How Does an ACH Payment Work? 2025 Guide

ACH payments are an effective way to improve the payment collection experience for customers and increase convenience. Continue reading this guide to help your business understand how to leverage ACH and also learn why your business should use Podium Payments.

What is an ACH Payment?

ACH payment is a type of electronic fund transfer system that facilitates the secure and efficient transfer of money between bank accounts in the United States. They’re commonly used for various financial transactions that include direct deposits, bill payments, business-to-business (B2B) payments, and person-to-person transfers.

ACH payments have really taken off over the last few years, experiencing explosive growth as the marketplace has advanced. Just last year, B2B payments increased over 10% from the previous year. In only the first half of the year, the value of same-day transactions increased by nearly 52%. And the numbers are continuing to grow.

How ACH Payments Work

So, how does ACH work? First, someone (and individual, business, financial institution, etc.) initiates an ACH payment by creating an ACH transaction request. This request includes relevant information such as the amount to be transferred, the recipient’s bank account details, and the type of transaction (direct deposit, bill payment, etc.).

The originator’s bank, known as the Originating Depository Financial Institution (ODFI), processes the ACH payment request and submits it to the ACH network for further processing. The network then forwards the payment instructions to the Receiving Depository Financial Institution (RDFI)–the bank of the recipient.

After the bank processes the request, the bank transfers the funds which are either credited to the recipient’s account in the case of a credit transaction like a direct deposit, or debited from the account of the payer in the case of an ACH debit transaction like a bill payment.

It’s important to note that there are two primary categories of ACH payment options: direct and indirect.

• Direct payments involve transferring funds directly from one customer’s account to another. Again, this can include transactions such as direct deposits and bill payments.
• Indirect payments, on the other hand, typically involve an intermediary or third-party service to facilitate a transfer of funds between different banks or parties. The payment failure rate is lower than that of direct payments.

Due to its cost-effectiveness, efficiency, speed, automation, integration capabilities, and security, more and more business owners are turning to ACH to operate their finances.

3 Types of ACH Payments You Need To Know

Now that we’ve covered the basics, let’s take a look at varieties. Here are three types of ACH payments and transfers, how each works, and when your business should use them.

1. Direct Deposits

As we mentioned, direct deposit is a type of ACH payment where funds are electronically deposited directly into a recipient’s bank account. Businesses should use direct deposit for paying employees’ salaries, bonuses, and benefits.

2. Same-Day ACH

Same-day ACH allows you to process ACH transactions quickly, with settlement taking place on the same business day. Businesses should use same-day ACH for time-sensitive transactions, expedited payroll processing, or urgent payment requests.

3. ACH Credit

ACH credit transfers involve electronically depositing funds into a recipient’s bank account. Unlike direct deposit, which is typically used for payroll, these credit transfers can be used for various one-time or recurring payments including vendor payments and reimbursements. Businesses should use ACH credit for making vendor payments, issuing reimbursements to employees or customers, and handling other disbursements.

Benefits and Drawbacks of ACH Payments and Transfers

Like any payment method, ACH has its benefits and drawbacks. For example, ACH information never expires, but ACH payments come with overdraft or overpayment risks. Listed below are the main advantages and disadvantages of the platform and what you should be aware of when making the switch.

Benefits of ACH payments

Let’s start with the good. Here are a few distinct benefits of using ACH:

1. Cost-Effective

ACH transactions are typically more cost-effective than traditional paper-based (paper checks) or credit card (and debit card) methods. Businesses can save on payment processing fees, making it an attractive option for high-volume transactions.

2. Convenience

ACH payments offer consistent convenience to your customers by providing a seamless and electronic method for making payments. This can lead to improved customer satisfaction, especially in the case of recurring payments where customers might prefer automated processes.

3. Enhanced security

ACH transactions incorporate robust security measures, including encryption and authentication, to ensure confidentiality and integrity in all electronic fund transfers. This provides businesses and consumers with confidence in the safety of their financial transactions–a huge component of credibility and trust for your business.

4. Automation and recurring payments

ACH is well-suited for recurring payments such as subscription fees, utility bills, and loan repayments. Businesses can set up automatic payments, reducing the burden on both you and your customer. And as you know, less headaches all-around is a great thing.

Disadvantages of ACH payments

Now for the challenges. Here’s what you should be aware of when implementing ACH:

1. ACH Payment Processing Time

The biggest challenge: ACH payments are not instantaneous. Standard ACH transactions may take a few business days to complete. While same-day ACH expedites the process, it can come with additional fees and is not always available for all types of transactions.

2. Limited International Use

ACH payments are primarily designed for domestic transactions within the US and are not well-suited for international payments. Businesses engaging in global transactions may need to use alternative payment methods for cross-border transfers.

