A CFOs Guide to ACH Payments

We’ve gone from using cash, checks, and credit or debit cards to electronic payment systems that streamline the process and offer more security – and the Automated Clearing House (ACH) network is at the core of this transformation. This system has revolutionized the way money is transferred and has enabled the banking system to adapt to the demand for faster and more efficient payment methods.

So what does that mean for your business? It means you have a faster, more efficient way to make payments, but all digital ways of working can open us to greater cyber risks. In this guide, we’ll explain how to leverage the efficiencies of ACH payments while safeguarding your business against cybercrime and scams.

To do that, we’ll break down the concept of ACH payments, how they work, and how you can integrate them – securely – into your business to pay vendors and for other transactions.

What Are ACH Payments?

ACH payments are a form of electronic funds transfer made through the Automated Clearing House (ACH) network. Established in the United States, this network handles both credit transfers, such as direct deposits for payroll and government benefits, and debit transfers, such as utility bill payments and mortgage installments. And, unlike wire transfers, which are processed in real-time and often come with higher fees, ACH transfers are processed in batches at specific intervals, typically once a day. This method allows for cost-effective and reliable fund transfers between accounts.

The governing body that oversees ACH transactions is the National Automated Clearing House Association, commonly known as Nacha. Nacha establishes and enforces the rules and guidelines for ACH payments, ensuring the network’s integrity and security.

ACH payments are widely used across various sectors in the United States because they are more efficient and secure than the alternative method: checks. ACH also allows automated and streamlined recurring payments, such as salaries, supplier payments, and consumer bills—all of which can play a major role in the daily operations of your business. Thanks to the ACH network, companies can reduce the reliance on paper checks and manual processing, leading to significant time and cost savings.

How ACH Payments Work

ACH payments involve a structured process to transfer funds between accounts. Let’s break it down.

The are essentially two entities involved in an ACH payment:

• Originating Depository Financial Institution (ODFI). The ODFI is the financial institution that initiates the ACH transaction on behalf of the sender—whether an individual, a business, or a vendor. For instance, when a company wants to pay its employees via direct deposit or a consumer wants to pay a utility bill electronically, the ODFI begins the process by submitting the transaction details to the ACH network.
• Receiving Depository Financial Institution (RDFI). The RDFI is the financial institution that receives the ACH transaction on behalf of the recipient. For instance, when an employee’s paycheck is deposited into their bank account, the RDFI is responsible for crediting the funds to the recipient’s account.

Now, through ODFIs and RDFIs, the ACH network processes two main types of transactions:

• ACH Credit. In an ACH credit transaction, the originator (e.g., an employer or a customer) pushes funds from their account to the recipient’s account. Direct deposits of payroll, vendor payments, and tax refunds are common examples of ACH credit transactions. In other words, the originator’s bank (ODFI) sends the payment instructions to the ACH network, which then routes the funds to the recipient’s bank (RDFI).
• ACH Debit. Conversely, in an ACH debit transaction, the recipient pulls funds from the originator’s account. This is often used for recurring payments such as mortgage payments, utility bills, and subscription services. The company or service provider initiates the debit transaction through their ODFI, which sends the request to the ACH network. The network then executes the transfer of funds from the payer’s account (held at the RDFI) to the recipient’s account.

In this process, the Automated Clearing House (ACH) essentially acts as an intermediary that processes these transactions in batches. It collects transaction requests throughout the day, processes them at specific intervals, and ensures that funds are accurately and securely transferred between ODFIs and RDFIs.

Who Accepts ACH Payments?

ACH payments are versatile, cost-effective, and efficient. That’s why they’ve become widely accepted across various sectors, making them an integral part of financial transactions for businesses, individuals, and organizations:

1. Businesses. ACH payments are widely used for business-to-business (B2B) transactions, like payments between companies for services, supplies, and other business expenses.
2. Government agencies. Tax payments can be made via ACH, including federal and state taxes.
3. Individuals. ACH money transfers are commonly used for personal transactions, such as sending money to friends and family.
4. Employers. Employers typically deposit salaries directly into employees’ bank accounts via ACH, ensuring timely and reliable payroll processing.
5. Nonprofit organizations. Charitable donations can be processed through ACH.
6. Utility companies and landlords. ACH payments are often used for consumer bills, including rent payments, utilities, and other recurring monthly expenses.
7. Financial institutions. ACH transfers are used for funding investment accounts.
8. Suppliers and vendors. Businesses use ACH payments to pay suppliers and vendors.
9. Payroll services. Employers use ACH for additional payroll transactions, such as bonuses, reimbursements, and more.

