What Are ACH Payments and How Do ACH Transactions Work?

What is an ACH payment? How are ACH transactions processed? What’s the difference between ACH payments, checks, and wire transfers? Read this ACH guide to dive deeper into the differences and advantages of these payment methods.

What is an ACH payment?

ACH stands for Automated Clearing House, a U.S. financial network for electronic payments and money transfers. Also known as direct payments, ACH payments are a way to transfer money from one bank account to another without using check payments, credit card networks, wire transfers, or cash.

ACH payment volume is steadily growing. ACH Network payment volume rose 6.7% from 2023 to 2024, to 33.6 billion payments in 2024. The value of those payments was $86.2 trillion, an increase of 7.6%.

As a consumer, it’s likely you’re already familiar with ACH payments, even though you might not be aware of the jargon. If you pay your bills electronically (instead of writing a check or entering a credit card number) or receive direct deposit from your employer, the ACH network is probably at work.

For businesses, ACH payments are a popular alternative to physical checks and credit card payments. Because they’re electronic, ACH payments are cost-effective, faster, and more reliable than checks, thereby helping to automate and streamline accounting. Generally, it costs less to process an ACH transfer than a credit card payment or wire transfer. If you’re a business that accepts recurring payments, the savings can be significant.

What’s the difference between ACH payments, wire transfers, checks, and EFT payments?

ACH payments and wire transfers are both ways to move money between two accounts, but there are a number of differences between them. Wire transfers are processed in real time, as opposed to ACH payments, which are processed in batches three times a day. As a result, wire transfer funds are guaranteed to arrive on the same day, while ACH funds can take several days to process. Wire transfers are also more expensive than ACH payments. While some banks don’t charge for wires, in some cases, they can cost customers up to $60.

EFT (electronic funds transfers) payments is an umbrella term used to describe all electronic payments. As a result, the term can be used interchangeably with ACH payments because they both denote the same payment mechanism. In today’s economy, many physical checks are converted into e-checks through digital imaging, allowing them to be converted into an EFT payment. If the check is processed through traditional means with paper files passed back and forth between banks, then it does not fall under the category of EFT. 

ACH & EFTs vs. Wire Transfers vs. Physical Checks: Key Differences

When comparing these different transaction types there are three key differences to keep in mind: transfer time, transaction costs, and how they are processed.

Transfer time: Paper checks processed physically can often have the longest transfer time out of the four due to physical files and paperwork needing to be transferred back and forth between payment institutions. ACH transfers can often take the second longest because of how they are processed, often three to five business days. EFT payments transfer time encompasses a number of variables, including transaction type, amount, location (i.e., international), and more. However, standard domestic EFT transactions can take anywhere from one to four days. Wire transfers, on the other hand, are immediate.

Transaction costs: Wire transfers tend to be the most expensive and cost up to $60. ACH transactions, on the other hand, are often free or cost less than a few dollars. Depending on the type of EFT transaction, the costs can range from free to a few dollars. ATM transactions, for instance, often cost a small fee depending on the financial institution, while direct deposit is generally free. Physical checks can cost a small fee if cashed at a check cashing company, but it often varies.

Processing: Physical checks, EFTs, and ACH payments are processed through the Automated Clearing House, whereas wire transfers are processed through the Federal Reserve Wire Network, also known as the Fedwire. ACH payments are administered through an independent organization, while the Fedwire is government owned. 

Understanding the nuances between the different payment types can help you make informed decisions about your business.It’s always important to consult a financial advisor to weigh how your choices will affect your financial and operational needs.

Examples of ACH payments

There are two types of ACH payments. ACH debit transactions involve money being “pulled” from your account. ACH credit transactions let you “push” money to different banks ( your own or others). Here are two examples of how they function in the wild:

Recurring bill payments

Consumers who pay a business (say, their insurance provider or mortgage lender) at certain intervals may choose to sign up for recurring payments. That gives them the ability to initiate ACH debit transactions at each billing cycle, pulling the amount owed directly from the customer’s account.

Direct deposit payroll

Many companies offer direct deposit payroll. They use ACH credit transactions to push money to their employees’ bank accounts at designated pay periods. (Employees need to provide a voided check or a checking account and routing number to set this up).

How ACH payments work

Aside from the Automated Clearing House network (which connects all the banks in the United States), there are three other players involved in ACH payments:

• The Originating Depository Financial Institution (ODFI) is the banking institution that initiates the transaction.
• The Receiving Depository Financial Institution (RDFI) is the banking institution that receives the ACH request.
• The National Automated Clearing House Association (NACHA) is the nonpartisan governmental entity responsible for overseeing and regulating the ACH network.

Let’s take your automated monthly phone bill payments as an example. When you sign up for autopay with your phone company, you provide your checking account information (routing and account number) and sign a recurring payment authorization.

Then, when you hit your billing cycle, your phone company’s bank (the ODFI) sends a request to your bank (the RDFI) to transfer the money owed. The two banks then communicate to ensure enough funds are in your bank account to process the transaction.

If you have sufficient funds, the transaction is processed and the money is routed to your phone company’s bank account.

What are typical ACH payment processing times?

ACH payments typically take several business days (whenbanks are open) to go through. The ACH network processes payments in batches (as opposed to wire transfers, which are in real time).

Per the guidelines set forth by NACHA, financial institutions can choose to have ACH credits processed and delivered either within a business day or in one to two days. ACH debit transactions, on the other hand, must be processed by the next business day.

After receiving the transfer, the other bank might also detain the transferred funds for a holding period. Overall, you’re looking at an average three- to five-day processing time for ACH payments.

