What is ACH?

4 MINUTE READ

ACH is an electronic, bank-to-bank money transfer that’s processed through the Automated Clearing House (ACH) network, comprising over ten thousand financial institutions.

borderless™ is the only US-based local and international ACH solution. But what are “direct debit” and “ACH” and what are they used for?

What is ACH?

ACH is an electronic, bank-to-bank money transfer that’s processed through the Automated Clearing House (ACH) network, comprising over ten thousand financial institutions. The ACH network processes two types of transfers: direct deposits and direct payments. These transfers are a form of payment in which a bank directly pulls funds from a payer’s bank account also known as Direct Debit.

ACH is a computer-based, electronic network for processing electronic fund transfers. This network is designed to handle large batches (millions!) of relatively low-value transactions. 

According to the National Automated Clearing House Association (NACHA), ACH works on a “net balance system”: the network creates a balance sheet of how much money banks owe one another, and then the balances are paid out. This happens typically three times a day. This way, there are fewer transactions and faster processing speeds instead of banks transferring money back and forth millions of times all day.

If you are in Canada, Australia, or the United Kingdom, ACH is equivalent to EFT, BECS, and BACS, respectively. 

What is Direct Debit?

Direct debit is a transaction in which a business or an individual withdraws funds directly from the bank account of another person/business. It is the simplest, safest, and most efficient payment method to make regular or recurring payments

With direct debit, you can authorize someone to collect payments from your account when they are due. For example, a utility bill, an invoice, or your Spotify monthly subscription.

This process involves two parties, the recipient (who receives a payment) and the payer (who makes the payment). The payer gives the recipient permission to take money from their account whenever a payment is due. The funds are then taken (or debited) from the payer’s bank account and transferred to the recipient’s bank account.  

The diagram depicts the basic process for ACH direct debit transfers.

The recipient instructs their bank to collect funds from the payer’s bank account. The word debit essentially just means collect (fun fact: the word comes from the Latin word for debt, debitum, because when someone’s bank account is debited, it is recorded as indebtedness to the recipient’s bank account).

The payer must authorize the recipient to initiate a direct debit, and the funds are electronically transferred. The direct debit process works differently in different countries, but, in the US, this transfer process is executed through the Automated Clearing House (ACH).

What is ACH used for?

ACH is commonly used for various types of transactions:

• One time payments. One-time business-to-business (B2B) transactions for settling an invoice.
  
• Recurring payments with fluctuating amounts based on usage, like utilities or phone bills.
  
• Subscriptions/memberships. Think of commercial rent or a membership to a local gym: you provide your bank information to the merchant and authorize them to collect a set payment amount on a weekly, monthly, or yearly basis.
  
• E-commerce. Although ACH does not have instant transfer of funds, borderless™ has developed a system to enable direct debit for e-commerce transactions (B2B and C2B e-commerce), saving online businesses thousands of dollars a year – See how much you can save.

How do I Set Up An ACH And What Should I Know?

For businesses, setting up an ACH payment system can be a time-consuming process to set up, and it may require a lot of time to be effective. You can setup an ACH processing with your bank and it will cost you a monthly fee between $20-$35 per month. You can also set up ACH payments with borderless™ for free with no monthly fees or hidden fees. Learn more below.

Considerations for ACH:

Although there are many uses for ACH, there are limitations:

• The settlement and payouts for ACH payments are different compared to card payments. Card payments are settled in a day or two but are usually collected to a merchant account where the funds are held for an additional 2-10 days. ACH payments take on average three business days, but the funds are settled directly in your bank account.  
  
  
• Similarly as to with cards and checks, ACH could leave you at risk of non-sufficient fund (NSF) fees. This occurs when there are not enough funds in a payer’s bank account when it comes time to make a payment. Due to the time it takes for ACH transactions to settle, as previously mentioned, the funds you intended to pay with could no longer be available in the time it takes to process the payment.
  
  
• ACH also is limited in its global reach. There is no global ACH payments network. Rather, each country (or region) has its own local payments clearing body: the US has ACH, the EU has SEPA, etc.

Read how borderless™ has improved upon the limitations of direct debit below.

ACH (Direct Debit) vs. Wire Transfer

Wire transfer is another method of transferring funds electronically across a network of banks or transfer agencies around the world. 

When a person/business wants to initiate a wire transfer, they must go through a lengthy process of instructing their bank to execute a wire. The sending bank then transmits a secure message to inform the receiving bank of the payment. The receiving bank will then credit the recipient the funds in their bank account. Although both are done through a network of banks, direct debit and wire transfers are fundamentally two different systems that have several key differences:

1. Transfer Speeds: With domestic wire transfer, the recipient usually receives the funds within 1 business day while international wire transfers can take up to two weeks! Direct debit transfers, on the other hand, take 2-3 business days to complete. (Note: There are steps being taken to increase the speed of direct debit payments in order to allow the same-day processing of any ACH payment.)
   
   

2. Certainty/Safety: Direct debit is safer than wire transfers. With wire transfer, there are high risks with sending money: once you make a wire transfer, the process is not reversible, and since the recipient can withdraw the funds immediately, it is risky. Conversely, direct debit is known to be more secure as transfers can be reversed if there is a fraudulent transaction. 
   
   

3. Fees: Wire transfers are much more expensive than direct debits. For domestic wire transfers, the fee to send a wire is between $10 and $35, and some banks/credit unions also charge a fee between $10 and $20 to receive a wire transfer. In contrast, direct debit transfers are generally free for the payer, but there is usually a small fee for B2B and C2B transactions on the recipient. Some direct debit payment platforms may also charge setup and/or monthly subscription fees.
   
   

4. International Reach: Though wire transfers are possible internationally, they are quite expensive. The average cost of sending an international wire transfer is $43, and the average cost of receiving one is $18. On the other hand, direct debit is limited as there is no single global ACH system. Note: borderless has made international direct debit possible and is now a very efficient method for international payments.

Now that you are a direct debit expert, where does borderless™ fit in?

ACH With borderless™ = Global Reach and Simple UX

ACH is one of the most efficient payment methods for individuals and businesses. However, there are two main limitations: accessibility/ease of use and global payments reach. borderless™ has solved the top two limitations of direct debit, making it the first US-based local and international ACH/direct debit solution.

borderless has spent years linking distributed local payment systems around the world under ONE global ACH system allowing for international payments. In addition, our team has developed a product that makes it easy for anyone to make and accept direct debit payments in seconds.

• User experience. We have created a seamless payment experience with one-time easy setup, simple and secure bank connection and @handle for quick user identification.
  
• International reach. With the borderless™ global network, international direct debit (ACH payments) is now a possibility. Cross-border payments have found a new home with no international wire fees and better foreign exchange rates than most banks or PayPal. 
  
• Tracking. With the borderless™ payment tracking feature, direct debit can now be used for B2B and C2B e-commerce, giving our users the transparency and visibility they need for peace of mind.
  
• E-commerce. With the borderless™ gateway and e-commerce button, paying with your bank online has never been easier. Users can enjoy fast and secure checkout with one-click payments while businesses can benefit from alternative payment methods and increase conversion. See borderless vs Stripe 
  

borderless™ is designed for business to pay and get paid with low rates and fast payouts. Our platform can provide multiple ways for you to collect and send money locally and internationally saving you up to 90% in processing fees versus cards. With borderless™ you only pay when you get paid. There are no hidden, no setup, or monthly fees, and unlike wire transfers, making a payment is free and easy!

Sign up today or contact our sales team to learn more and book a demo.