ACH transfers are a widely used method of payment processing that moves funds directly between bank accounts. Within the global payment ecosystem, ACH systems align with local banking practices and each country implements its own version tailored to domestic banking regulations and practices.
In 2022, the ACH network in the United States processed 30 billion payments, according to Nacha. Businesses and customers alike are increasingly opting for the reliability and traceability of ACH debit transactions, a type of ACH transfer, aligning with a broader trend of adopting electronic payments.
While ACH transfers are a prominent payment method in the US, this isn't the case worldwide. For example, in the European Union, SEPA transfers offer a standardised approach to cross-border payments within the euro area, streamlining the process for both payers and payees, and reducing the need for other systems, such as ACH. Countries with advanced banking infrastructures tend to have higher rates of ACH debit usage. In contrast, nations with less-developed banking systems may rely more on alternative payment methods, such as mobile payments, which are popular as a result of having fewer infrastructure requirements. Local banking laws, societal preferences for cashless transactions and the level of local technology integration all shape the way in which ACH debit payments are used from country to country.
ACH debit systems around the world share a common goal: to facilitate the efficient and reliable transfer of funds. This guide will summarise how ACH debit payments work and describe the specifics of ACH debit in different regions across the globe.
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Automated Clearing House (ACH) debit is a type of ACH transfer which pulls funds directly from a payer's bank account. Operated by Nacha, originally the National Automated Clearing House Association, the ACH network processes large volumes of credit and debit card transactions in batches. The ACH network acts as a financial hub, connecting banks and financial institutions. This network enables various types of payments, including direct deposits, payroll, customer bills, tax payments and many business-to-business transactions.
ACH debit differs from other payment methods in terms of both its process and its speed. When a business or individual initiates an ACH debit transaction, the requesting party must first obtain authorisation from the account holder to pull funds from their account. This can be done through a signed contract, a recorded voice conversation or an online agreement form. Once authorised, the payment is processed and typically takes a few working days to clear. This time frame ensures that the necessary checks and balances are performed to secure the transaction.
The global use of ACH debit reflects a broader shift towards electronic payments. According to a report from Nacha, the ACH network processed UA$76.7 trillion in payments in 2022, a 6% increase from 2021. The system is known for its reliability and has been adopted for various uses, including handling large-scale business transactions and automating recurring bills. As businesses and customers increasingly seek out electronic payment solutions that can be integrated with their digital finance tools, ACH debit has become a staple in modern financial transactions.
The United States leads the way in ACH payment usage, relying on this system for payment transactions from the government, for payroll, and for business and peer-to-peer transactions. The 2022 Federal Reserve Payments Study demonstrated that an increase in ACH payments value accounted for more than 90% of the rise in the non-cash payments value from 2018 to 2021, signalling a growing preference for this method over traditional payments by cheque.
Similar electronic funds transfer systems are used around the world, often under different names and operational frameworks:
ACH debit transactions are frequently used by a diverse array of businesses and customer segments. The ACH network facilitates payment services that appeal to a broad spectrum of users due to their reliability and cost-effectiveness.
The transaction value of ACH direct deposits increased by nearly 5% from 2021 to 2022, demonstrating the growing appeal of ACH debit transactions across business sectors and customer segments. As new digital-payment technologies are developed, the ACH network's role in supporting a variety of financial transactions remains steady, reflecting its importance in modern payment systems.
When a customer or a business initiates an ACH debit transaction in the US, the process begins with a request for authorisation to debit their bank account, which can be granted through an online form, a recorded phone conversation or a signed paper form. The initiating entity, often referred to as the "originator", then submits the payment information to its bank, the "Originating Depository Financial Institution" (ODFI).
The ODFI aggregates multiple ACH requests and forwards them in batches at predetermined times throughout the day to one of the ACH operators – either the Federal Reserve or The Clearing House. These ACH operators then sort the transactions and route them to the appropriate "Receiving Depository Financial Institutions" (RDFIs), which hold the recipients' accounts.
ACH transactions must comply with the rigorous data security standards set forth by Nacha and the Office of Foreign Assets Control (OFAC) of the US Treasury Department. These include requirements for data to be encrypted both in transit and at rest, risk management protocols and adherence to consumer protection regulations. ACH further secures customer data by using multi-factor authentication, routine security audits and strict access controls throughout the transaction.
