ACH transfer
An electronic bank-to-bank payment through the US Automated Clearing House network, used for payroll, supplier payments and direct debits.
In short
- ACH moves money in batches, usually settling the same day or the next business day.
- It is much cheaper than wires or cards, which makes it the default for recurring business payments in the US.
- Canada's equivalent is EFT; Europe's is the SEPA credit transfer.
An ACH transfer is an electronic payment between bank accounts in the United States, processed through the Automated Clearing House network under rules set by Nacha. It covers both credits, where the payer pushes money to the recipient, and debits, where the recipient pulls money from the payer's account with authorization.
How it works
Banks collect payment instructions from their customers and submit them in batches several times a day. The ACH operators sort and exchange them between banks, which settle the net amounts. Standard ACH typically settles within one or two business days, and same-day ACH is available for most payments below a per-payment limit, at a slightly higher cost.
Common uses
- Payroll: direct deposit of salaries.
- Supplier payments: accounts payable payment runs.
- Direct debits: utilities, subscriptions, loan payments and insurance.
- Customer payments: B2B customers paying invoices by bank transfer.
Remittance data
An ACH payment can carry a small amount of reference information, and a richer format can carry full remittance detail listing the invoices paid. When it doesn't, the recipient has to match the payment to invoices using a separate remittance advice.
Outside the US
In Canada, the equivalent is an electronic funds transfer (EFT) cleared through Payments Canada's systems; many people still call it ACH. In Europe, SEPA credit transfers and SEPA direct debits play the same role across the euro area.
Worked example
A weekly supplier run
A US distributor pays 60 suppliers each Friday. Its AP system creates one ACH file for $412,000, which the bank submits that afternoon. Suppliers receive funds on Monday, and each payment carries the distributor's reference so the supplier can see which invoices it covers. The bank charges a few dollars for the whole batch, compared with about $25 per wire.