What Are ACH Transfers And How They Work?

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ACH Transfers

An ACH transfer is one of the most popular ways worldwide to send or receive money online.

To put it simply, ACH payments are electronic transfers from one bank account to another. These electronic payments are made through the Automated Clearing House network –  a network that coordinates electronic payments and automated money transfers.

ACH transactions come in two forms. The first are Direct Deposits, which are payments to a receiver, such as wages from your employer paid into your checking account. 

The other are Direct Payments, which are requests to pull funds from an account. For example, direct payments happen when you pay utility bills, e.g. phone bills, automatically from your checking account.

Most consumers have experience with ACH payments, although they may not be aware of it due to technical jargon.

ACH payments are most commonly used when:

  • A customer pays a service provider
  • An employer deposits money to an employee’s checking account
  • A consumer moves funds from one bank to another
  • A business pays a supplier for products
  • A taxpayer sends funds to the CRA, IRS or local organizations online 
ACH: So How Do They Work? 

The ACH system consists of computers working together to process payments automatically.

It eliminates the need to manually handle payments – ACH is a batch processing system that handles millions of payments at the end of the day.

An originator (this could be an individual, a corporation or another entity) starts the process by initiating either a Direct Deposit or Direct Payment transaction.

ACH transactions can be both debit or credit.

The originator prepares information about the transaction to be automated for its recipient and passes it along to an Originating Depository Financial Institution (ODFI), usually their bank.

The ODFI then collects ACH transactions from participating companies, consolidates the information and presents it to the ACH operator.

ACH Operators (two central clearing facilities: The Federal Reserve or The Clearing House  / e.g.,  Payments Canada) receive batches of ACH entries from the ODFI.

The ACH operator then processes the batch of transaction files from submitting ODFIs and distributes them to Receiving Depository Financial Institutions (RDFls), usually the recipients bank.

The RDFI then receives entries for its customer accounts.

The Receiver’s account is debited or credited by the RDFI, which posts entries on the settlement date.

Transactions are also reported on account statements. 

What Information Is Needed? 

To complete an ACH transfer, the person or organization wishing to initiate the payment, whether they want to send funds or receive funds, needs to gather the relevant bank account information from the other party involved.

For example, employers require the following information from their employees when paying them using direct deposit:

  • The name of the bank or credit union receiving funds
  • The type of account at that bank (checking or savings)
  • The bank’s routing/ABA number
  • The recipient’s account number.

The same details are required to make pre-authorized withdrawals from customer accounts.

Additionally, authorisation forms and void cheques may be requested from the customer as evidence of pre-authorized instructions.

Are There Any Drawbacks? 

Sending money between banks using ACH transfers can be easy and convenient, but there are numerous downsides to this method.

ACH transfers can take a while, typically taking around 3 business days. In today’s world, at the rate at which business is done, this is simply not quick enough. With this type of transfer, you can also be charged to send money between banks. With ACH transfers, you hand other people access to your bank account and its information, including your account number.

Accidents happen, and a large error could drain your account. This would cause your cheques to bounce and leave you unable to make any other payments. ACH payments leave you open to forgetting what you’re paying for, especially if you don’t actually see the bills coming through. You may be paying for services that you no longer need, like the membership from your old gym. You could even overdraw your account if money is taken from you on a date when your account does not have the necessary funds, leading you to pay unnecessary fees to your bank.

Another big limitation with ACH transfers is that they are often unavailable for international transfers, impacting companies ability to make foreign payments

What Are The Alternatives? 

Another popular method of sending money around the world is wire transfers, but these payments can also take several days to be processed and cost more than ACH Transfers.

The best alternative way to send money would be to use an Electronic Funds Transfer (EFT). These EFTs can be done online using any computer with Internet access via Money Service Businesses (MSB).

One such MSB would be us here at REMITR. Here we understand that time is money – and we can help you save both.

Using our service guarantees you savings. REMITR charges a flat fee of $5, while some bank wire fees can cost you anywhere between $15 and $80! We help you save time as money arrives in your beneficiaries account within 1 business day – and our service is available 24/7.

REMITR can be used to transfer money to over 150 countries across the globe, and you get access to the best live exchanges rates, no matter what currency you’re sending.

For stress-free transfers at the click of a button, get in touch with REMITR today.