Switching from Checks to ACH Payments

Setting up ACH payments for your business can streamline your financial transactions and improve efficiency. Here’s a step-by-step guide to get you started:

1. Choose an ACH payment processor

The first step in setting up ACH payments is selecting a reliable ACH payment processor. There are many options: you can enroll in your bank’s ACH program or use third-party providers (like PayPal and Stripe) that process ACH payments.

Either way, it’s essential to research and compare different processors based on their fees, services, and reputation. Look for a provider with strong customer support, robust security features, and compatibility with your existing financial systems. More importantly, ensure the processor can securely handle your bank routing number and other sensitive information.

2. Complete ACH setup forms

Once you’ve chosen a processor, you must complete the necessary ACH setup forms. These forms will require information about your business, including bank account details and authorization for ACH transactions. Ensure all information is accurate to avoid delays in the setup process.

3. Clarify the type of ACH payments you want to make

Determine the specific types of ACH payments you intend to make. As we explained in the section above, this could include ACH credits for outgoing payments, such as payroll or vendor payments, and ACH debits for incoming payments, such as customer billing.

4. Select the entry class

ACH transactions are categorized into different entry classes based on their purpose. Some common entry classes include:

• PPD (Prearranged Payment and Deposit): Used for direct deposits and pre-authorized bill payments.
• CCD (Corporate Credit or Debit): Used for B2B transactions.
• WEB (Internet-Initiated Entry): Used for payments authorized over the Internet.
• TEL (Telephone-Initiated Entry): Used for payments authorized over the phone.

Choose the entry class that aligns with your transaction types to ensure proper processing and compliance with ACH network rules.

5. Review terms and conditions

Before finishing your setup, thoroughly review the terms and conditions provided by your ACH payment processor. Pay close attention to details such as fees, processing times, and any limitations or restrictions. Understanding the terms will help you avoid unexpected issues and ensure a smooth operation.

How Long Does an ACH Transfer Take?

ACH transfers typically take between one to three business days to clear because, again, the process involves several steps and parties. However, the exact timing can vary based on several factors:

1. Cut-off times. Banks often have specific cut-off times for ACH transactions. Transfers initiated after these times may be processed the next business day, potentially adding a day to the overall timeline.
2. Bank policies. Banks have different processing times and internal policies that can affect how quickly they handle ACH transfers.
3. Weekends and holidays. ACH transfers are processed only on business days. Transactions initiated on weekends or public holidays will be delayed until the next business day.
4. Type of transfer. ACH credits (sending money) and ACH debits (pulling money) may have different processing times. Also, same-day ACH services are available for a higher fee, which can expedite the process.
5. Processing volume. High transaction volumes, especially during peak times like holidays, can impact how quickly transfers are processed.

Although the process is usually pretty quick, it’s important to keep these factors in mind when initiating an ACH transfer to avoid unnecessary delays.

Why Switch from Checks to ACH Payments

Switching from checks to ACH payments can significantly benefit your business. If you are still considering whether ACH payments are a good choice, here are a couple of compelling reasons to make the switch:

ACH payments are efficient

ACH transfers are faster and more reliable than traditional payment methods. For instance, with ACH, funds are transferred electronically, eliminating the delays associated with mailing and processing paper checks. This efficiency ensures that payments are received and cleared quickly, improving cash flow management for both payers and recipients.

ACH payments cost less

ACH payments are generally more cost-effective than checks and wire transfers. The cost of issuing a check includes not only the price of the check itself but also postage, handling, and processing fees. Wire transfers, while faster than checks, can be significantly more expensive. In contrast, ACH transactions typically have lower fees, making them a more economical option for businesses looking to reduce operational costs.

ACH payments provide more control

With ACH payments, businesses have greater control over their transactions. ACH allows for scheduling and automating payments in advance, setting up recurring payments, and easily managing cash flow. This control ensures you make payments on time, reducing the risk of late fees and improving relationships with vendors and suppliers.

ACH payments are better for bookkeeping

ACH transactions are automatically recorded and categorized in accounting systems. This automation reduces the likelihood of errors, makes reconciliation easier, and provides a clear audit trail, helping your business maintain accurate financial records and streamline financial reporting.

ACH payments are more secure

ACH payments offer enhanced security compared to traditional methods. ACH payments are encrypted and processed through secure networks, significantly reducing the risk of theft and fraud. Additionally, ACH transactions can be monitored and tracked more easily, providing an extra layer of security.

However, given the rising rate of fraud and cybercrime in the US, security is still a major concern when handling ACH transactions. Businesses should always consider investing in a final line of defense when it comes to protecting itself against ACH fraud.

