What are ACH payments and how do they work?

ACH payments are a type of electronic payment you’ve likely used before, even if you didn’t know it. When you get paid by direct deposit, that’s an ACH payment. And when automatic bill payments are processed, that’s another example of an ACH transaction.

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.
  • Nacha, originally the National Automated Clearinghouse Association, oversees and governs the ACH Network.
  • ACH payments work by “pushing” and “pulling” money between bank accounts.
  • ACH transactions can be secure, quick, reliable and affordable options for transferring money.

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What is an ACH payment?

An ACH payment—also known as an electronic check or a 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.

The Consumer Financial Protection Bureau specifically defines an ACH payment as an electronic funds transfer, or EFT, between financial institutions, including banks and credit unions. 

What does ACH mean?

“ACH” stands for automated clearinghouse, a payment system—often called the ACH Network—used by U.S. banks and credit unions to send and receive money. 

Nacha manages and governs the ACH Network and sets the rules for ACH payments and transactions.

How do ACH payments work?

ACH payments work through ACH credits and 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, the ACH Network 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. 

Consider an automatic monthly car insurance payment, for example. When you sign up for autopay, the ACH process begins. Each month, the insurance company’s bank requests a payment from your bank. Assuming all requirements are met, which includes having sufficient funds in your account, the transaction is processed and completed.

Types of ACH payments

Two common ACH transaction types are:

  • ACH direct deposit: Think of an employer’s direct deposit program. When an employer sends a credit to an employee’s account, money is transferred directly from the employer’s account to the employee’s. That’s an ACH deposit.
  • ACH direct payment: Imagine 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 payment. This type of ACH transaction works by sending and receiving funds. Direct payments include ACH credits and debits.

Pros and cons of ACH payments

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

Benefits of using ACH payments

  • Convenient recurring payments: 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.
  • Secure transactions: Payment encryption could make ACH payments more secure than writing checks.
  • Inexpensive: 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.

Drawbacks of ACH payments

  • Limits on the number of payments allowed: 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.
  • Risk of overdrafts: If you’ve set up automatic bill payments using the ACH process, it’s important to make sure you have enough money in your account. If you don’t, payments may not go through and you may miss your due date or overdraft your account. This could also lead to fees or penalties, like late payment fees.

FAQs about ACH payments

Here are answers to some frequently asked questions about ACH payments:

A direct deposit is a type of ACH payment, but the terms shouldn’t be used interchangeably. That’s because ACH payments include many other types of bank-to-bank transfers, including peer-to-peer (P2P) and automatic bill payments.

Wire transfers aren’t the same as ACH payments. While ACH payments 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.

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, an ACH transfer could take 1-3 days to complete and fully settle into a receiving account.

ACH payments in a nutshell

ACH payments can be a secure and convenient way to automatically pay your bills, get paid and make money transfers. And if you have experience using P2P payment apps like PayPal or Zelle®, you’re already using ACH payments. If not, you can get started sending and requesting payments through Zelle® on your phone—it’s fast, free and available on the Capital One Mobile app.

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