What Are ACH Payments? Everything You Need to Know

Processing ACH payments should be effortless, but many businesses unknowingly leave room for costly errors and delays. 

Imagine eliminating the uncertainty and ensuring every payment goes through without a hitch. Sounds simple, right? It is, once you know the best practices that can streamline your entire process. 

In this blog, we’re breaking down the must-know strategies for managing ACH payments efficiently and securely. Takes 7 minutes. Let’s start. 

What are ACH Payments?

ACH payments (Automated Clearing House payments) are a type of electronic transfer that allows funds to be moved between banks or financial institutions in the U.S. They are commonly used for direct deposits, bill payments, and other types of financial transactions. 

Instead of using paper checks or credit cards, ACH payments allow money to be transferred digitally in batches, making it a secure, efficient, and cost-effective way to send and receive funds.

In short, ACH is like a middleman that processes bulk transactions between different accounts. It’s used for things like payroll, paying your bills, or moving funds between accounts, with lower fees and a slower processing time compared to wire transfers.

How do ACH Transfers Get Processed

To understand how ACH payments work, you gotta think of it like a relay race, where money gets passed from one place to another, but with a few important steps along the way.

There are five main stages of these transfers:

Stage 1 – Initiation

Let’s say you’re paying your rent or your paycheck is being deposited. The process starts when you (the payer) or the business (payer) submits a payment request to their bank, called the “Originating Depository Financial Institution” (ODFI). This could be your bank or any other financial institution you use.

Stage 2 – Batching & Processing

Now, ACH isn’t like a one-off wire transfer; it works in batches. What happens is your request gets collected with thousands of others, and all those payments are processed together at specific intervals throughout the day. It’s like a big shipment of money being packed up and ready to be sent off.

Stage 3 – Clearinghouse

Once all the transactions are bundled, they get sent through the Automated Clearing House network (a central hub that acts like a traffic controller). The ACH system sorts out where the money’s going and ensures that everything gets to the right destination.

Stage 4 – Settlement

After the clearinghouse sorts everything, it’s time for the money to settle into the recipient’s account. The money gets transferred from the payer’s bank (ODFI) to the recipient’s bank, called the “Receiving Depository Financial Institution” (RDFI). Now, the recipient’s account gets credited with the money.

Stage 5 – Finalization

The RDFI makes the funds available to the recipient, whether it’s your paycheck, a bill payment, or anything else. At this point, the transaction is considered complete, and the whole process wraps up.

Now, let’s look at best practices to ensure a strong and efficient KYB process.

Before You Process ACH Payments

ACH transactions, while cost-efficient, often do not receive the same level of scrutiny as card-based payments, making them a preferred method for criminals attempting to avoid detection.

Therefore, before processing ACH payments, make sure the bank account belongs to the right person (right person = identity verification and KYC are prior steps to ensure that the person doesn’t carry risk) to reduce chances of getting involved in money laundering.

Mainly, verify bank accounts at 3 key moments: 

1. When you start a new relationship
2. During periodic reviews
3. When account details change. 

To verify bank accounts, you can manually confirm details by requesting bank statements, using check verification tools, or cross-referencing account details with the institution. However, these methods can be prone to error. 

A more efficient approach is to integrate automated verification systems, such as APIs, that instantly validate bank account information in real time.

Best Practices for Managing ACH Payments

Managing ACH payments efficiently starts with ensuring security and compliance every step of the way. We’ve compiled these best practices accordingly. 

1. Automate Payment Verification with KYB/KYC APIs

One of the first steps in managing ACH payments smoothly is ensuring that you’re transacting with verified customers and businesses. Using KYB (Know Your Business) and KYC (Know Your Customer) APIs allows you to automate the identity verification process in real-time. This reduces the risk of fraud before initiating ACH transfers. 

You can integrate these APIs to run background checks on new customers or vendors, verifying their legitimacy and ensuring compliance with regulatory requirements. This builds a foundation for smoother, secure ACH transactions without delays or issues later.

2. Integrate Fraud Detection and Monitoring APIs

Fraud prevention should be a top priority for businesses handling ACH payments. Leverage fraud detection APIs that can monitor transaction patterns in real time and flag suspicious activity. These APIs can check for signs of unusual behavior, like a large volume of payments from a new account or inconsistent payment timing, which may indicate fraud.

3. Use Secure Payment Gateways

Choose payment processors and gateways that are PCI-DSS compliant and adhere to high security standards. Secure ACH gateways will encrypt sensitive payment data and provide robust fraud detection measures. Make sure your ACH payment provider is up-to-date on industry best practices and has strong security protocols in place.

4. Use Multi-Factor Authentication (MFA)

Always implement MFA for any system handling ACH payments or accessing sensitive data. Whether it’s for logging into your ACH processor portal, accessing customer information, or authorizing payments, MFA adds an extra layer of security. This helps prevent unauthorized access even if login credentials are compromised.

5. Ensure Compliance with Regulations

Stay compliant with ACH regulations, including NACHA rules, AML (Anti-Money Laundering), and KYC (Know Your Customer) regulations. Non-compliance can lead to penalties and increased scrutiny from regulators. By adhering to these standards, you ensure that your ACH processes are secure and aligned with industry best practices.

Getting Started

While we don’t provide direct payment APIs, Signzy can help you ensure that your business remains compliant and secure throughout every transaction. 

By integrating our solutions, you can streamline customer verification, mitigate fraud risks, and comply with regulatory standards (Important elements in building a trustworthy and efficient payment process).

1. KYC Verification: Automate the process of verifying customer identities during onboarding to ensure compliance with AML regulations and reduce fraud risks.
2. Bank Account Verification: Verify the bank accounts of business clients to ensure your client owns their bank account and ensure safe ACH transactions.
3. Identity Verification: Use government-issued documents and biometric checks to confirm the identity of individuals, preventing fraud and chargebacks in ACH payments.

To strengthen your compliance framework for more safe transaction processing, book a demo to explore how Signzy’s solutions can simplify and secure your processes.