Payments made through the Automated Clearing House (ACH) are electronic transfers of funds from one bank account to another. ACH payments have been around for over four decades and were designed to be faster, safer, and more efficient than using paper checks to transfer funds. Many businesses and government agencies have long used ACH payments to direct deposit paychecks, for example, and they have also grown in popularity among individuals as a method of paying taxes and recurring bills. Normally, setting up ACH payments is a fairly simple process. However, it is beneficial to understand how they work, the variations and risks involved, and the fundamentals of setting up ACH payments through your intended payee or your financial institution.
Part 1: What Are ACH Payments?
1. Discover the fundamentals of ACH. The National Automated Clearing House Association (NACHA) was founded in 1974 by several regional clearing houses in the United States. These clearing houses facilitate money transfers between financial institutions.
The Automated Clearing House (ACH) was essentially an agreement among these organisations to streamline the process of clearing funds for transfer.
The NACHA now estimates that $40 trillion passes through the ACH Network each year.
2. Learn how ACH transactions work. Making a paperless payment to your utility company, for example, entails electronic transactions between you and your bank, the utility company and its bank, and the two banks and one of two ACH Operators that clear the transaction.
The Originator [you] initiates an ACH payment with his or her financial institution.
The ACH entry is recorded by the Originating Depository Financial Institution (ODFI) [your bank].
The ODFI groups and sends multiple ACH requests to one of two ACH Operators.
The ACH Operator of choice (the Federal Reserve or the Clearing House) clears the request and sends it (in batches) to the Receiving Depository Financial Institution (RDFI) [the electric company’s bank].
Within 1-2 business days, the RDFI credits the Receiver’s [the electric company’s] account.
3. Contrast ACH with alternatives. An ACH payment is similar to wire transfers, writing paper checks, and credit card charges because it uses paperless transactions, clearing payments between banks, and credits to accounts. However, it differs from each and has advantages (and disadvantages) over the alternatives.
A wire transfer is a paperless transaction between the payer and the payee that eliminates the “middle man” who clears the transaction. Western Union and other wire transfer companies merely facilitate the process (and charges a fee for it). Wire transfers are faster, happening almost instantly, but they are more expensive (due to facilitator fees) and may be more vulnerable to fraud (due to the lack of a “middle man” to clear the transaction). If you need to send money to someone quickly, a wire transfer is still the best option.
Paper checks are processed in a similar manner to ACH payments, but they are physically bundled, cleared, and exchanged between financial institutions. Those who are concerned about online hacking may believe that sending a paper check in the mail is safer, but keep in mind that a paper check contains your name, address, phone number, account number, and routing number. This is more than enough information for a thief to wreck your finances.
When deciding whether to set up automatic payments via ACH or credit card charges, one factor to consider is your fraud liability level. According to federal law, your liability for fraudulent credit card charges is zero, whereas the maximum liability for ACH payments (or debit card transactions) is $50 if you notify your bank within 48 hours, or $500 if you notify your bank within 60 days.
Also, keep in mind that if your credit card number is stolen, the available funds on the credit card will be reduced, but your bank account balance will not be affected. However, ACH debit will affect your bank account, and if the number is stolen, you may receive a bounced check or be unable to pay your bills.
4. Distinguish between ACH credit and ACH debit payments. There are two types of ACH payments available. Consider them as a “push” and a “pull” payment method, respectively.
The most common form of online bill payment through your bank is an ACH credit payment. You give your bank permission to send payments (one-time or recurring) to the designated payee.
An ACH debit payment, on the other hand, is more commonly associated with online bill payment via the recipient’s website — for example, setting up automatic payments via your electric company’s website. Essentially, you are giving the payee permission to withdraw funds (single or recurring) from your account.
As a result, ACH debits necessitate providing your account number and routing number to a third party, the payee (so they can withdraw funds). Because such information is kept in-house by your bank, ACH credits avoid this potential security risk.
As a result, if you have the option of setting up automatic payments for your electric bill through your bank (ACH credit) or the electric company’s website (ACH debit), the former may pose less risk to your personal financial information.
Having all of your bill pay information in one place can also be very convenient. If you need to change or verify anything, you can do so all in one place.
Making ACH Credit Payments, Part 2
1. Inquire with your financial institution about your ability to use online bill pay. Online bill pay has become a standard feature of bank accounts, and it is usually included for free.
You do not need to provide your bank account information because you are setting up online payments through your own bank. However, if you have multiple accounts with that bank, you must choose which to use for online payments.
