How do ACH payments and transactions work?

You’ve probably seen ACH payments in action, even if you didn’t know it. ACH payments are a type of electronic payment. When you get paid by direct deposit, that’s an ACH payment. And when automatic bill payments are processed, that’s another example of ACH.

Keep reading to learn more about ACH payments and how they work. 

Key takeaways 

• ACH payments apply to checking and savings accounts and include direct deposits and recurring payments.
• The National Automated Clearing House Association, or Nacha, oversees and governs the ACH network.
• ACH payments work by “pushing” and “pulling” money between bank accounts.
• ACH transactions can be a secure, quick, reliable and affordable option to transfer money.

ACH stands for automated clearing house. The automated clearing house is a payment system—often called the ACH network—used by U.S. banks and credit unions to send and receive money. ACH may also refer to the network itself. 

An organization called Nacha manages and governs the ACH network. Nacha sets the rules for ACH payments and transactions.

According to the Consumer Financial Protection Bureau, an ACH payment is an electronic funds transfer, or EFT, between financial institutions, including banks and credit unions. 

An ACH payment—also known as electronic check or direct debit, among other names—is one of several ways to transfer money from one bank to another. And it doesn’t require cash, paper checks, credit cards or other methods.

Types of ACH transactions

Two common ACH transactions are:

• ACH direct deposit: Think of an employer’s direct deposit program. When the employer sends a credit to their employee’s account, they transfer money directly from their account to their employee’s. That’s an ACH deposit.
• ACH direct payment: Imagine that you and a friend split a dinner check, and you front the bill. Your friend might use Zelle® or another payment app to send you their share. That exchange is possible through ACH direct payments. This type of ACH transaction works by sending and receiving funds. Direct payments include ACH credits and ACH debits. 

Is ACH the same as a wire transfer?

Wire transfers aren’t the same as ACH payments. While ACH and wire transfers are both used for bank-to-bank transfers, wire transfers are often completed on the same day and can come with higher costs. 

Learn more about the differences between ACH and wire transfers.

ACH payments work through ACH credits and ACH debits—also called push and pull payments. Push payments send money, and pull payments collect it. While most payment networks can only push or pull, ACH can do both as needed. 

Push payments are credit transactions where payers instruct their bank to send money from their account to another account. Pull transactions are debit transactions, and the recipient’s bank initiates the transfer and pulls money from the payer’s account. 

The banks sending and collecting money in an ACH payment are either the: 

• Originating depository financial institution (ODFI): The bank or other financial institution that initiates the ACH transaction.
• Receiving depository financial institution (RDFI): The bank or other financial institution that receives the ACH transaction.

Modern ACH payment processing standards can support same-day, next-day and two-day transfers. Depending on when they’re received and submitted for processing, ACH transfers could take 1-3 days to complete and fully settle into the receiving account.

There are many different types of ACH transactions. But as an example, take an automatic monthly car insurance payment.

When you sign up for automatic payments, the ACH process begins. Each month, the insurance company’s bank, the ODFI, requests a payment from your bank, the RDFI. Assuming all requirements are met, including that you have sufficient funds in your account, the transaction is processed and delivered. 

There are benefits and drawbacks to using ACH payments to get paid and pay bills. Here are some to consider:

ACH payment pros

Using automatic ACH payments for your recurring bills can be convenient. By automating payments through online bill pay, you can avoid having to put a check in the mail every month. It can also help you avoid missing due dates if your account is set up to automatically pay your bills on time. Plus, payment encryption could make ACH payments more secure than writing checks.

If you need to send money to a friend, an ACH transaction through a money transfer app—such as Zelle®, Venmo or PayPal®—may be less expensive than a traditional wire transfer.

ACH payment cons

Some banks put a limit on how many ACH transfers customers can make each month. Typically, these kinds of rules apply to savings accounts. If you’re using your savings account to make ACH transfers, check with your bank about any restrictions.

If you’ve set up automatic bill payments using ACH, it’s important to make sure you have enough money in your account. If you don’t, payments may not go through. And if payments don’t go through, you may miss your due date or overdraft your account. This could also lead to fees or penalties, like late payment fees.

ACH transactions can be a secure and convenient way to automatically pay your bills, get paid and make money transfers. Check out additional ways to make shopping more convenient and secure, like virtual card numbers and other card security features.