However, a new rule by NACHA (which went into effect in September 2016) requires that the ACH process debits three times a day instead of just one.

How much do ACH payments cost to process?

ACH payments are typically more affordable for businesses to process than credit cards. Your merchant account provider (or whatever entity you use to process ACH payments) sets the prices.

Some ACH processors charge a flat rate, which typically ranges from $0.25 to $0.75 per transaction. Others charge a flat percentage fee, ranging from 0.5% to 1% per transaction. Providers may also charge an additional monthly fee for ACH payments, which can vary. Square uses ACH payments for deposits, and there’s no fee associated with that for Square merchants.

Why are some ACH payments rejected?

If an ACH payment is rejected, your bank (OFDI) will provide a reject code that explains what happened. These reject codes are important for providing accurate information to your customers, letting them know why their payment didn’t go through. Here are the four most common reject codes:

• R01 Insufficient funds: This means the customer didn’t have enough money in their account to cover the amount of the debit entry. When you get this code, you’ll probably have to rerun the transaction after the customer transfers more money into their account or provides a different payment method.
• R02 Bank account closed: This happens when a customer had a previously active account that they closed. They likely forgot to notify you of the change and will have to provide you with a new bank account to process the transaction.
• R03 No bank account/unable to locate account: This code is triggered when some combination of the data given (the account number and name on the account) doesn’t match the bank’s records, or a nonexistent account number was entered. The customer needs to check and provide their banking details again.
• R29 reject: If a bank doesn’t allow a business to withdraw funds from a particular bank account, you’ll get this reject code. In this case, the customer needs to provide their bank with your ACH Originator ID to enable ACH withdrawals by your business, and then you need to rerun the transaction.

Are there any penalty fees with ACH payments?

Unfortunately, rejected ACH payments could land your business a penalty fee. So, if you get a reject code, it’s important to quickly correct the issue to avoid incurring additional fees on each recurring billing cycle. To avoid the hassle of untangling ACH rejects, it may be worth only accepting ACH payments from trusted customers.

ACH security

Although the ACH network is managed by the federal government and NACHA, ACH payments don’t have to follow the same PCI-compliance guidelines required for credit card processing.

However, NACHA requires that all parties involved in ACH transactions (including businesses initiating the payments and third-party processors) implement processes, procedures, and controls to protect sensitive data. Their rules also stipulate that the transmission of any banking information (like a customer’s account and routing number) be encrypted using “commercially reasonable” technology.

That means you can’t send or receive bank information via unencrypted email or insecure web forms. If you use a third party for ACH payment processing, make sure it has implemented systems with state-of-the-art encryption methods.

Under the NACHA rules, originators of ACH payments must also take “commercially reasonable” steps to ensure the validity of customer identity and routing numbers and to identify possible fraudulent activity. Most third-party ACH processors should have these capabilities, but check before you sign on with anyone. It’s also worth working with an IT or security professional to ensure your business safely processes ACH payments.

The benefits of ACH payment processing

There are a number of reasons why ACH payments are becoming an increasingly attractive option for businesses.

Lower processing costs

ACH payments typically have the lowest processing fees of any type of payment. If you use a provider with a flat rate, processing ACH payments will cost your business way less out of pocket than processing credit cards.

Fewer declines due to expiration

Checking accounts don’t have things that “expire” like credit and debit cards. So you deal with far fewer declines when processing ACH payments.

More convenient for you

No more paper invoices, paper checks, and time-consuming trips to the bank.

More convenient for your customers

Providing different payment options makes for a better customer experience. With ACH payments, customers don’t have to search for their checkbook every month. They can just “set it and forget it” by signing up for recurring billing.

The drawbacks of ACH payment processing

ACH payment processing is affordable and convenient, but there are some limitations.

Speed

ACH payments can take several days to process — typically between three and five business days.

Caps

There can be daily and monthly caps on how much money you can move. The Same Day ACH per transfer limit is set at a maximum of $25,000.

Cutoff times

After a certain time of day, a transfer won’t be processed until the next day (or Monday, if it’s before a weekend).

U.S. only

Your bank likely doesn’t allow ACH transfers to and from international accounts.

How to accept ACH payments at your small business

Small businesses aren’t set up by NACHA to be the ODFI or the RDFI in an ACH transaction. But you can use a bank or payment processor set up to run ACH payments.

Square leverages ACH to deposit the funds you process through Square into your linked bank account as quickly as possible. ACH transfers are batched and deposited on a set cadence. (We also use ACH payment processing to pay employees through Square Payroll and to deposit funds into sellers’ accounts through Square Loans^¹.)

Square ACH deposits are available as soon as the next business day. If your close of day is at 5 p.m. PT (the default) or earlier, your funds will arrive in your bank account the next business day. If your close of day is after 5 p.m. PT, your funds will arrive in your bank account within two business days. Learn more about tracking your deposits.

Want to get paid faster? Try Instant ransfers.

If next-business-day deposits aren’t quick enough for you, Square offers another option: instant transfers. Instant transfers allow you to move money to your bank account right away. You can instantly send up to $10,000². per transfer, 24 hours a day, 7 days a week, for a fee of 1.75% of the transfer amount. 2

If you have a Square Checking³ account, your account includes account and routing numbers for inbound and outbound transfers. You can use use your account and routing numbers to allow third parties to debit your Square Balance via ACH at no additional cost to complete payments for bills or expenses. In addition to this, you can also deposit funds into your Square Balance via ACH.