This is a guest post written by Mariah K. Young. As a Digital Marketing Specialist at Dwolla, she helps educate people on the ideal API for moving money from one bank account to another. If you’d like to learn more about Dwolla’s ACH API, visit the blog.
At Dwolla, I spend a lot of time explaining to people the ins and outs of ACH payments. What I’ve realized is that while we all move money every day/week/month, we really don’t know the systems and technology behind how that money is moving.
For example, you may receive a direct deposit payment from your employer each month. Do you ever wonder how exactly that money got there? Let me tell you, it’s not the magic money fairies, there’s a whole system behind that money movement. We’ll start at the top…
What does ACH stand for?
ACH stands for the Automated Clearing House. This “clearing house” is not a physical place, but rather an electronic network that allows banks and their customers to send funds between one another in the United States. Essentially, the ACH system is responsible for moving all funds between banks within the U.S.
So the better question to be asking is, what does ACH actually do?
The ins and outs of ACH
Before diving too deep into the “How” of ACH, let me provide some high-level background knowledge. There are three additional acronyms that are helpful to know before diving deep into ACH:
- ODFI aka Originating Depository Financial Institution
- RDFI aka Receiving Depository Financial Institution
- NACHA aka National Automated Clearing House Association: NACHA is the governing body of the ACH Network. They ensure regulations are met, create new procedures (like Same Day ACH), etc.
Okay, so back to how ACH works.
An ACH transaction is an electronic payment initiated to or from a bank account. There are two ways to think about these electronic payments: ACH credits and ACH debits.
An ACH credit is when you initiate a transfer from the sending account – you are essentially instructing the ODFI to push the money from the sending account into the destination account at the RDFI.
On the other hand, an ACH debit is when you initiate a transfer from the receiving account – you are sending instructions to the ODFI to pull funds from the sending account.
Example #1: With payroll direct deposit, you’ve already provided your employer your bank account and routing numbers, then when payday arrives, your employer’s ACH processor initiates the funds transfer (via an ODFI) into your bank account using the ACH network. Once those funds have successfully cleared, you’ll enjoy a new credit to your bank balance and an ACH transaction will have taken place!
Example #2: When your account is being debited, like when you pay your utility bill with the “echeck” option, the debiting party—or utility company in this situation—sends a request to pull funds from your bank account using the ACH network. Once those funds have successfully cleared, you’ll have a debit to your bank balance and an ACH transaction will have taken place.
With both ACH credits and ACH debits, there is a confirmation process in place in which the RDFI and ODFI “communicate” with each other after the entries have been posted to the account;e. if there aren’t enough funds or there are other issues, you’ll receive a notification. While this communication takes place, an ACH transaction is noted as pending.
For more detail, check out these rules from NACHA.
Business Benefits: Who’s using ACH payments?
Now that you have some sense of how ACH payments work day in and day out, let’s talk about how businesses can find a benefit in using ACH in their day to day processes.
Lower per transaction fees: The major differentiator for ACH transactions over credit cards are how fees are structured. Credit cards typically charge a percentage of the transaction, while ACH is just a few pennies to process.
Save Time: If you’re still operating in a world of check-based payments then you’re likely losing time and struggling with the headaches of managing an archaic payment method. Considering an integrated ACH provider can help you save time in managing the payments process.
Confidence in payments: As you’ve learned above, there is a confirmation process in place between the RDFI and ODFI. This confirmation ensures a better level of payment security than the check example.
Better built for recurring billing: Unlike your credit card, bank accounts and their associated routing numbers don’t expire. This is great if you’re dealing with recurring payments, like rent.
There are far more examples of why and how businesses use ACH payments within their platform. For example, Rentberry has integrated an ACH Payments API in order to make paying rent a more seamless experience for their users. They’ve made it possible to skip the paper check, instead tapping the ACH network to pay rent online right from a bank account.
To learn more about accessing the ACH network, tap the experts—learn more about Dwolla’s ACH API.
