Today’s focus is understanding the ACH payment system.  Electronic payments primarily use the Automated Clearing House (ACH) system.  The ACH payment system is the intermediary between banks and between the payee and the payor.  It is used for Electronic Funds Transfer (EFT) in the U.S.   Individual banks and credit unions have different rules regarding when funds are available for use.  A hold can be placed on the transaction’s debit or credit.  It is important to understand the specific hold periods at your financial institution to avoid insufficient funds fees from bouncing checks and payments.  Recall The Money Skinny™ mission is to save you time and money.   Let’s review what the ACH payment system is and the most cost-effective ways to use it.

ACH Payment System Defined

The Automated Clearing House is under the jurisdiction of the Federal Reserve.    ACH payments are batch processed between sending and receiving banks.  An  ACH Transaction Overview is published by the Federal Reserve.  The batch processing cycle is why payments must be entered by a certain time of day – perhaps noon or 1:00 – to be included in that day’s transactions.  ACH started with the direct deposit of payroll checks.  You’re encouraged to use direct deposit for payroll checks because it’s cheaper for a company to set up an ACH payment than to produce a paper payroll check.  Growth has exploded with online banking and cellphone usage.

ACH Payment Not Available 24/7

You can pay your bills anytime, from anywhere.  When you pay your credit card bill online at midnight, the payment is reflected in the account in three seconds.  Hold the phone.  This is the type of message that is displayed in the fine print somewhere on the credit card account:

Your payment will post to the credit card account right away, but may take 1 to 3 business days to appear in your funding account. Posted payments may not be available for immediate use.

That payment goes into a pending or hold queue.  The transaction settles in two or three days.  It may not reflect that status within your account.  It may appear as paid or as a debit.  But rest assured, the bank will unwind a non-sufficient funds transaction lickety-split if the money isn’t available.

ACH Payment Not Available Holidays or Weekends

Expecting the direct deposit of a tax refund?  The money will not be deposited into your account on a holiday or weekend.  The ACH payment system batch processes during business hours on weekdays, excluding holidays.

Some banks and credit unions display a pending category of activity for payments and deposits in the hold queue.  That tax refund from the IRS may first show as pending.  Deposits in the pending category cannot be used for payments or withdrawn until the hold expires.  Typically a business day or two later.

ACH Verification Step

There may be a verification step with an ACH transfer.  Suppose you want to pay a credit card bill electronically with a checking account.  The credit card company may send a one-time trial amount of less than a dollar to your checking account.  Then you verify within the credit card payment system that as the owner, you authorize the ACH transfers.  Another common verification step may require that the account owner provide a voided blank check or deposit slip.  This method is often used for direct deposit of payroll checks.

ACH Payment vs Wire Transfer

An electronic transfer of funds through ACH payment travels through the ACH system under the jurisdiction of the Federal Reserve.  Typically free or inexpensive.  More secure.  Conversely, a bank employee sets up the wire transfer to wire money.  It occurs instantly.  No hold period.  No batch process.  Less secure than an ACH payment.  You might pay a $10-15 fee on both sending and receiving ends of a wire transfer.  Choose EFT payments instead of wiring money to avoid/minimize fees.

Wire Transfer Example

Typically a title company requires a wire transfer for closing on a real estate transaction.  The money must be available on a specific date.  How about people and companies that ask you to wire money?  That raises the scam alert flag.  With a wire transfer, the money is gone.  ACH payments are more secure due to the hold period.  However, credit cards offer more consumer protection than wire transfer or ACH payments.

Caution on Savings Account Transfers or Withdrawals

There is limit of six transfers or withdrawals from a savings account per month.  Any type of withdrawal – ACH payment, ATM or whatever.  A savings account is not a “transaction account”.  The Federal Reserve definition of a savings account is available here.  To avoid a Savings Withdrawal Limit Fee, do not make more than six withdrawals from a savings account per month.  Use a checking account for routine payments.  A checking account has unlimited monthly withdrawals.

A Second Caution on the Amount of Withdrawals

Recall from The Money Skinny™ article How to Avoid Structuring Money that ACH payments occur under the jurisdiction of the Federal Reserve.  In summary, reporting requirements for things like gifts of money over $14,000 in 2017 apply to ACH payments.

The Money Skinny™ article ACH Payment System Push versus Pull has further ACH details.

When You’re Fancy

My children use an app on their cellphones to deposit paper checks.  Information about how a paper check is processed is available at Bankrate.  The cellphone app mimics what a bank does with a paper check.  Front and back images of the check are transmitted to the bank.  Processed as if the bank had received a paper check.  The electronic processing of paper checks occurs separately from the ACH system.

• The Automated Clearing House (ACH) system electronically transfer funds and makes payments.
• Funds in a pending category are available when the hold expires.
• Choose EFT payments instead of wiring money to avoid/minimize fees.
• To avoid a Savings Withdrawal Limit Fee, do not make more than six withdrawals from a savings account per month.