Agile Payments Blog

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What is an ACH?

Is your mind stuck in the credit card only world? ACH payments can be one awesome solution for many organizations needs.

It's a payment vehicle. Paper money and credit cards are also payment vehicles. Some might say PayPal is a payment vehicle also, but the underlying payment vehicles that actually transmit funds for a transaction are ACH and/or a credit card. ACH stands for Automated Clearing House, which is an electronic banking transaction network that's regulated by NACHA. The ACH network is a batch network at its core, although some Third Party Processors provide real-time connectivity to their ACH processing engine. Even when transmitting transactions in real-time to a processor, the transactions are ultimately batched and delivered to RDFI's though one of the networks ACH Operator, the Federal Reserve or EPN. Being a batch network, there is no authorization component like credit card transactions to capture funds before settlement, sometimes resulting in returned items.

Types of ACH transactions are categorized with a three letter code relevant to what kind of transaction they perform. This is called a Standard Entry Class. For example, a company using the ACH network to pay a business related invoice are classified differently than a utility company debiting consumers for a monthly electric bill. And from the above example we can see that one transaction is a credit, pushing money out, and the other is a debit, capturing money and funding the transaction originators account. Following are examples of both credit and debit transactions:

Credits:

  • Annuities
  • Vendor Payments
  • Dividends
  • Interest Payments
  • Social Security Payments
  • Pensions
  • Tax Payments
  • Payroll

Debits:

  • Cash Concentration
  • Association Dues
  • Contributions to IRA's or 401K's
  • Utility Payments
  • Mortgage or Loan Payments
  • Insurance Payments
  • Club Payments
  • Point of Sale Payments
  • Distributor / Dealer Payments
  • Recurring Services Payments

Above it was mentioned that some that some Third Party Processors (TPP) provide real-time connectivity to their ACH processing engine. First, a brief explanation of what a TPP is:  A TPP is a service company that provides software systems and/or tools to companies that have a need for processing ACH transactions. A TPP will have one or more sponsor banks (ODFI) that allow the TPP's customers to originate the ACH transactions. A TPP is not an Originator itself, although they can be for the purposes of collecting their service fees from client companies. Some TPP's provide connectivity utilities, e.g., an API, that allow clients to submit ACH transaction information in real-time. The benefits for doing so depend on the client company's needs, but here are some typical examples:

  • A client business connecting to a TPP's API can reduce their risk of data theft by immediately transmitting customer bank account data to the TPP, where the TPP returns a reference token to the client's software system. This eliminates the storage of all sensitive data within the client's application.
  • Some clients have a need for anti-fraud utilities. Calling the TPP's system live might enable the client to perform electronic anti-fraud checks before an ACH item is originated. Identities can be verified and bank accounts can be checked for status, including funds availability before the transaction is originated. This can result is lowering returned items and fraudulent activity passing through the network and subjecting client companies to chargeback fees.
  • Client companies with recurring payments needs can not only setup schedules using the TPP's recurring engine, they can edit or delete customer schedules without having to access sensitive data.
  • Some TPP's are connected to other payment vehicles, reducing development time if there are needs for incorporating a credit card gateway for example.

For some businesses utilizing the ACH network to transmit funds makes perfect sense. For others, not so much. Typically the better a company knows their customers, the more sense it makes. One big benefit is the fees are substantially lower than other payment vehicles, credit cards for example. In fact, we can use credit card companies as an example; How do you pay your credit card bill? Chances are it's either an ACH or an old-school paper check. Companies that have customers  with monthly recurring invoices are an excellent example of one who can benefit from using the ACH network.

If your business uses the ACH network, do you connect in batch method or real-time?

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