.

Government Benefits: Government agencies use ACH to disburse benefits such as Social Security, unemployment benefits, and veterans' benefits. It provides a secure and efficient way to distribute funds to recipients.

Savings and Investment Contributions: Individuals can set up automatic ACH transfers to contribute to savings accounts, retirement plans, and investment portfolios. This promotes regular savings and investment habits.

How ACH Works

The ACH network consists of financial institutions, businesses, and payment processors connected through a secure electronic system. Transactions are routed through the Federal Reserve or The Clearing House, which act as ACH operators, ensuring the smooth flow of funds between accounts.

ACH transactions involve two primary participants: the Originator (the party initiating the transaction) and the Receiver (the party receiving the funds). Both participants' banks play critical roles in facilitating the transaction.

ACH transactions can be categorized into two main types: ACH credits and ACH debits. ACH credits involve sending funds to recipients, while ACH debits authorize withdrawals from a payer's account.

ACH transactions follow a series of steps, including initiation, submission to the ACH network, processing, clearing, and settlement. Understanding this lifecycle is essential for efficient transaction management.

Processing Times for ACH Payments

ACH payments can take between 2 and 7 days to completely process. The exact timing depends on the ACH network's processing windows and the policies of the receiving bank. Transactions initiated earlier in the day often settle faster.

To expedite transactions, Same-Day ACH allows for same-day settlement for eligible transactions. This provides quicker access to funds for businesses and individuals, enhancing liquidity management.

Several factors can influence ACH processing times, including transaction volumes, bank policies, and the ACH network's operating rules. Large volumes of transactions may experience slight delays during peak periods.

Advantages of Using ACH


ACH transactions are cost-effective, with lower fees compared to alternative payment methods like wire transfers and paper checks. This cost efficiency makes ACH an attractive choice for businesses seeking to minimize transaction costs.

Security and Fraud Prevention

ACH transactions are highly secure, with encryption and authentication measures in place to safeguard sensitive financial data. They also provide traceability for auditing purposes, reducing the risk of fraud and unauthorized transactions.

Convenience and Automation

ACH payments can be automated, reducing manual processing and minimizing errors. This convenience is especially beneficial for recurring payments, such as payroll processing, subscription billing, and loan repayments.

Reliability and Predictability

ACH offers a reliable and predictable payment method with standardized rules and regulations, promoting financial stability. Businesses can confidently plan their financial operations around ACH payment schedules.

Disadvantages and Limitations of ACH

Limited International Use

ACH is primarily a U.S.-centric system, making it unsuitable for international transactions. Businesses engaged in global commerce may need to explore alternative payment methods for cross-border transactions.

Settlement Risk

While ACH transactions are generally secure, there is a slight risk of settlement issues in rare cases. Businesses should have contingency plans in place to address potential settlement delays or errors.

Reversal and Return Fees

ACH transactions can incur fees for reversals and returns, impacting both payers and payees. These fees are typically imposed to cover administrative costs and discourage unauthorized reversals.

Dependency on Banking Hours

ACH transactions are subject to banking hours and holidays, which may delay processing times. Businesses should factor this into their payment processing schedules to avoid disruptions.

Transaction Limits

Some banks impose transaction limits on ACH transfers, which can be a limitation for high-value transactions. Enterprises with substantial financial needs may need to explore alternative payment methods for larger transactions.

How Can You Take Advantage of ACH in Your Business?

How you leverage ACH will be unique to your particular use case, but regardless of use case embedding the functionality into your existing app or website is the best way to go. Integrating the experience and making it seamless for your customers is critical for adoption and continued use.

Embedding ACH into your system will allow you to streamline payment processes, enhance customer experiences, and improve cash flow management. It can also enable businesses to monetize financial services, creating new revenue streams.

One example of a large corporation taking advantage of the ability to embed ACH is Target and their RedCard.

Target offers its shoppers the Target RedCard, the umbrella name for Target’s branded card product. Users connect their bank of choice to the card which allows Target to pull funds from that account. This means Target can convert what would otherwise be an expensive point of sale transaction into a low-cost ACH transaction. It’s projected that Target could theoretically see a 65% increase in profits if they were able to move all purchases to their RedCard - thanks to ACH.

Challenges and Considerations

While embedding ACH solutions come with a series of challenges such as compliance with ACH network rules and regulations, security and data protection considerations and monitoring and managing transaction volumes, implementation can be made simple.

On the user side, tools like Plaid have significantly streamlined the process of connecting bank accounts. Users no longer need to commit their bank account and routing numbers to memory or waste time looking for them just to set up an account or initiate a payment.

On the enterprise side embedded finance platforms like Bond can help companies navigate all of the technical and regulatory hurdles that come with adding a financial service to your existing platform. 

Everyday, both traditional and innovative companies trust Bond to help them build and embed financial products into their current suite of offerings and many of them include ACH.

If you have more questions about ACH or want to talk with one of our team members, please reach out to us.