ACH is the driving force behind most bank-to-bank money transfers, including payroll deposits, invoice payments, and more. What types of ACH transactions are available, and how do they work?
Chris has been writing about small business topics since 2003. He has been featured in Fox Business, ABC News, Yahoo Finance, GoBankingRates, Newsweek, BizJournals, and other publications. He has a Bachelor’s of Arts in English Writing Arts from SUNY Oswego, and a Masters of Science in Interactive Media from the University of Central Florida. He currently resides in the Hudson Valley region of New York.
WRITTEN & RESEARCHED BY Chris Motola Chris has been writing about small business topics since 2003. He has been featured in Fox Business, ABC News, Yahoo Finance, GoBankingRates, Newsweek, BizJournals, and other publications. He has a Bachelor’s of Arts in English Writing Arts from SUNY Oswego, and a Masters of Science in Interactive Media from the University of Central Florida. He currently resides in the Hudson Valley region of New York. Expert Contributor
Shannon has been writing for Merchant Maverick about small business software and financing since 2015. She started writing professionally about business topics in 2005. Shannon has been featured in the Washington Post, Reader's Digest, US News, MSN, Yahoo Finance, Business Insider, and other publications. She has a bachelor's degree in English from San Diego State University and currently resides in San Diego, California.
REVIEWED BY Shannon Vissers Shannon has been writing for Merchant Maverick about small business software and financing since 2015. She started writing professionally about business topics in 2005. Shannon has been featured in the Washington Post, Reader's Digest, US News, MSN, Yahoo Finance, Business Insider, and other publications. She has a bachelor's degree in English from San Diego State University and currently resides in San Diego, California. Lead Staff Writer
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Automated Clearing House (ACH) payments power most of the bank-to-bank transfers in the United States. ACH is so common that many of us take it for granted, not realizing that the system is used to finalize credit card payments, for direct deposits of paychecks, and in check cashing. Below, we’ll demystify the types of ACH payments and pull back the curtain a bit on how ACH works.
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ACH transactions allow money to be sent from or received by bank and credit union accounts. These transactions are batched and sent by the sender’s institution to a middle entity called an ACH operator that sorts and routes the transaction to the receiver’s financial institution. The receiving account is then credited or debited. Batches are sent four times each business day.
There are two ACH operators:
ACH payments can be settled when the Federal Reserve’s settlement system is open. The system is closed on weekends, federal holidays, and between the hours of 6:30 p.m. and 7:30 a.m. ET.
ACH transactions can be broken down into two main categories: ACH credits and ACH debits.
Also known as direct deposits, ACH credits account for a little less than half of all ACH transactions and typically settle in one banking day.
An ACH credit takes money from one account and “pushes” or deposits it into another. A typical ACH credit is a direct payroll deposit from your employer, a tax refund from the government, or a similar type of mass payout. Customers could use ACH credit transactions to authorize a one-time payment of an invoice, too. ACH credits allow customers to decide how much and when to pay you.
For example, a business with W-2 employees would send its payout request to its bank, which will credit the employees’ accounts at a specified time. The bank would then send the request, along with all information about all the relevant accounts, to the ACH operator in one of its batches. The operator would then route the request to each employee’s financial institution, instructing it to credit the recipient’s account at the specified time.
With the exception of the US Treasury, ACH credit settlement times cannot be more than two days in the future.
The ability to debit accounts separates ACH from its bank-to-bank payment method alternative, the RTS network. An ACH debit is an electronic transaction that “pulls” money or takes it from one person’s account and moves it to another. ACH debit transactions are initiated by the person receiving the funds, with the payer’s consent. ACH debits are also referred to as direct payments.
Examples of ACH debits include payments on regular or recurring invoices, such as automatic bill payment, where you and the customer have a standing agreement that they will pay an agreed-upon sum at a recurring set time. Recurring donations and subscription fees are also examples of ACH transactions that your company can use, with authorization, to pull money from customers’ accounts into your business account.
The routing system works similarly to that of ACH credits, but in this case, the billing company is sending requests for payments by pre-authorized accounts to the ACH operator. The operator sorts and sends the requests to the appropriate banks, which then remove the agreed-upon amount from the recipient’s account.
ACH debits account for just over half of all ACH transactions and generally settle more quickly than ACH credits–often in the same day. ACH debits cannot have a settlement time of more than one day in the future.
A relatively new type of ACH payment was introduced in 2016. As the name implies, these are expedited ACH payments that are settled on the same day they are sent. To be eligible for Same-Day ACH, files must be submitted to the ACH operator by 4:45 p.m. ET. Same-Day ACH transactions are capped at $1 million.
While ACH payments probably fall into the categories above, the ACH network does code payments differently depending on characteristics such as whether the transaction is consumer or corporate, whether it’s recurring, and any authorization required beforehand. These codes will generally be invisible to both businesses and customers unless you’re dealing with payment processing infrastructure in-house.
| SEC Code | Characteristics | Authorization |
|---|---|---|
| CCD/CCD+ (Corporate Credit) | Corporate to corporate | Agreement required between companies |
| CIE (Customer Initiated Entries) | Consumer to corporate | Presumed agreement between consumer and company |
| CTX (Corporate Trade Exchange) | Corporate to corporate | Agreement required between companies |
| IAT (International ACH Credit) | Corporate to consumer/corporate | Oral or written agreement or agreement between companies |
| PDD/PDD+ (Pre-arranged Deposit) | Corporate to consumer | Oral/non-written |
| WEB (Internet Intiated/Mobile Entries) | Corporate to consumer | No authorization by the Receiver |
| SEC Code | Characteristics | Authorization |
|---|---|---|
| ARC (Accounts Receivable Entries) | Consumer to corporate | Notification prior to acceptance of the check |
| BOC (Back Office Conversion) | Consumer to corporate | Notification prior to acceptance of the check |
| CCD/CCD+ (Corporate Debit) | Corporate to corporate | Agreement required between companies |
| CTX (Corporate Trade Exchange) | Corporate to corporate | Agreement required between companies |
| IAT (International ACH Debit) | Corporate to consumer/corporate | Oral or written agreement or agreement between companies |
| POP (Point of Purchase) | Corporate to consumer/corporate | Notification prior to acceptance of the check and written authorization |
| POS (Point of Sale) | Consumer | Written |
| PDD/PDD+ (Pre-arranged Payment) | Corporate to consumer | Written |
| RCK (Represented Check Entries) | Corporate to consumer | Notification prior to acceptance of check |
| TEL (Telephone Initiated Entries) | Corporate to consumer | Recorded oral or written authorization confirming oral authorization |
| WEB (Internet Intiated/Mobile Entries) | Corporate to consumer | No authorization by the Receiver |
The terms echeck and EFT are often used in discussions of ACH payments, but have their own distinct meanings:
Note: E-checks are an especially important form of payment for high-risk businesses that may not be able to use other payment methods. If you’d like to dig deeper into how e-checks work and learn how they can benefit your business, check out our complete e-check payment guide.
Whether you’re using ACH to credit or debit an account, ACH transactions provide a secure and low-cost method of moving money between accounts.
Looking to add ACH transaction support to your payment processes? We can help you compare ACH processors.
Chris has been writing about small business topics since 2003. He has been featured in Fox Business, ABC News, Yahoo Finance, GoBankingRates, Newsweek, BizJournals, and other publications. He has a Bachelor’s of Arts in English Writing Arts from SUNY Oswego, and a Masters of Science in Interactive Media from the University of Central Florida. He currently resides in the Hudson Valley region of New York.
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