ACH Payment Processing: What It Is and How It Works

Key takeaways:

• Merchants primarily use ACH payments to collect recurring revenue from subscriptions, memberships, and invoice-based billing.
• Businesses opt to accept ACH payments to reduce processing fees, minimize payment failures, and streamline cash flow for regular transactions.
• Service-based, subscription-driven, and B2B businesses benefit most from ACH due to its low cost, reliability, and suitability for scheduled billing cycles.

What is ACH payment processing?

ACH payment processing is an electronic payment method that moves funds between banks without using paper checks or credit card networks. Governed by the National Automated Clearing House Association (Nacha), the ACH network processes various transaction types, such as payroll direct deposit and vendor payments, in batches throughout the day.

ACH supports two main transaction categories:

• Direct deposits: Employer-to-employee payroll, tax refunds, and benefits disbursements
• Direct payments: B2C and B2B transactions, such as subscriptions, bill payments, or invoice settlements

ACH vs e-checks

ACH payments are electronic bank-to-bank transfers processed through the ACH network. They include both credits (sending money) and debits (pulling money) for transactions like payroll, bill pay, and subscriptions.

Meanwhile, an e-check (electronic check) is a digital version of a traditional paper check that authorizes a merchant to withdraw funds directly from a customer’s bank account.

E-checks are also processed through the ACH network; essentially, ACH is the broader category, while e-checks are a specific format that mimics the structure and process of a traditional check. They are used for one-time transactions where a digital alternative to paper checks is needed, such as invoice settlement or larger B2B transfers.

How ACH payments work

ACH transactions begin when a merchant (or payer) obtains authorization from a customer to debit or credit their bank account. The process includes several parties:

• Originating Depository Financial Institution (ODFI): The payer’s bank submits the transaction to the ACH network.
• ACH Operator: Either the Federal Reserve or The Clearing House batches and clears the payment.
• Receiving Depository Financial Institution (RDFI): The recipient’s bank receives and posts the funds.

ACH payments can take one to three business days to settle. Each batch run includes thousands of transactions, making ACH efficient for high-volume, non-urgent payments.

The future of ACH payments

One of the biggest challenges in using ACH payments for day-to-day transactions is the processing delay. Though there is still a long way to go, some progress has been made in this area in the form of Same Day ACH and RTP (an alternative), which are now being used in banking and third-party apps.

Same Day ACH (Not real-time, but faster)

Faster than standard ACH (one to three days), but not instantaneous — batches still process several times per day.

• What it is: A faster version of traditional ACH, introduced by Nacha.
• Speed: Funds settle the same business day if the payment is submitted before a cutoff time (typically around 4:45 p.m. ET).
• Availability: Widely supported by banks and processors.
• Use case: Payroll, bill payments, emergency disbursements.

Real-Time Payments (RTP) by The Clearing House

RTP is a true real-time alternative by one of the two ACH operators in the U.S. that works alongside Nacha, though it uses an entirely different payment rail from the ACH network.

• What it is: A completely separate system from ACH that supports instant bank-to-bank transfers
• Speed: Real-time (typically seconds), with immediate confirmation and settlement
• Availability: Growing bank adoption, but not yet universal
• Use case: Emergency P2P payments, real-time bill pay, B2B disbursements

SEE: P2P Payments: Benefits, How It Works, and Top Payment Apps

Common use cases for ACH payments

ACH is used extensively across industries for a range of purposes:

• Payroll and employee reimbursements
• Subscription billing and SaaS renewals
• Vendor payments and invoice settlements
• Utility bills, rent, tuition, and mortgage payments
• P2P money transfers via platforms like Venmo and Zelle

As a payment method, ACH is particularly attractive to small businesses seeking cost-effective digital payment alternatives. Businesses that rely on predictable, recurring payments benefit most from ACH due to its lower failure rate and fees compared to card payments. This includes:

Subscription-based businesses

Companies offering recurring services, such as SaaS platforms, subscription boxes, or memberships, rely on consistent monthly billing. ACH reduces the risk of failed payments due to expired cards and lowers transaction fees, improving retention and margins.

Professional services firms

Accountants, consultants, attorneys, and other service-based professionals often invoice clients for large, scheduled payments. ACH provides a low-cost, reliable method for collecting payments without the credit card processing overhead.

Property management companies

Landlords and property managers benefit from ACH for collecting monthly rent and lease payments. Tenants can set up automated transfers, reducing late payments and administrative work.

Healthcare and wellness providers

Clinics, dental offices, and therapists with ongoing patient billing, like payment plans or retainers, can use ACH to reduce processing costs and automate collections. It also simplifies financial workflows and reduces reliance on mailed checks.

Educational institutions and training providers

Private schools, online course platforms, and training academies offering tuition or class subscriptions can use ACH for predictable, recurring revenue. ACH helps avoid card failures and provides students or parents with an easy, bank-based option.

Nonprofits and charitable organizations

ACH makes it easy to collect recurring donations or pledges with lower fees than credit cards, maximizing the value of contributions. Donors can authorize regular bank transfers, which improves predictability for financial planning.

B2B companies with contract-based billing

Businesses providing goods or services to other businesses on net-30, net-60, or retainer terms can streamline receivables with ACH. It minimizes manual invoicing friction and improves cash flow reliability.

SEE: The Ultimate Guide to B2B Payments

Pros and cons of ACH for businesses

ACH is especially valuable for minimizing involuntary churn in recurring billing environments, where card expiration or cancellation can otherwise disrupt service.

