What is an ACH transfer and how does it work?

What is an ACH payment?

An ACH (Automated Clearing House) payment, or ACH transfer, is a direct payment method that can electronically transfer money between banking accounts or banking networks in the United States. This enables businesses or people to send money to each other without having to deposit the money into a third-party service first.

Understanding the many ways to send, transfer, and receive money is essential to sustaining your business as a merchant, and that starts with ACH payments.

How do ACH payments work?

These transfers allow both business owners and customers to take funds directly from their respective bank accounts instead of processing a transaction with a credit card, paper check, wire transfer, or cash. In other words, ACH payments facilitate the transfer of funds between bank accounts via a centralized clearing system.

The ACH network handles enormous volume, which speaks to how established and reliable it is for businesses. In 2025, the ACH Network processed 35.2 billion payments worth $93 trillion, up 4.9% year over year, and Same Day ACH alone reached 1.4 billion payments valued at $3.9 trillion.¹

Types of ACH payments

There are two types of ACH payments: credit and debit. Here's what they mean:

• ACH credit: A business or entity can choose to move money into another bank account outside of their own. For example, an employer pays an employee via direct deposit, or the government places a tax refund into someone's account. In these cases, money leaves one account and is deposited into someone else's account.
• ACH debit: This type of ACH payment describes a business or operation pulling money from someone's account (i.e., a customer). For instance, when a company lets a customer pay a bill or subscription due, the money is "pulled" out of their checking account to complete the transaction.

Examples of an ACH transfer

ACH transfers are convenient, fast, and versatile, making them a preferred alternative to writing a check. And there are many ways a business may leverage this payment method.

The most common examples of ACH payment transfers are:

• Direct deposit of payroll into an employee's account
• Split deposit of payroll between the employee's bank account and IRA account
• Direct payment to vendors
• A tax refund or interest payment straight into a bank account
• Payment for a bill or subscription via ACH payment instead of writing a check

An example of an ACH payment can be found across almost every business interaction. A business owner can pay their supplier invoices, pay an employee, fund employee retirement accounts, issue refunds to customers, pay taxes or receive refunds, and make donations to nonprofit charitable partners, all by using direct payment ACH transfers.

ACH payments common transaction terms

In the world of ACH payments, it’s important to familiarize yourself with common transaction terms that may come up when sending or receiving money.

• Settlement pending: After the transaction is submitted to the banking network, it is labeled as settlement pending.

• Failed: This status indicates an error has occurred when submitting the transaction.

• Settlement declined: If the settlement is declined, it means the banking network will return the transaction within three business days, and the funds will not be disbursed. A fee may apply here.

• Settled: The transaction was not returned in the three-business day timeframe, which means the funds will be disbursed. If a return is received after a transaction has "settled," the status will remain “settled.”

What information is needed for an ACH payment?

Before sending an ACH payment, you’ll typically need the following information:

• The recipient’s bank account number and bank account type

• The recipient’s routing number

• The account holder’s name

• The transaction or payment amount

How do you send an ACH payment?

Knowing how to send an ACH payment is straightforward once you have the recipient's bank details. Here is how the process works step by step:

1. To send an ACH transfer, you'll need the account information of where you want to send the money. Once you have that, you'll submit the payment through your online banking portal or PayPal.
2. Once submitted, your bank (known as the originating depository financial institution) will send the ACH payment information to the ACH network operator. The money will show up as having been debited from your account.
3. The ACH network operator routes the payment to the recipient's bank (known as the receiving depository financial institution). Once they process the payment, the funds will show up in the recipient's account.

What's the best way to send ACH payments for your business?

If you send ACH payments regularly, the best way to send ACH payments depends on how often you pay, how many payments you send at once, and the tools you already use. The best way to send money with ACH for a single one-off payment can be different from the right method for recurring or bulk payments.

A payments platform, sometimes called a payment service provider, bundles sending, accepting, and tracking payments in one place. Here is how the common methods compare on the factors that matter most.

Why are some ACH payments rejected?

Some reasons why ACH payments can be rejected include:

• Insufficient funds: When a customer does not have sufficient funds to cover the amount of the payment.

• Bank account closed: If a customer closes a previously used account for ACH payments and forgets to update the transaction with the new account information.