As the risks of internal and external threats rise and tactics become more refined and difficult to detect, thousands of businesses across Australia and the US rely on Eftsure’s payment protection software. Eftsure saves time and money by making sure all ACH payments are going to the correct accounts before they leave your bank. Providing a secure vendor management system to prevent businesses from suffering financial losses due to cybercrime and fraud.  ​

How to Start Paying Vendors via ACH

Implementing ACH payments for vendor transactions can significantly improve your business operations. Now that we’ve covered why you should use ACH payments, let’s get to the ‘how.’ Here are some practical tips to help you start paying vendors via ACH smoothly:

1. Evaluate your current payment process. Before making any changes, assess your current payment process. Identify the pain points and areas where ACH payments can improve efficiency, reduce costs, and enhance security. This will help you understand the specific needs of your business and make a more informed decision.
2. Choose the right ACH payment processor. Selecting a reliable ACH payment processor is crucial. Look for a provider that offers comprehensive services, strong security features, and excellent customer support. Ensure the processor is compatible with your existing financial systems and can handle the volume of transactions your business requires.
3. Gather vendor information. To set up ACH payments, you’ll need specific information from your vendors, including their bank routing and account numbers. Businesses can either reach out to your vendors and request this information, or extract it from their respective accounting systems. Ensure that you handle this data securely and confidentially to protect sensitive financial information.
4. Update vendor contracts and agreements. Review and update your vendor contracts to include ACH payment terms. Clearly outline the payment schedule, authorization process, and any other relevant details. Ensure that both parties agree to these terms to avoid any misunderstandings or disputes later on.
5. Set up authorization. Get written authorization from your vendors to initiate ACH payments. This authorization should include details such as the vendor’s bank account information, the frequency and amount of payments, and any other relevant terms. This helps protect your business and ensures compliance with ACH regulations.
6. Conduct a test run. Before fully transitioning to ACH payments, conduct a test run with a few vendors. This will allow you to identify and resolve any issues or glitches in the process. Use this opportunity to familiarize yourself and your vendors with the ACH payment system and ensure everything runs smoothly.
7. Automate payment scheduling. Leverage the automation capabilities of ACH payments to streamline your payment process. Set up recurring payments for regular expenses and schedule payments in advance to ensure timely and accurate transactions. Automation reduces the risk of late payments and minimizes the administrative burden on your team.
8. Monitor and reconcile payments. Regularly monitor and reconcile your ACH payments to ensure accuracy. Keep detailed records of all transactions and compare them with your bank statements. Address any discrepancies as soon as they come up to maintain the integrity of your financial records and avoid potential issues.
9. Communicate with your vendors. Maintain open communication with your vendors throughout the transition to ACH payments. Keep them informed about the process, address any concerns they may have, and provide support as needed. Strong communication ensures a smooth transition.
10. Regular verification. It’s important for businesses to keep security at the forefront when it comes to any form of payments. Never trust an invoice without taking the appropriate steps to verify account numbers and payment details. Many businesses do this through manual verification, or by deploying a secure and timesaving verification system, like Eftsure. This protects your business from cyber scams and human error to ensure you pay the right suppliers, every time.
11. Review & optimize. Periodically review your ACH payment process to identify areas for improvement. Seek feedback from your vendors and employees to understand their experience and make necessary adjustments. Continuously optimizing your ACH payment system will help you maximize its benefits and maintain efficient financial operations.

By following these tips, you can successfully implement ACH payments for your vendor transactions, improving efficiency, reducing costs, and enhancing the overall security of your payment processes.

Summary

• ACH payments are electronic funds transfers processed through the Automated Clearing House (ACH) network, offering an efficient, secure, and cost-effective alternative to checks and wire transfers.
• ACH payments involve two main types: ACH credit (pushing funds) and ACH debit (pulling funds). These transactions are facilitated by Originating Depository Financial Institutions (ODFIs) and Receiving Depository Financial Institutions (RDFIs).
• ACH payments are efficient, cost less than checks and wire transfers, provide enhanced security, offer greater control over transactions, and simplify bookkeeping.
• To set up ACH payments, choose a payment processor, complete necessary forms, clarify payment types, select the appropriate entry class, and review terms and conditions.
• Transition from checks and wire transfers by selecting a payment processor, educating employees, identifying vendors that accept ACH, notifying customers, and starting to make and collect ACH payments.
• Evaluate current processes, choose the right processor, gather vendor information, update contracts, set up authorization, conduct test runs, automate payments, monitor transactions, communicate with vendors, and continuously optimize the system.