How to set up ACH payments for your business

To accept ACH payments, follow these steps:

1. Select a payment processor that supports ACH (e.g., Stripe, Square, Helcim, PaymentCloud).
2. Obtain authorization from customers. This typically includes account and routing numbers with a signed agreement.
3. Integrate ACH with your invoicing or accounting software, such as QuickBooks.
4. Confirm Nacha compliance for data formatting and transmission protocols.
5. Test your setup with a small transaction before rolling it out company-wide.

Providers vary in terms of fees, settlement speed, and features such as recurring billing or virtual terminals.

SEE: Best ACH Payment Processing for Businesses

ACH payment security and compliance

ACH payments are governed by the Nacha Operating Rules, which set baseline requirements for data protection, fraud prevention, and regulatory compliance. If your business initiates or processes ACH transactions, whether directly or through a provider, you are responsible for meeting these requirements.

Data encryption

Nacha requires that any non-public customer banking information (like account and routing numbers) be encrypted during transmission. Use only ACH processors that support Secure File Transfer Protocol (SFTP), HTTPS, or similar encryption standards.

Tokenization and secure storage

While Nacha doesn’t mandate tokenization, it’s strongly recommended. Replacing bank account details with secure tokens minimizes the risk of breaches. Choose a payment provider that tokenizes account data and offers PCI-compliant storage practices.

Fraud detection and risk monitoring

Businesses must implement commercially reasonable fraud detection systems to identify unauthorized or suspicious activity. Set transaction limits, use IP geolocation filters, and monitor for unusual payment patterns (e.g., multiple transactions from the same account).

Account validation

Nacha rules now require businesses to verify a customer’s account information before initiating the first ACH debit. Use micro-deposits or third-party validation services to confirm account ownership during onboarding.

Authorization and retention

You must obtain explicit authorization from customers before initiating ACH transfers and retain this authorization for at least two years. Store signed ACH agreements or digital authorizations in a secure, searchable format in case of audit or dispute.

Handling disputes, returns, and failed ACH payments

While ACH payments offer high reliability, they are not immune to failures or disputes. Understanding how these situations differ from credit card chargebacks is essential for protecting your business’s cash flow and maintaining customer satisfaction.

Common reasons ACH transactions fail

Compared to credit cards, ACH failures are usually related to bank account status or authorization, not fraud or transaction disputes at the point of sale. ACH payments may be rejected for several reasons, often signaled by specific return codes:

• Insufficient Funds (R01): The customer’s account lacks the necessary balance to cover the payment.
• Closed or Invalid Account (R02 / R03): The account is no longer active, or the routing/account number is incorrect.
• Unauthorized Debit (R10 / R29): The customer disputes the charge as unauthorized or claims the authorization was revoked.
• Banking data entry errors: Manual input of bank information by customers can lead to mistyped numbers and failed transfers.

How ACH returns are handled (vs credit card chargebacks)

ACH provides fewer consumer protections than credit cards, meaning your business faces less automatic liability. That said, you must still respond quickly and professionally to resolve disputes. Once an ACH payment settles, reversing it is far less common than with card transactions. Disputes must meet narrow criteria, such as unauthorized or incorrect billing, in order to get approved.

For successful disputes, ACH returns typically occur within two to five business days of initiating the transaction, much faster than the 30- to 90-day window allowed for credit card chargebacks. In terms of cost, return fees for ACH are usually minimal (often $2 to $5), unlike credit card chargebacks that can carry hefty penalties, lost revenue, and processing fees up to $25 or more per dispute.

International ACH and cross-border considerations

ACH payments are primarily U.S.-based, but International ACH Transactions (IATs) extend this capability. However, despite growing support, international ACH is still less prevalent than wire transfers or SWIFT for cross-border transactions, especially where real-time settlement is critical.

That said, IAT is a viable option for U.S. businesses with moderate cross-border payment needs. It offers a secure, low-cost alternative when compliance and formatting standards are met, especially for recurring payments and vendor disbursements.

• Remote-first or global service providers: Businesses that serve clients internationally, such as digital marketing agencies, SaaS vendors, design studios, or freelance platforms, can use IATs to receive lower-cost payments from customers abroad.
• Educational and training platforms: Online course providers and universities accepting tuition or enrollment payments from international students may benefit from ACH alternatives to wire transfers, especially for recurring payment plans.
• Nonprofits with international donors: Charitable organizations with donor bases in multiple countries can use IATs to collect contributions cost-effectively without requiring donors to navigate expensive remittance platforms.

Please note that IATs are not processed in real-time, unlike wire transfers or SWIFT payments. While they offer a lower-cost alternative, they may take additional time and require advance planning.

ACH payment processing frequently asked questions:

How long does it take for an ACH transfer to process?

ACH transfers typically take one to three business days to process, though Same Day ACH can complete transactions within the same day. Processing speed depends on the bank’s cutoff time and the type of ACH service used.

What is the maximum amount you can send through ACH?

There is no universal limit for standard ACH transfers, but individual banks or processors may impose their own caps. For Same Day ACH, Nacha currently sets a per-transaction limit of $1 million.

Are ACH payments secure?

Yes, ACH payments are secure and regulated by Nacha, which enforces rules around encryption, fraud detection, and transaction monitoring. Businesses must follow strict compliance standards to protect sensitive banking data.

Can ACH payments be reversed or canceled?

ACH payments can be reversed under certain conditions, such as duplicate charges or wrong account numbers, but reversals must typically be requested within a short window. Once processed and settled, ACH payments are generally final.

How do ACH payments compare to wire transfers?

ACH payments are less expensive and suitable for recurring or non-urgent transactions, while wire transfers are faster, more expensive, and used for high-value or time-sensitive payments. Unlike ACH, wire transfers settle in real-time and cannot be reversed.