• Unable to locate bank account: Banking details are incorrect or do not match bank records.

• Payment stopped or authorization canceled by customer: Customer cancels the transaction.

Pros of ACH payments

As a business owner, here are some potential benefits of ACH payments:

• Convenient and seamless compared to other payment methods

• Allow customers to avoid credit cards, wire transfers, and paper checks

• Lower processing costs compared to credit cards

• Faster alternative to payment methods like paper checks

• Varied payment methods available to customers for a better customer experience

• Secure payment method with encryption and authentication measures

• Integrations with accounting software for simplified record-keeping and reconciliation

Cons of ACH payments

There are some disadvantages and limitations of ACH payments, such as:

• Speed — Transactions could take several days to be processed.

• Location — Only U.S. bank accounts may use ACH payments (no international accounts).

• Limits — Daily and monthly caps on how much money can be sent or received.

• Cutoff times — An ACH payment may not be processed until the next business day.

How much does an ACH transfer cost for small businesses?

ACH transfers tend to cost less than other payment transfer methods, which is one reason why it's one of the more popular payment transfer methods for small businesses.

At some banks, ACH transfers are free. Others may charge a flat rate per transfer, ranging from $.25 to $3.

How long does an ACH transfer take?

Because ACH transfers are usually processed, sent, and received in bulk on a predetermined schedule throughout the day, the time it takes to complete a transaction will vary depending on the day and time the payment was initiated, which banks are involved in the transfer, and if there are any errors along the way.

That said, ACH transfers usually take about one to four business days to complete, which is like the time it takes to process a check after it's been deposited. Some financial institutions offer expedited processing of ACH transfers, which may require an extra fee.

Same Day ACH is also widely available and can settle a payment on the same business day when it is submitted before the network's cutoff time, which is useful for time-sensitive payroll or vendor payments.

How do ACH transfers differ from debit and credit card transactions?

ACH transfers are processed through the Automated Clearing House network, which is only used to transfer money from bank to bank. While debit and credit card payments are also electronic, they use different payment networks managed by companies like Visa, Mastercard, and American Express.

Because the ACH network sends payments out in batches, it can often take longer for a payment to move from one bank to another. Credit card transactions, on the other hand, are usually processed in seconds.

One advantage of ACH transfers is they require authorization between your bank and the receiving bank. This can help reduce the chances of chargebacks arising from a customer disputing a transaction and demanding a refund.

What is the difference between an ACH and a wire transfer?

A wire transfer is another way to move money electronically from one bank to another. The main difference is that a wire transfer is a direct transfer between two financial institutions, while an ACH transfer moves the money through the ACH network.

Because a wire transfer is direct, it can be cleared within minutes, making it the faster way to send money. However, wire transfers can be costly, with banks charging both the sender and the recipient. Fees can range from $0 to $50, which can add up if you regularly transfer funds.

What is the difference between an ACH payment and direct deposit?

Is ACH the same as direct deposit? Here’s the difference between ACH and direct deposit: Direct deposits fall under the umbrella of ACH payments. Because direct deposit is a specific type of ACH payment, it primarily focuses on depositing funds directly into an individual's account.

In general, ACH refers to a system that can electronically move funds between bank accounts for various types of transactions, including deposits, withdrawals, and transfers. When it comes to ACH direct deposits, they’re commonly used for employee payroll.

Alternatives to ACH payments

While ACH transfers are often the right tool for the job, keep in mind that there are alternative payment methods and checkout payment methods to send money that may be faster or more cost-effective, including:

• Instant transfer apps with a digital wallet like PayPal that let you send and receive money

• Pay Later, in which buyers can pay for a purchase over a period of weeks or months while the merchant receives the funds upfront.

• Cryptocurrencies, which allow customers to check out with crypto.

• Legacy money transfer services like Western Union

• Paper checks

• Money orders

See more ways to accept payments.

Accept and send payments with a PayPal merchant account

PayPal business solutions make it easy to accept and send ACH transfers, along with other popular payment methods like credit cards, debit cards, PayPal, and more.

Sign up for a PayPal merchant account to get started, or explore how to accept payments and see what a PayPal account can do for your business.