Nearly a decade ago, NPR’s Planet Money produced an episode called “The Invisible Plumbing of Our Economy”, taking a deep dive into the history of ACH payments. It’s recommended listening for anyone joining the team here at Chargent.
For a digital native accustomed to splitting the dinner tab over Venmo, the history of payments is almost unbelievable. Picture a food truck rally in an empty parking lot, except that instead of empanadas and lobster rolls, the trucks are filled with bags and bags of paper checks. If you want to hear more, it’s worth checking out the entire episode, which they have since updated to reflect more recent changes to the ACH process.
But while the Planet Money team does an excellent job of explaining how consumers moved away from paying their bills with paper checks, it’s really only the beginning of the story of ACH payments.
We talk a lot about the advantages of ACH payments like lower costs and faster payments; here, we’ll break that down further, and tell you about the origin of ACH payments, how they work, and what you need to know to prepare for the future.
What is ACH?
The ACH, or Automated Clearing House, network coordinates electronic payments and automated money transfers between financial institutions. In short, ACH payments allow individuals and businesses to move money between banks without relying on higher-cost options like paper checks, wire transfers, credit card networks, or cash.
You’re probably already familiar with ACH transactions, even if you don’t necessarily think of them that way. But if you’re one of the 94% of Americans who is paid by direct deposit, you’ve participated in an ACH transaction.
A Short History of the ACH Network
Back to that Planet Money episode (and again, we highly recommend checking it out)… pre-ACH Network, paying by check was a highly manual process. Transferring money between financial institutions required physically exchanging paper checks. This led to the aforementioned parking lot exchanges, flying bags of checks cross country, and above all, lots of elapsed time.
In the late sixties, a group of bankers became concerned that with increasing use of paper checks, this entire process could soon become unsustainable, and began to investigate paperless options. Other regional groups formed across the United States, and in 1974, they joined to form the National Automated Clearing House Association – better known today as Nacha – to administer and govern the ACH Network in the U.S.
The Key Players
Nacha is the not-for-profit group governing the ACH Network, writing the rulebook (literally) for all ACH payments. Equal parts advocacy group and governing body, Nacha is funded by the institutions it governs, and seeks to promote and expand the use of ACH payments. It’s important to note that while Nacha sets the rules, it doesn’t actually move the money….
That work is done by an ACH operator. All transactions through the ACH Network are processed by one of two operators: the Federal Reserve Banks’ Automated Clearing House, or FedACH, and The Clearing House’s Electronic Payments Network (EPN).
If it sounds strange that the ACH Network is governed by a non-profit and operated jointly by the Federal Reserve Banks and a private collective of commercial banks that predates the Civil War… it’s important to remember:
The Federal government has always played a large role in the growth of ACH payments, and has often been on the leading edge of technology and development. In fact, the U.S. Air Force was the first employer to pay via direct deposit, and the Social Security Administration began rolling out ACH payments to recipients as early as 1975. They even had celebrity spokespeople!
We have seen examples of this more recently as well: ACH payments originated by the U.S. Treasury grew by more than 10% from 2019 to 2020, driven largely by government Economic Impact Payments, better known as “stimulus payments.” There is simply not a more efficient way to roll out payments on a massive scale, and that is why the government has always been a leader in this space.
How Do ACH Payments Work?
Now that you understand where the ACH Network originated, and who the key players are, you may still be wondering – what does this process actually look like? It’s pretty simple.
How Long Does This All Take?
The bankers who originally conceived of the ACH Network would have had difficulty imagining just how much technology has advanced in the last 50 years. Don’t forget that their initial concern was that paper checks were becoming too popular.
ACH payments have a somewhat undeserved reputation for being slower than other digital payment options. In recent years, the ACH Network has made advances to better accommodate modern business practices, including introducing same-day ACH payments, expanding operating hours and the frequency of batch processing, and raising dollar amount limits on transactions. Nacha has a highlight of these changes, and ultimately, unless your use case is highly specific, ACH payments can probably meet your business needs.
Why Do I Need to Know About ACH Payments?
One recommendation we often make is for organizations to stop using paper checks – and start accepting ACH payments. The growth of ACH payments shows no signs of slowing, and organizations that embrace digital payments in a strategic way will gain significant competitive advantage.
Some quick facts from Nacha’s annual ACH survey:
- In 2021, the volume of payments sent over the ACH Network rose 8.7%, or 2.3 billion over the previous year.
- In that same year, the value of ACH payments grew by 17.4%, or $10.8 trillion, for a total of nearly $73 trillion.
- 2021 marked the seventh consecutive year in which payment volume grew by at least 1 billion payments, and the ninth year where payment value increased by over $1 trillion.
ACH Payments Save You Money
According to the Association for Finance Professionals’ Annual Payments Cost Benchmarking Survey, the average cost of an ACH payment ranges between 26 cents and 50 cents for most businesses.
In contrast, paper checks come with an across-the-board median cost of between $2.01 and $4. Researchers measured both external costs, such as processing fees, as well as internal factors like personnel expenses, to calculate the true cost of each transaction. You don’t need a calculator to clearly understand the potential savings.
You Have a Digital Mandate
Rapid change brought about by the pandemic has accelerated digital transformation across every industry. How has your organization been impacted?
Among B2B businesses, ACH payments have grown by over 30% since 2020. Companies are looking to digital solutions to improve efficiency, embrace automation, and ultimately, better serve both their customers and their workforce.
And your customers are ready too. Nacha reported that Americans made 8.7 billion internet-based ACH transactions in 2021 – up 13.2% from the prior year. That is an enormous number – that we explore more in our blog post on why organizations are embracing ACH payments.
The Future of ACH Payments
ACH payments are poised to undergo a substantial shift as demand grows for faster digital payments. What do you need to know to be prepared?
Instant Payments Are (Almost) Here
Instant payments, typically thought of as the domain of person-to-person payment services like Venmo, are becoming available to a wider range of financial institutions. In 2023, the Federal Reserve’s FedNowSM Service will roll out round-the-clock, real-time funds availability to expand access to instant payments features.
Ultimately, this will spur innovation across the entire payments space. According to PYMNTS.com, “nine in 10 businesses expect to be able to initiate and receive faster payments” in order to gain efficiency and remain competitive. Thinking through your payments strategy now will help you prepare for this new environment.
Improving ACH Payment Processing
In addition, Nacha continues to work to make the ACH process speedier and more secure, enacting new Operating Rules on an ongoing basis. In September, Phase 1 of a new rule standardizing practices around Micro-Entries will take effect; and earlier this year, Nacha began enforcement of its Web Debit Account Validation mandate.
If your organization already uses ACH payments, smart strategies for meeting Nacha mandates can reduce your compliance risk, decrease returned payments, and better identify risky customers before doing business with them. That’s where Chargent comes in. We offer seamless solutions to help our customers get compliant with relevant Nacha rules, at a reasonable cost, without impacting their customers’ payment experience.
If you’re ready to make ACH payments a more prominent part of your payments strategy, or want to take the next steps in taking the friction out of ACH transactions, we’re here to help.
Start a conversation with our sales team today and find out how you can gain efficiency, deliver a better experience to your customers and workforce, and get paid faster.