What are ACH payments and how do they work?

There are so many ways to transfer your funds, make payments and receive money from employers as well as others. It can get quite confusing if you are not aware of the different methods with which you can transfer your funds. It is best to understand how different transfer methods work in order to avoid confusion, late payments or delays in receiving your funds.

One of the most common methods of transferring your funds is ACH payments.

What are ACH payments?

AHC is the acronym used for Automated House Clearing which is essentially an American financial network that is widely used for electronic money transfers, and electronic payments. ACH transfers are a safe and reliable method of transferring funds between different financial institutions and bank accounts.

ACH transfers are a way to transfer money without the use of cash, paper checks, credit card networks and wire transfers. They are usually free of cost and take about 3 to 5 business days for the transaction to go through.

ACH payments generally work best with small and frequent payments or deposits. You may be using ACH payments and might not be aware of it. Some common ACH payments include paying your bills electronically, receiving your salary through a direct deposit and even automatic contributions you make to a savings account.

How do ACH payments work?

ACH payments work by connecting two banks together and the ACH network acts as the intermediary between the two. The ACH creates a daily check and balance between the two banks or financial institutions and tallies their debits and credits. At the end of the day the ACH receives and calculates the amount that is to be sent to each bank or institution. It then sends out the relevant amount to each bank. It is important to note that ACH transfers are only applicable for checking accounts and savings accounts.

Aside from the ACH network when an ACH transfer takes place there are three other parties that are involved.

These are:

  • Originating Depository Financial Institution (ODFI): this is essentially the bank or institution that initiates the transaction e.g. The Bank of America sending out an ACH request for a company sending out their payroll.
  • Receiving Depository Financial Institution (RDFI): this is the bank or financial institution that is receiving the ACH payment e.g. the bank of the employee that is receiving the payroll.
  • National Automated Clearing House Association (NACHA): this the government body that is a non-partial, overseer and regulator of the ACH network.

Therefore, the ACH payments would work in the following manner:

The Bank of America will send the money with the routing information of the receiving bank to ACH. During that same day the receiving bank as well as all other banks will send ACH their transfers as well.

ACH will tally all this information and hold onto it until the end of the day at which point, they will see how much money needs to be sent to each bank and how much money needs to be credited from each bank. This is the reason that ACH transfers are not immediate and take 3 to 5 business days for the funds to deposit.

What is the cost to process ACH payments?

The cost of processing ACH payments is much lower than that of other money transfer methods generally. Although the specific rate to send the transfer my depend on your specific situation, a flat fee per transfer can range anywhere between $0.20 to $1.5. They can also offer bundle price or monthly rates which are often even lower for people who make very frequent ACH transfers.

Why are some ACH payments rejected?

Sometimes ACH payments can be rejected; this can happen due to a couple of reasons. Either you do not have enough funds in the account for the transaction or the bank account is frozen. There may also be a change in the bank account that you are trying to transfer the funds from. If you don’t update the information the payments will be rejected. There are usually fees charged for payments that are rejected.

ACH transaction limits

Banking institutions can set limits on your ACH transactions such as a daily limit, monthly limit and even dollar amount limits. These are imposed by the bank to limit how much money you can send by ACH transfers. There may also be a daily time limit after a certain time the ACH payment will be processed the next day. There may also be a limited on international transfers. It is best to read your banks policies on ACH transfers before you commit to making the transfer.

Global ACH

Normal ACH payments and transfer are limited to use between Canada and the United States under the ACH network. However, the global ACH network allows you to transfer funds beyond the United States and Canada. For certain types of transactions, you can use the global ACH network to transfer funds to other regions and countries such as South Korea, China, Hong Kong, Australia, Europe, India, Japan and etc.

The pros and cons of ACH transfers

Similar to other methods of transfer funds, ACH fund transfers have their pros and cons.


  • Cheaper costs: ACH payments or transfers are considerably cheaper or lower in cost compared to other method of money transfer such as wire payments which can even cost up to $60 per transfer. This is especially useful for businesses which require frequent and repetitive transfer of funds.
  • Secure and reliable: ACH payments ae a secure and reliable method of transferring funds and is monitored by NACHA.


  • Speed of transfer: Due to the fact that Ach payments can take several days to process; ACH payments or transfer might not be the optimal choice depending on the urgency of your payment or transfer. For example, if your bill payment is due in one or two days it might not be the best choice to use ACH payment as you may be charged with a late fee if the payment is not deposited within the two days.


ACH payments are secure and reliable method of making payments or transferring that is based on the ACH network which calculates and transfers funds between different banks and financial institutions. It is great for multiple or frequent payments and is cost effective. However, it is not the best for payments or transfer that need to be made immediately as there is a 3-5 business day processing period.

See Also

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