What Is ACH? ACH Payments and How They Work

Written by Jennifer PachecoReviewed by Nathan Brown, CFP®Updated: 19th Apr 2022
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When I see the abbreviation ACH, I automatically think about some sort of electronic payment option, whether it’s related to a transfer of funds or receiving funds. Because it’s so popular nowadays, you probably think of something initially, too.

If you think about it and look back, you likely deal with ACH transfers daily. That’s how popular they are.

For instance, do you get direct deposit? That’s an ACH. One of the most important and widely known transfers in the world.

These electronic payments have made our lives easier; there’s no more hassle of going to the bank on a Friday night to cash or deposit a check. Waiting in lines at the bank, going through traffic during busy hours, etc.

ACH has done something for us, and that something has turned out to be positively great! So if you don’t already know what ACH electronic payments are, or if you want to learn more about the system, keep on reading to take a sneak peek and learn a little bit.

What Is ACH? And What Does It Stand For?

ACH stands for Automated Clearing House. The network itself isn’t only named this; it acts as this – it’s a clearinghouse!

A trusted agency that processes electronic payments and money transfers, arranging for them to arrive in the right hands.

Simply put, ACH is a great way to move money between online banks, completely disregarding the paper trail check system and cash transactions. According to modern-day banking, ACH is one of the safest, quickest ways to receive funds.

>> More: What Is a Wire Transfer? And How Does it Work?

Understanding Automated Clearing House (ACH)

To better understand the Automated Clearing House, we need to accept that it is run by a complex system of computers.

For visual purposes, it’s like a grand library filled with educational books – except it’s a grand computer hub filled with computers that know how to transfer money funds back and forth.

The ACH operates digitally, approving and denying transactions in groups multiple times a day. Why in groups?

Why multiple times a day? Because there are so many transactions coming through every few minutes. Because businesses and companies are constantly sending transfer requests throughout the day.

More often than not, an ACH payment will settle into the account it’s supposed to within one business day.

However, ACH may take a few extra days to go through the agency depending on rejection or reversal potential requests – in that case, it will take 2-5 business days to get funds.

>> More: Best Ways to Send Money

How ACH Payments Work

Just like most payments, ACH has two types: Debit and credit. Recipients need to initiate ACH debit payments, and payees need to initiate ACH credit payments.

It doesn’t matter if you’re a recipient or a payee. In either case, you’ll need to authorize the transaction before it can legally go through.

The originator, or the person that initiates the transfer of funds, then sends a request to the bank or institution.

The bank or institution then passes that transaction along to the ACH operator. The ACH operator will route that request over to the RDFI or Receiving Depository Financial Institution. And lastly, the deposit will occur, making the transaction complete.

Where Will You See ACH?

Generally, you will see ACH payments on your bank statements or your bills. Direct deposit payroll slips are also ACH.

Bank Statements

If you see them on your statements, the transfers will show up in your transaction history with a side mark noted ACH.

This transaction will occur under credit or debits, depending on whether you are the receiver or payee.

Routine Bills

If you see them on your bills, you are currently signed up as an automatic withdrawal for that company.

This means that your bills will electronically and automatically be paid via the checking account you have linked up to it every month.

You will be able to avoid writing a check or entering a credit card every time payment is due with this option.

Most companies allow you to opt-out of the ACH offered program if need be at any time with no penalties.

Direct Deposit

Many companies and businesses nowadays offer direct depositpaychecks on a weekly or bi-weekly basis to their employers.

If you are enrolled in a direct deposit program through your employer, you’re likely getting an ACH transfer to your bank account.

That way, you don’t have to wait to go to the bank and cash the check – the funds are already there the morning you’re supposed to get paid.

Examples of ACH Transactions

ACH is more widely known than you’d think. In fact, you’ve probably had experience with at least one type of ACH transaction in your lifetime – with so many more to come.

Many people and countless businesses use ACH on the daily to complete the following transactions:

  • Direct deposit weekly or bi-weekly paychecks
  • Automated electronic monthly bill payments
  • Payments from business to vendor or business to the supplier
  • Transfer of money from one bank to the next

How ACH Is Used: Banks, Consumers, & Businesses

So many banks, consumers, and businesses use ACH on the daily.

Banks (Financial Institutions) and ACH

Banks use ACH for transfers internally and externally. Banks can also use ACH to electronically acknowledge bill payments and send them through.

Consumers and ACH

Individuals use ACH for various areas of their lives, including but not limited to direct deposit ventures from employers, setting up automatic payments of monthly bills, and buying auto-refill items online.

Businesses and ACH

Businesses use ACH to send funds through direct deposit by electronically transferring paychecks to employees. Payments to vendors and suppliers can also be made through ACH.

What Is the Difference Between ACH Payments and Direct Deposit?

ACH is an electronic transfer of funds from one account to the next, but it can pertain to the receiver or to the payee.

Direct deposit is specific to one type of transfer: Paycheck funds. Yes, both receiver and payee can be involved in direct deposit transfer, as one party has to pay the other for the work that has been done.

But to get to the point, direct deposit is only one type of ACH transaction.

>> More: Can You Deposit Cash at an ATM?

Pros and Cons of ACH Payments


  • Fast transfer of funds
  • Omit paper check usage
  • Pay bills on time with no late fees
  • Offers great security
  • Make online purchases without credit card or check usage
  • Omit paper bank records to avoid fraud
  • Money transfers are low in cost – lower than credit cards, too
  • Automated transactions reduce errors in monthly payments


  • Bank account access must be granted for use
  • May risk overdraft if automatic payments are not accounted for
  • Companies may have to invest in training and software to properly process ACH

Bottom Line: What Is ACH?

All in all, the Automated Clearing House is a great way to receive and send electronic money transfers, no matter the type.

Currently, we see the ACH growing more and more each year, and for a good reason. The #1 reason?

Because it’s a trusted agency that makes payments go through faster, safer, and easier. With everything else becoming more digital, why not make payments fully digital, too?

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Jennifer Pacheco

Jennifer Pacheco attended the University of Dartmouth, Massachusetts where she earned her degree in English Writing & Editorial Work. She is a seasoned personal finance writer with over 5 years of professional work under her belt, and supplies easy-to-read information that’s educational, engaging, and conversational to help you make the most of your money.