How Does ACH Work?
ACH (or Automated Clearing House) is the quintessential payment method in America that can do a debit/credit directly into your bank account electronically.
The system itself is extremely outdated and hence the race for a new faster payments system in US, although that will still take some time.
It is estimated that ACH transactions processed over $40 Trillion in the US in 2015 alone.
Today, ACH is one of the most cost-effective way to take payments from client or reimburse them electronically. Average ACH costs vary (depending on provider and type of business), but it is anywhere from 10 cents to 50 cents. Some providers like Dwolla used to have it free for anything under $10 and 25 cents for anything over $10 (a great model if you ask me personally). Now its all free! (See their pricing plans).
Despite it being over 40+ years old, it is the system that is used widely in the US for payments. NPR’s Planet Money did a really good show on how ACH works, it is a must listen before you read through the documentation of how it actually works.
Because the ACH is a 2–3 day process, it is important to understand how the process looks like. Below is a time-motion diagram of a typical ACH transaction:
Some companies now even offer next-day or same day ACH with the help of using technology originally put out by Plaid. Others in the space are Knox Payments, Synapse, etc.
Though there are 100s of articles, explaining how ACH works, nothing comes close to the good work that the folks at Zen Payroll have put out:
Balanced Payments (which is now no more), has a beautiful write-up / infographic depicting how an ACH works:
I wish there was a great video for ACH and explaining how it works, sadly there are none.
This is the only video that is reasonably worth watching, though still not quite what I was looking for.
Hope this information helps.
About the Author: As an independent banking & payments consultant, Faisal Khan helps businesses overcome the myriad issues facing a payments business. He also contributes his knowledge to answer questions on Q&A site Quora. Faisal is one of the co-hosts of Around The Coin, a popular weekly podcast about banking, money and payments.
His official website is at www.faisalkhan.com