Online bill payment interfaces vary by financial institution, but there’s no reason why yours shouldn’t be simple and straightforward. If it isn’t, you might want to look for a new bank.
2. Check with your bank to see if your intended recipient is eligible for ACH credit payments. Most banks should allow you to make an online payment to almost any company or individual, just as you can write a check to almost anyone.
Similarly, almost any potential payee should be able and willing to accept payments from your bank, but it never hurts to check.
Your online bill pay interface most likely already has information on common payees — credit card companies, local utilities, and so on — on file and ready to use. You may need to search for or select your electric company from a list, then enter your account number and payment zip code from your electric bill. This is frequently sufficient to get you started.
Other, less common payees or individuals may necessitate the provision of additional information. Examine your account statements or contact the company directly to get the correct billing information.
3. Determine whether you’re performing an ACH credit or a “paperless” paper transaction. Some smaller payees, such as your local water authority, and almost certainly individuals, may not be configured to receive paperless, ACH credit payments. In this case, your bank may print and mail you a paper check as part of its online bill pay service.
Instead of you remembering to write out and send a check to the water company, you may be authorising your bank to create and send a check to the water company on your behalf each time payment is due. Although this is not an ACH credit payment, you will most likely set it up in the same way.
Examine your online billing statements, which now typically include check images. You should be able to see an image of the check written on your behalf by the bank to pay the water bill.
While you will save money on postage, please keep in mind that these paper checks will have your account and routing numbers on them, making them no more secure than sending a check yourself.
Many people, regardless of whether they use an ACH credit or their bank account, use online bill pay instead of purchasing paper checks.
4. If desired, set up recurring payments. You’ll almost certainly want to set up a monthly payment for your rent or electric bill, giving yourself one less thing to remember each month.
You can set up a recurring ACH credit in the same amount at the same time each month, which is useful for things like mortgage payments where the amount due remains constant.
You can set up recurring payments in varying monthly amounts if your bank is able to receive online statements from the payees you designate — when available from a payee, this is usually an option when you add a new online bill payee. For example, you can have your credit card bill’s total balance due or minimum balance due paid automatically each month without you having to do anything.
If you have multiple automatic payments set up each month, keep an eye on your account balance to ensure you have enough funds. If you do not have enough funds to make an ACH credit payment, the payment will be rejected.
Making ACH Debit Payments in Part 3
1. Check to see if your intended recipient accepts ACH debit payments. Call the recipient or, more likely, go to the recipient’s website. If you are setting up ACH debit payments, you will almost certainly be doing so through the biller’s website.
Most businesses of any size have embraced online bill payment because it reduces their costs. Consider how much time and effort it takes to open all of those envelopes stuffed with paper checks and payment stubs.
2. Set up ACH debits in accordance with the recipient’s procedures. These will naturally vary depending on the recipient, but there are some common characteristics of the process.
If you sign up online, you must provide your bank account and routing number, in addition to standard information about yourself. These numbers can be found at the bottom of your checks. If you don’t have paper checks, you can find your account number on statements or other documents and then contact your bank to obtain your routing number.
Just a reminder: be cautious about who you give access to your account and routing numbers when setting up online payments or sending out a check, whether voided or active. Some security experts advise treating these numbers the same way you would your Social Security number, so think twice before providing them.
If you sign up by completing a form that will be mailed, faxed, or scanned, you may be required to provide a cancelled check, which will provide the payee with your account and routing numbers. In large, bold letters, write VOID across the middle of the check (and in ink).
3. Keep your eyes peeled for a small test transaction. If you set up automatic payments for your phone bill, your bank statement may show an ACH debit for a few pennies or even $0.00 from “GloboFone” (or whatever it may be).
A test transaction is a way for the recipient to confirm that your information is correct and that it can “pull” funds from your account.
4. Configure your payment parameters and wait for your ACH debits to start. Determine the frequency and amounts (recurring amount, balance due, minimum due, and so on) to be withdrawn each month or other time period.
You may be able to set up automatic email or text notifications when you receive a new bill, when a payment is posted, and so on. This is usually a good option.
There may be a delay of up to 1-2 billing cycles before an automatic payment plan goes into effect, so be prepared to pay another bill or two as usual.
Make sure you have enough money in your account so that an automatic ACH debit does not overdraw it. If the electric company attempts to withdraw $100 from your account and you only have $80 in it, you will be charged overdraft fees by your bank, as well as any interest/penalties imposed by the payee.
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