Automated Clearing House (ACH) payments are an electronic funds transfer from one
bank account to another. ACH payments have been around for over forty years, and were developed with the intention of being faster, safer, and more efficient than the use of paper checks to transfer fu6nds. Many businesses and government entities have long used ACH payments to direct deposit paychecks, for instance, and they have also gained popularity among individuals as a way to pay taxes and recurring bills. Setting up ACH payments is normally a fairly simple process.
That said, it is helpful to understand how
they work, the variations and risks involved, and the basics of setting up ACH payments either through your intended payee or your financial institution.
1. Understanding ACH Payments
Learn the basics of ACH. The National Automated Clearing House Association
(NACHA) was established in 1974 by several U.S. regional clearing houses, the entities
that facilitate money transfers between financial institutions.
• ACH was essentially an agreement among these organizations to streamline the
process of clearing funds for transfer.
• The NACHA now estimates that $40 trillion per year passes through the ACH
Network.
Find out how ACH transactions work.
Making a paperless payment to your electric company, for instance, involves electronic transactions between you and your bank, the electric company and its bank, and the two banks and one of two ACH Operators which clear the transaction.
• The payment Originator [you] initiates an ACH payment with his/her financial
institution.
• The Originating Depository Financial Institution (ODFI) [your bank] records the
ACH entry.
• The ODFI batches together and sends multiple ACH requests to one of two ACH
Operators.
• The chosen ACH Operator (the Federal Reserve or the Clearing House) clears the
request and transmits it (in a batch) to the Receiving Depository Financial Institution (RDFI) [the electric company’s bank].
• The RDFI credits the Receiver’s [the electric company] account within 1-2
business days.
Compare ACH to alternatives. With elements such as paperless transactions, clearing of payments between banks, and credits to accounts, an ACH payment has some similarities to wire transfers, writing paper checks, and credit card charges. But it is different from each and has strengths (and possible weaknesses) vis-a-vis these
alternatives.
• A wire transfer is a direct, paperless transaction between payer and payee, cutting out the “middle man” that clears the transaction. The wire transfer company, such as Western Union, only facilitates the process (and charges a fee for it).
Wire transfers are faster, happening almost immediately, but cost more (because of
facilitator fees) and may run more risk of fraud (because the lack of a “middle man” to clear the transaction). If you need to get money to someone right away, a wire transfer is still the fastest way to go.
• Paper checks follow almost exactly the same process as ACH payments, but they
are physically bundled, cleared, and exchanged between financial institutions.
Sending a paper check in the mail may seem safer to those who fear online hacking, but remember that a paper check has your name, address, phone number,
account number, and routing number. This is more than enough information for a
criminal to wreak havoc on your finances.
• If you are debating whether to set up automatic payments by either ACH payments or credit card charges, your fraud liability level is one factor to consider. By federal code, your liability for fraudulent credit card charges is $0, while with ACH payments (or debit card transactions, for that matter) the maximum liability is $50 if you notify your bank within 48 hours or $500 if you do so within 60 days.
• Also, keep in mind that if your credit card number is stolen, then this can reduce
your available funds on the credit card, but will not affect your bank account balance. However, ACH debit will affect your bank account and you may end up with a bounced check or not be able to pay your bills if the number is stolen. Distinguish ACH credit payments from ACH debit payments. There are actually two forms of ACH payment you can make. You may want to think of them as a “push” and a “pull” payment method, respectively.
• An ACH credit payment is the form most common to online bill paying through
your bank. You authorize your bank to send payments (single or recurring) to the
designated payee.
• An ACH debit payment, however, is more common to online bill paying through the recipient’s website — for example, setting up automatic payments via your electric company’s site. Essentially, you are authorizing the payee to take payments (single or recurring) from your account.
• ACH debits, thus, require you to provide your account number and routing number to a third party, the payee (so they can withdraw funds). ACH credits avoid this potential security risk because such information remains in-house with your bank.
• Therefore, if you have the option of setting up automatic payments for your
electric bill either through your bank (ACH credit) or through the electric company’s website (ACH debit), there may be less risk to your personal financial information by choosing the former.
• Having all of your bill pay information together in one account can also be quite
convenient. If you need to change or verify anything, then it is all in the same place.
2. Making ACH Credit Payments
Contact your financial institution regarding your access to online bill pay features. Online bill pay has become a standard feature of bank accounts, and is usually free with your account.
• Because you are setting up online payments through your own bank, you don’t have to worry about providing your bank account information. If you have
multiple accounts with that bank, though, you’ll have to choose which to use for online payments.