3. Risk of Reversal

Like a few other payment methods, with ACH, not all payments go through. If a customer has insufficient funds, a closed account, or inaccurately enters their account information, the transaction can fail or be rejected by the bank. Additionally, obtaining proper authorization for ACH transactions can sometimes be challenging.

How to Accept ACH Payments

We’ve covered the risks and advantages, and now it’s time to put everything into action. Here’s a specific, step-by-step guide for accepting ACH payments:

1. Choose a Payment Service Provider

Research and choose a payment service provider that supports ACH payments. Providers can include traditional banks, online payment processors, or dedicated ACH service providers. Carefully consider factors such as fees, features, and compatibility with your business needs.

2. Obtain an ACH merchant account

If you’re not using your bank directly, you may need to obtain an ACH merchant account from your chosen payment service provider. This account enables you to accept ACH payments and may require you to submit relevant business documents.

3. Verify Your Business and Bank Account

Complete the necessary verification processes for your business and bank account. This will probably involve providing sensitive information about your business (routing number, account number, checking account, savings account, etc.), tax identification number (TIN), and verifying your ownership of the account where funds will be deposited.

4. Set Up a Payment Gateway or Software

Integrate ACH processing into your payment infrastructure by setting up a payment gateway or ACH processing software. (This is the tech that facilitates the secure transmission of payment information between your website or system and the ACH network.)

5. Display ACH as a Payment Option

Implement your ACH payment option on your website or payment platform. Clearly communicate to customers that you accept ACH payments, and provide any necessary instructions for them to select this method.

6. Confirm and Track Payments

Once ACH payments are initiated by customers, confirm and track the transactions. Ensure that your system provides real-time or near-real-time updates on every payment status. This may involve sending confirmation emails to customers and updating order or invoice statuses in your system.

Payment Solutions for Small Businesses

There are a number of payment solutions out there that can make your life easier. But when it comes to finding a payment solution that has a wealth of experience and a proven success record for your small or growing business, there’s no better solution than Podium Payments.

“One of the ways for us to succeed in business is to keep ahead of the times. Podium Payments was the next step. Our customers were looking for ease of use. They were looking for quick responses…it was just easier for us to process payments using Podium.” – Andrew Mascaro, Marketing Manager, Lux Bond & Green

With Podium, you can:

• Provide financing, subscriptions, Buy Now Pay Later services, and estimates.
• Simplify the payment experience for you and your customers.
• Manage payment transactions in the same channel you use for customer messages.
• Guarantee the security and accuracy of your transactions with automated reconciliation and advanced fraud protection.
• Convert your phones into card readers, offering customers a swift and secure payment alternative.

The results speak for themselves.

“Just two months after my team began using Podium Payments, our accounts receivable were reduced to zero! Thanks to Podium Payments, our average time-to-payment this month is just 24 minutes!” – Justin Miller, Franchise Owner, Wow 1 Day Painting

“We no longer use any paper statements and have put our entire revenue management team on Podium. It’s super convenient for our patients, which we love, but also for our team members.”     – Hillary Smedley, VP of Operations at Genesis Dental

ACH Payments FAQs

If you still have questions, don’t sweat–we’ve got answers. Here are a few FAQs to get you started.

What are examples of ACH payments?

Ready for some use cases? We’ve got you covered. Let’s say Warner Dental has acquired a large amount of expensive dental equipment from another dentistry. Warner Dental might use ACH here to pay the dentistry for these supplies. Companies often use ACH for B2B transactions, including payments to other businesses for services rendered, supplies, or contractual agreements.

Other common use cases include tax payments, vendor payments, recurring bill payments (utility, mortgage, subscription, loan, etc.), employee expense reimbursements, payments sent in batches, and more.

What’s the difference between ACH payments and wire transfers?

Good question–there are a couple of major differences to keep in mind. ACH transactions are generally more cost-effective while wire transfers tend to have higher associated fees, both from the sending and receiving banks. ACH payments are often subject to transaction limits, which may vary based on the bank and transaction type. Wire transfers typically allow for larger transaction amounts and are ideal for time-sensitive and high-value transactions such as real estate transactions, large business payments, or international money transfers.

What’s the difference between ACH payments and EFT payments?

EFT, or Electronic Funds Transfer, is a broader term that encompasses any transfer of funds initiated electronically. EFT can include various electronic payment methods, such as ACH payments, wire transfers, electronic checks (eChecks), and other electronic payment systems. Essentially, ACH is a subset of EFT.

EFT payments can be both domestic and international, depending on the specific method used. ACH transfers are domestic and are typically used for transactions within the US. You can learn more about ACH on the National Automated Clearing House Association (NACHA) website.