Gravity Payments

What are ACH Payments and How Do They Work?

Learn everything you need to know about ACH payments, and whether collecting payments using this option makes sense for your small business.

 Reading Time: 4 minutes

Accepting Automated Clearing House (ACH) payments is an easy-to-overlook possibility for small businesses.

Even though this payment method is not typically used by consumers in day-to-day life, certain small businesses can benefit from accepting ACH payments. If your small business works with invoices, sells big ticket items, or collects recurring payments, using ACH could be a more convenient and affordable option.

In this article, you’ll learn everything you need to know about ACH payment processing – including how it works and whether or not it’s right for your small business.

Let’s get started!

What is an ACH Payment?

An ACH payment is the transfer of funds between two bank accounts. This type of transaction only works with checking and savings accounts, and can take anywhere from a few hours to several business days to complete. 

ACH payments are also called direct payments, and your customers only need a bank account to complete a transaction.

The ACH payment network is commonly used to pay bills online without using a credit card, and for businesses to pay employee wages.

How Do ACH Payments Work?

An originating party and a receiving party is involved in each ACH payment.

The technical terms for these parties are the Originating Depository Financial Institution (ODFI) and the Receiving Depository Financial Institution (RDFI).

The payment can be initiated by either the ODFI or the RDFI. Regardless of who initiates the transaction, the party that sends the funds always needs to provide authorization for the payment.

Here’s a step-by-step process of how ACH payments work:

  1. The merchant provides the amount due to the customer.
  2. The customer provides authorization for the merchant to initiate payment.
  3. The ODFI debits the customer’s account and sends the ACH files to the ACH operator.
  4. The ACH operator routes the files to the receiving bank (RDFI).
  5. The RDFI processes the payment.
  6. The funds clear and are deposited into the merchant’s account.

How Much Do ACH Payments Cost?

The cost of processing ACH payments is determined by your payment processor – it can be a flat fee, a percentage per transaction, or a combination of both.

Your payment processor typically works with a third party provider that facilitates the ACH payments.

If you’re asked to sign a contract directly with the third-party provider, it’s possible your payment processor has no control over future fees!

Gravity Payments signs contracts directly with small business owners – this way, we can can control future fees.

RELATED: How to Understand Credit Card Pricing Structures.

The Benefits of Accepting ACH Payments

The main benefits of accepting this payment method are:

  • It’s inexpensive. Accepting ACH payments is almost always cheaper than taking checks or wire transfers.
  • It’s reversible. This makes the payment method safer than wire transfers, which are irreversible and more easily subject to fraud.
  • It’s convenient. It’s as easy as sending a link to your customers who can then authorize the payment.
  • It supports recurring payments. After the recurring payment is authorized, it becomes a hands-off process.
  • ACH payments can be collected via text message. With Gravity Payments, you can offer this as a payment option in our text to pay solution.

Examples of ACH Payments

Here are a few examples where using ACH payments is beneficial for small businesses:

  • A subscription-based business. If a customer selects recurring payments for their subscription, they can pay you through the ACH network every month.
  • Paying employees. Your business (the sending bank account) can proactively grant authorization to send payments to your employees’ bank accounts. In this case, no authorization request is needed.
  • Businesses with big ticket items. Since payment processing fees on these types of transactions are on the lower end, businesses selling big ticket items can save a lot of money by accepting ACH payments. HVAC businesses and construction businesses are two types of businesses that can benefit from taking payments this way – which is possible with Gravity’s tailored payment processing solutions.

The Difference Between ACH Payments and Wire Transfers

ACH payments are processed in batches and can take between a few hours and several business days to arrive, while wire transfer payments are generally more expensive, but guaranteed to arrive on the same day.

Here are the differences between ACH payments and wire transfers:

ACH Payments Wire Transfers
Cost Very low percentage cost per transaction plus nominal monthly fee. Typically $25+ per transaction
Processing time Between a few hours and several business days Same day
Processing method Batched payments Single payments
Payment frequency One-off or recurring One-off
Transaction volume Limit set by bank. Typically <$25,000 per day. Limit set by bank. Typically <$250,000 per day.
Initiator Sender or receiver Sender
Settlement Reversible Irreversible


ACH payments are usually a better option due to cost savings. If you do a lot of transactions each day or need guaranteed same day settlements, wire transfers may be the better option.

Is Accepting ACH Payments Safe and Secure?

The ACH payments network is managed by the National Automated Clearing House Association (NACHA), which in turn is regulated by the federal government.

NACHA ensures that financial institutions that participate in the ACH payments network follow their operating rules and guidelines, which include strict requirements for protecting sensitive information such as data encryption.

While ACH payments are not required to be PCI compliant like credit card payments, the security standards the network participants are required to implement are similar.

Can ACH Payments be Rejected?

Yes, there are several reasons why ACH payments get rejected. If this happens, you will receive an ACH reject code from your bank that provides more context.

The most common ACH reject code is “R01 Insufficient funds.” This means your customer did not have enough funds in their bank account to execute the ACH payment.

If you get an ACH reject code, it is important to investigate what happened. Action is often required on the merchant’s end or the customer’s end – or both.

Is Accepting ACH Payments the Right Move for Your Business?

The first question you should ask yourself when deciding whether or not to accept ACH payments in your small business is what you are trying to achieve by adding this payment option.

Is it offering your customers more choice in how to pay or encouraging customers who use more costly payment methods to use ACH instead? Or is it both? If your customers are indifferent on how they pay, the decision is likely to come down to the potential savings for your small business.

We recommend examining your last three months of bank statements. How much in paper checks and wire transfers did you process? What is your average ticket size for checks and wire transfers, and what does the high end look like for your business?

If you are currently processing a lot of checks and wires, moving those payments to ACH will almost certainly save you money in processing fees.

Gravity Payments provides merchant services for small businesses to accept payments using the most convenient payment methods, including ACH payments. Contact us to explore the different payment methods that may be beneficial for your small business.

Related Posts