The cost-efficiency of ACH debit is a major factor in its widespread adoption. Fees for ACH payments are typically lower than those associated with credit card transactions and electronic transfers, and costs are borne by the originator. The exact fees can vary depending on the financial institution, the nature of the transaction and the volume of payments processed.
Once the transaction has been routed, ACH debits are usually settled on the next working day. The RDFI verifies the account details and either credits or debits the user's account according to the transaction type. In the event of an insufficient balance or incorrect account information, the RDFI may return the transaction to the ODFI, a process that can take several days to complete.
ACH network volumes are increasing every year. In 2022, the ACH network processed 30 billion payments, marking a 3% increase from 2021. This growth reflects a broader trend towards using electronic payments and is driven by the reliability and convenience of the ACH system.
ACH debit transactions are generally less expensive than transactions involving credit cards or electronic transfers. This cost-effectiveness can translate into substantial savings for businesses, particularly those with a high volume of transactions.
Businesses with subscription models or that rely on recurring payments find ACH debit to be highly beneficial. It streamlines the collection process by debiting customer accounts automatically, which reduces the administrative burden and improves cash flow.
ACH debit reduces the likelihood of errors that can occur with manual payment entry. Automated payments mean fewer instances of human error, leading to a smoother financial operation.
The ACH network's adherence to strict security protocols helps to safeguard sensitive financial information. This dedication to security can build trust with customers who are assured that their banking details will be handled with a high level of care.
ACH debit can make operational workflows more efficient by automating the payment process. This allows businesses to avoid managing each transaction individually and allocate their resources elsewhere.
As with credit card processors, the ACH network can provide businesses with valuable transaction data. This information can guide strategic decisions, refine payment processes and improve customer service.
Customers often prefer the convenience of ACH debit for making payments. This convenience can enhance the customer experience and potentially increase customer retention.
According to a report from Nacha in the United States, the value of ACH payments increased by 6% in 2022 compared with the previous year, with ACH debits accounting for more than half of all transactions.
The ACH network processes large volumes of credit and debit transactions in batches, including direct deposits and bill payments. These transactions contain sensitive financial information and security is key. The ACH network takes the following measures to maintain the integrity and safety of ACH transactions:
A business must first establish a merchant account with an acquiring bank or a financial institution to accept ACH debit payments. This specialised account is where funds from ACH transactions will be deposited or withdrawn. The process to set up this account involves due diligence by the bank to assess the business's financial stability and risk profile.
The business also needs to form an agreement with an ACH operator, either directly or through a third-party payment processor. This agreement will detail operational responsibilities, settlement procedures, liability issues and other tenets of using the ACH network.
As part of the onboarding process, businesses are required to comply with regulations set by Nacha. These rules govern the execution, processing and confirmation of ACH transactions, and also include guidelines on transaction reversals and consumer rights.
While PCI DSS is traditionally associated with card payments, the security measures outlined in these standards are relevant to any financial transaction handling sensitive data, including ACH debit payments. Businesses that process ACH payments must adhere to these standards to safeguard customer data.
In order to accept ACH payments, businesses must have systems in place to detect and prevent fraudulent transactions. These include tools for verifying the authenticity of transaction requests, as well as the authority of the customer to initiate such requests. The specifics may vary based on the business size and type, but these measures are important for mitigating fraud risk.
In general, businesses also require software that can be integrated with the ACH network and submit ACH transactions to the network for processing. Many businesses use third-party providers which offer integrated payment solutions that are compatible with ACH processing.
Businesses must disclose the terms of ACH debit transactions clearly to customers. They must also obtain authorisation from customers to process these payments, which can be in written, electronic or verbal form, depending on the nature of the transaction.
Alternative payment methods to ACH do exist, which offer distinct features and business considerations. Electronic transfers cater to urgent, high-value transactions, while payment card networks, such as Visa and Mastercard, lead the market in terms of overall transaction volume. Other services, such as PayPal, are popular for online payments, with PayPal reporting more than 400 million active accounts in 2023.
Digital payment platforms that can be integrated into existing websites are also becoming more popular. The mobile payments sector is expanding, too, with a substantial percentage of global smartphone customers embracing digital wallets for purchases.
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.