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An Employer’s Guide To ACH Transfers: Understanding How Money Moves

by Michael Pettengill on Mar 16, 2023 10:18:12 AM

If you’re considering direct deposit to pay your employees, you may be wondering just exactly how the money moves. The answer is ACH transfers. ACH transactions are electronic money transfers from one financial institution to another that are processed through the Automated Clearing House (ACH) Network. What do you need to know about these transactions to decide if ACH direct deposit is right for your company? Let’s find out.

In this article, we’ll explain what ACH transfers are, how they work, how long the transactions take, the benefits, and how to get started with ACH direct deposit. After reading this, you’ll know if ACH transfers are the right approach for paying your team.

What are ACH transfers?

As we just mentioned, ACH transfers are electronic, bank-to-bank money transfers processed through the ACH. For transfers to be authorized by the ACH, the financial institutions must be a member of the ACH network. There are about 10,000 institutions in the network.

ACH transfers are increasingly common; last year, 29.1 billion payments adding up to $72.6 trillion were reported by the National Automated Clearing House Association (NACHA). Typical examples of ACH transfers that employers make are funding payroll, paying vendors, transferring money between bank accounts, or receiving payments from clients and customers.

What’s the difference between an ACH and wire transfer?

Both ACH and wire transfer are secure means to move money between banks. But there are key differences between these approaches.

One primary difference is that wire transfers can be used to transfer money for same day arrival. As we’ll discuss next, ACH transfers typically take one or more business days. Not only are the processing times different but so are the posting times. Wire transfers allow recipients to access funds as soon as they hit their account; with ACH transfers, the funds will be released when they clear the ACH system.

Another way ACH and wire transfers differ is the cost. Wire transfers have fees that can be as high as $35 per transfer. ACH transfers, on the other hand, are generally processed at a lower charge set by your bank or payment provider – and are sometimes even free.

If you want to transfer funds abroad, it’s also important to note that wire transfers can be made internationally while ACH transfers can only be used in the US.

Lastly, another difference between the two types of transfers is that wire transfers are permanent as soon as the transaction is started whereas you may be able to request a reversal of an ACH transfer if there was a mistake.

How long do ACH transfers take?

The time it takes for ACH transactions to process can vary based on the type of transfer. There are two types of transfers:

  • ACH Credit Transfers: These types of transfers involve pushing money to accounts at different banks, either your own accounts or others’. These can happen as soon as the same day to up to a couple of business days. It’s important to keep in mind that the payments won’t appear in an account on a weekend or federal holiday.
  • ACH Debit Transfers: With these transactions, money is pulled from an account, for example, if you set up a recurring bill payment, the company you’re paying can pull what it’s owed from your account each month. Debit transactions must be processed the next business day.

These timelines are based on rules from the NACHA. It’s important to note that the bank receiving the money may hold it for a period of time – typically no more than 1 or 2 business days –  so the actual delivery time can differ. If you need funds transferred as quickly as possible, you may have to pay a fee for expediting.

What are the benefits of ACH transfers?

As you consider whether to use ACH transfers at your business, it can be helpful to understand the benefits of this approach. Here are the top advantages of using ACH transfers.

  1. Convenience: By automating payments, you’ll eliminate paperwork and manual processes, which can free up your staff to work on more strategic initiatives.
  2. Accuracy: Another advantage of electronic automation is that it enhances accuracy of the transfers by limiting the possibility of human error.
  3. Security: ACH regulations and rules like encryption make transfers between accounts more secure that other types of payments like wire transfers.
  4. Cost: While there are some costs associated with ACH processing, the fees are lower than other common payment types like credit or debit cards. It’s important to note that you can’t charge employees a fee to receive a direct deposit into their bank account.

There are some potential drawbacks with ACH transfers as well. Most notably is the processing time required when money moves, which we just discussed, as well as limits banks may impose on the number of transactions or amount of transactions allowed.

How does ACH direct deposit work?

With ACH direct deposit, your company issues an electronic funds transfer from your bank into an employee’s bank account automatically.

Before ACH direct deposit can take place, your employee will need to complete a form or account authorization. Since over 90% of employees receive their paychecks via direct deposit, it’s likely they have been asked to provide this information before but generally speaking, they’ll have to supply their personal data as well as bank details like their bank routing number, account number, and type of account. Employees will also be able to indicate whether they want the full amount deposited into one account or a flat amount or a percentage in one and the remaining amount in another or by paper check.

Once you have all of this information, before you run payroll each time, you or your payroll provider will send your payroll instructions to your bank, which will then pass this on to the ACH. From these instructions, the employee’s bank will process the payment and credit their account with the appropriate funds. To ensure employees have timely access to their pay, it’s a good idea to schedule payroll direct deposit a couple of days in advance of your pay date. Or you may have the option to pay a fee for same-day or next-day direct deposit.

How can I get started with ACH direct deposit?

Before implementing ACH direct deposit, you’ll want to review the laws in your state to make sure you follow the requirements.

Next, you’ll want to collect the necessary information from employees. If you use a payroll provider, they’ll have the necessary forms or self-service portal to collect this information.

The last thing you’ll want to do is select a deposit schedule. It’s important to make sure that you have the funds available in your account before direct deposit is processed.

If you’re still not sure if direct deposit is the right approach for your company, read our next article on paperless payroll to help you decide.


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