What Is ACH?
ACH (Automated Clearing House) refers to a network that allows participating financial institutions to transfer funds electronically between accounts. While Nacha (the National Automated Clearing House Association) is the sole authority governing the rules, there are also two operators responsible for ACH payments: the Federal Reserve and The Clearing House (TCH). In this post, we will cover all of its details.
What Are ACH Payments?
ACH payments move money directly between bank accounts without using cash or a card network. ACH transactions are divided into two main types. ACH Credit (Push) and ACH Debit (Pull).
ACH payments are one of the most popular ways for domestic electronic funds transfers in the U.S. These include direct deposits of salaries, recurring bill payments, online bill pay, tax refunds, and business payments.
How Does ACH Work?
1. Initiation: The originator, which could be a person or a business, initiates a request. This request can go two ways: ACH Credit, in which the bank is instructed to send money, and ACH Debit, which means giving someone permission to take money from an account.
2. Submission to Bank: In this step, the bank, often called the Originating Depository Financial Institution (ODFI), collects the transaction request. These transactions are often kept in batches, which include multiple transactions from all its customers.
3. Bank sends request to the ACH Operator: Then, the ODFI sends this batch to the ACH Operator, which is often dispatched at the end of the day or in cycles. Subsequently, the operator verifies and forwards the transactions.
4. ACH Operators clear and settle the payment: The destination bank, often called Receiving Depository Financial Institution (RDFI), receives the transactions and checks a few things such as whether the account exists, whether the authorization is valid, or whether there are any red flags. Then, depending on the instruction, the bank credits or debits the customer’s account.
5. Funds are deposited into the receiver’s account: Funds usually move between banks in the same business day or the following business day after the transaction. After all these steps, both parties can view the transaction in their bank statements or banking apps.
Is ACH Safe?
Yes, it is a heavily regulated payment method under several directives such as the Nacha Operating Rules. However, just like all electronic payment methods, there are always risks of certain types of fraud such as unauthorized transactions or account takeover.
ACH vs. Wire Transfer: What’s the Difference?
Transfer Speed: The wire transfers are usually much faster compared to the ACH transfers. While wire transfers go through as soon as the receiving bank verifies the transfer, the time it takes to settle ACH transfers varies. If the originator does not pay extra for same-day processing, it can take a few days.
Cost: In this regard, ACH transfers are often much less expensive than wire transfers and more often than not, transfer fees are not passed on to customers. On the other hand, wire transfers generally charge both parties. While domestic wires can cost up to $35 for the sender and up to $20 for the receiver, international transfers can also add another $15-30 for the sender.
Cancellation: If there are errors in bank account number, amount, or date, ACH credit transfers can be recalled or disputed within five business days. For debits, payers can dispute them for being non-authorized within 60 days. For wire transfers, they can be cancelled until the moment they are clearable. Since they do not take much time, it is possible to say that they are generally irrevocable unless the bank is at fault.
Transaction Size: While wire transfers are larger ($86 trillion in transfers in 2024 across 33 billion transactions), ACH transfers are much higher in volume ($1,113 trillion in transfers in 2024 across 209 million transactions).
Use Case: For recurring payments, ACH transfers are very convenient. Thus, it is often the preferred method for regular billers and employers. On the other hand, wire transfers are singular transactions and often used for urgent transfers.
Common Use Cases for ACH
· Payroll
· Tax refunds and benefits
· Subscription services
· Rent or mortgage payments
· Customer payments
· B2B and P2P payments
· Vendor payments
· E-commerce payouts
· Benefit disbursements
ACH in AML/KYC and Compliance
Every entity that participates in ACH transfers is subject to U.S. AML laws under the Bank Secrecy Act (BSA), USA PATRIOT Act, and Office of Foreign Assets Control (OFAC) programs. This strict oversight is mainly due to the fact that ACH transfers can be used for financial crimes such as layering, structuring, fraud, synthetic identities, and sanctions breaches.
This makes financial institutions obligated to take necessary measures such as Customer Identification Program (CIP), Know Your Customer (KYC), Suspicious Activity Reporting (SAR), transaction screening, transaction monitoring, record keeping, reporting, and third-party oversight. In order to achieve full compliance, we strongly suggest using solution providers such as Sanction Scanner.
Challenges with ACH
Fraud: The risk of fraud and unauthorized transactions is clearly acknowledged in Nacha’s Risk Management Framework. Criminals may use several methods such as business-email-compromise (BEC), vendor impersonation, and account takeover. According to a survey by AFP, 30% of organizations experienced fraud through ACH debits and ACH credits in 2022.
Delayed Processing: Compared to other payment methods, namely wire transfer, ACH is relatively slow due to its structure. Moreover, issues such as formatting and data lacking quality may increase the time it takes to process these payments even further, or result in an outright rejection.
Regulatory Burden: Nacha’s upcoming rules will likely require all parties to implement more intensive monitoring systems. In addition to criticisms to ambiguity of proposed timeline, upcoming rule’s demands will likely result in major challenges for institutions.
How to Enable ACH for Your Business?
Provider and KYC verification: First, decide whether to initiate ACH through your business bank (it must be offering ACH services), or through a third-party payment processor. After the first step, you should submit your business name, address, tax ID, ownership details, and bank info.
ACH Origination Agreement: Nacha also requires you to sign an ACH origination agreement. This will confirm that you are following Nacha Operating Rules, which define transaction limits, types, and responsibilities.
Customer Authorization: Obtaining customer authorization is one of the most critical parts of ACH processes. You must have written or digital consent and keep each of these authorizations for at least two years.
System Test: Before making it publicly available, do not neglect to test your system by connecting your banking portal. Once you confirm that the system is working flawlessly in different scenarios, it can go live.
Security Controls: As we have mentioned a few times in the previous paragraphs, ACH are often targeted by criminals and consequently the regulatory requirements are constantly getting stricter. Therefore, you should consult preventive measures such as encryption, MFA, screening, and monitoring.
Top ACH Payment Providers
· Stripe ACH
· Plaid
· Dwolla
· PayPal Business
· GoCardless
· Square ACH transfers
FAQ's Blog Post
ACH helps reduce payment fraud risks by using encrypted batch processing, validation checks, and NACHA security rules.
ACH payments follow NACHA guidelines and batch settlement, while wire transfers require stricter real-time verification.
ACH processing supports AML monitoring by allowing institutions to analyze recurring patterns, anomalies, and high-risk senders.
ACH return codes show why a payment failed—helping institutions detect fraud attempts, incorrect accounts, or unauthorized debits.
Sanction Scanner enhances ACH security by screening counterparties, monitoring transactions, and identifying suspicious activity in real time.