• Online bill payment interfaces vary by financial institution, but there is no reason
yours should be anything but intuitive and easy-to-use. If it isn’t, you may want to
shop around for a new bank. See if your intended recipient is eligible for ACH credit payments via your bank. Most banks should permit you to make an online payment to virtually any company or individual, just as you can write a check to just about anyone.
• Likewise, just about any potential payee should be able and willing to receive
payments from your bank, but it cannot hurt to contact them and make sure.
• Your online bill pay interface probably has information on common payees — credit card companies, local utilities, etc. already on file and ready to go. You may have to search or choose your electric company from a list, for instance, then provide your account number and payment zip code from your electric bill. Often this is enough to get you started.
• Other, less common payees, or individuals, may require additional information to be provided. Look at your account statements and/or contact the company directly to obtain the proper billing information.
Determine if you are making an ACH credit or a “paperless” paper transaction. Some smaller payees — such as perhaps your local water authority — and almost certainly individuals may not be set up to receive paperless, ACH credit payments. In this case, your bank may actually print up and mail a paper check for you as part of its online bill pay service.
• Instead of you remembering to write out and send a check to the water company,
then, what may be happening is that you are authorizing your bank to create and
send a check to the water company for you each time payment is due. This isn’t
actually an ACH credit payment, but you will probably set it up in the same
manner as one.
• Examine your online billing statements, which usually now contain check images.
You should be able to see the image of the check drawn up by the bank on your
behalf to pay the water bill.
• While you’ll save on postage, please note that these paper checks drawn up for
you will have your account and routing numbers on them, so they are no more
secure in that regard than sending a check yourself.
• Many people use online bill pay instead of purchasing paper checks, regardless of
whether they use an ACH credit or their bank account. Set up recurring payments if desired. For your rent payment or electric bill, you’ll almost certainly want to set up a monthly payment, thereby giving yourself one less thing to forget about each month.
• You can set up a recurring ACH credit in the same amount at the same time each
month, which is good for something where the amount due remains steady, such
as a mortgage payment.
• If your bank is able to receive online statements for your from the payees you
designate — when available from a payee, this is usually an option when you add
a new online bill payee — you can set up recurring payments in varying monthly
amounts. For instance, you can have your total balance due or minimum balance
due for your credit card bill paid automatically each month, without you having to take any action.
• If you have multiple automatic payments happening each month, keep a close eye
on your account balance to make sure you maintain sufficient funds. If you have
insufficient funds to make an ACH credit payment, the payment will not be made.
3. Making ACH Debit Payments
See if your intended recipient allows ACH debit payments. Call or, more likely, visit
the recipient’s website. If you are setting up ACH debit payments, you will more than
likely be doing so via signing up on the biller’s website.
• Most companies of any significant size have embraced online bill payment
because it cuts down on their costs. Think of all the time and staff it takes to open
all those envelopes stuffed with paper checks and payment stubs.
Follow the recipient’s procedures for setting up ACH debits. These will naturally
vary by recipient, but there are some typical features of the process.
• If you are signing up online, you will have to provide, along with standard
information about yourself, your bank account and routing number. You’ll find
these numbers along the bottom of your checks. If you don’t have paper checks,
you can find your account number on statements or other documents, and contact your bank and request your routing number.
• Just a reminder: when setting up online payments, or sending out a check,
whether voided or active, be careful regarding whom you are providing access to
your account and routing numbers. Some security experts recommend that you
treat these numbers in the same way you do your Social Security number, so think
before you provide them.
• If you are signing up by filling out a form to be mailed, faxed, or scanned, you
may have to provide a canceled check, which will give the payee your account
and routing numbers. Write VOID across the middle of the check in bold, large
letters (and in ink).Keep an eye out for a small test transaction. If you are setting up automatic payments for your phone bill, you may see an ACH debit for a few pennies or even $0.00 from “GloboFone” (or whatever it may be) on your bank statement.
• Such a test transaction is the recipient’s way of confirming that your information
is correct and that it is able to “pull” funds out of your account.Set up your payment parameters and wait for your ACH debits to begin. Establish
the timing and amounts (recurring amount, balance due, minimum due, etc.) to be
withdrawn each month or other time period.
• You may be able to set up automatic notifications by email or text when you have a new bill, when a payment is posted, etc. This is usually a wise choice.
• There may be a delay of up to 1-2 billing cycles before an automatic payment
plan takes effect, so be prepared to pay another bill or two as you did before.
• Make sure you have sufficient funds so that an automatic ACH debit does not
overdraw your account. If the electric company tries to pull out $100 from your
account and you only have $80 in it, expect to pay overdraft fees with your bank,
as well as any interest/penalties imposed by the payee.
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