Summary: This article explains how businesses can use ACH payments to reduce costs and improve reconciliation.
- Learn how setting up ACH payments offers a flexible, cost-effective payment processing option.
- See the step-by-step process for how to set up ACH payments, starting with establishing a merchant account.
- The guide also emphasizes compliance with Nacha rules and Regulation E.
ACH payments are cost-effective, easy to use, and offer customers more flexibility and choice. If businesses like using ACH for all of these reasons, why put off implementation? Some companies simply don’t know how to set up ACH payments.
Don’t let setup be a barrier. Make payments more convenient for you and the customers you serve.
What Are ACH Payments and How They Work
ACH payments are electronic bank-to-bank transfers that use the Automated Clearing House network. These transactions use a bank account and routing number to move money between financial institutions.
ACH is not to be confused with credit card processing, which is facilitated by card brands such as Visa or Mastercard. ACH transactions can either be a “credit” or a “debit.”
- ACH Credit: In an ACH credit transaction, the "sender" pushes funds from their account into yours. Businesses typically use these for outgoing payments like payroll or paying vendors.
- ACH Debit: In an ACH debit transaction, you "pull" funds directly from a customer’s bank account after they have authorized the transfer. This is the most common method for businesses to collect recurring bill payments or one-time service fees.
Why Setting up ACH Payments is Good for Business
There are many perks to setting up ACH payments for your company. Here are a few compelling reasons to implement an ACH set up for your business:
Reducing operating costs
Merchants typically pay a percentage of each credit card transaction processed. For companies with large dollar payments, this means paying a higher percentage of each transaction. This billing model eats directly into profits.
ACH payments, however, are typically charged as a flat fee per transaction. This structure saves companies money on large payments, as the merchant fee remains the same no matter the customer’s payment amount.
Easier payment reconciliation
Waiting for a paper check to be processed by the bank takes time, and these payments must be manually accounted for somehow in your company’s records.
Setting up ACH payments improves reconciliation by keeping track of electronic payments — and reporting on them all in one place.
Pulling and reading reports, tracking specific customer workflows, and reconciling your merchant account are all easier when the information is housed in one software system without requiring extra work from your staff.
Customer preference
Learning how to set up ACH payments doesn’t just save time and money for your office. The more payment options you offer to customers, the more money you’ll bring in overall.
Customers want choices for how to pay, and they want the payment process to be easy. Letting customers pay with a bank account (through email/text request, or online portal) is a fast, preferred option.
What is the process of an ACH transaction?
- Initiation: The process begins when an Originator — an individual, corporation, or other entity — decides to send an ACH transfer.
- Submission: The Originator initiates the payment with their bank, known as the Originating Depository Financial Institution (ODFI).
- Batching: After receiving instructions from multiple Originators, ODFI batches these requests before sending them to an ACH Operator.
- Processing: Next, the ACH operator processes each batch and arranges for the transaction amount to be debited or credited accordingly.
- Settlement: Finally, payment reaches its destination after being routed through the Receiving Depository Financial Institution (RDFI).
Step-by-Step Guide: How to Set up ACH Payments
The process of setting up ACH payments should be straightforward, but there are other considerations to keep in mind.
After ACH setup, your business will also need to understand what it means to take a compliant ACH payment and implement internal processes that help you follow these rules.
Establish Your Merchant Account
The first step to setting up ACH payments is to establish a merchant account. Your payment vendor should be able to explain how to set up ACH payments through their company.
Often, this involves providing financial documents and going through an approval process.
To set up ACH payments through PDCflow, for example, our payment experts will:
- Outline the payment processor choices we offer. PDCflow offers several ACH processor options to choose from. Pick the right one for your business.
- Provide a list of necessary documents. A PDCflow Customer Success specialist will help you understand the items you need to provide to get approved with the processor of your choice.
- Walk merchants through submission. Because we have existing relationships with these ACH processors, PDCflow’s team can help monitor the process, answer questions, and help you submit the appropriate items to get approved.
- Set up ACH payment processing through PDCflow. Once approved, PDCflow will add ACH payments to an existing account (if you already have one with PDCflow) or will set up ACH payments in a new account.
- Train you and your staff. PDCflow’s Customer Success team is always available to train staff and answer any other questions about our software. Every customer can take advantage of our free training.
Choose the Right ACH Entry Class (WEB, TEL, PPD, CCD)
ACH payments are identified by different transaction types. Each type, or entry class, has its own code to explain how the transaction was processed and the type of authorization taken.
The most common types of transactions are:
- TEL (Telephone-Initiated): one-time/recurring
- WEB (Web-Initiated)
- CCD (Corporate Credit or Debit)
- PPD (Prearranged Payment and Deposit)
Collect and Secure Customer Banking Information
To successfully take ACH payments, you need to gather certain information from your customer:
- Their full legal name
- Their bank’s 9-digit routing number
- Their bank account number
Nacha requires companies to keep payment details secure. Never store raw payment data in spreadsheets, across unsecured physical paperwork, or unprotected in your company’s system of record.
PDCflow offers secure payments, account number tokenization, and data storage to simplify your ACH transaction processing.
Initiate and Schedule Your Transactions
Once your ACH merchant account has been set up, it’s time to start processing transactions. PDCflow makes it easy to start taking payments.
- Access your PDCflow dashboard
- Select the correct ACH payment template (or build a new one to meet your needs)
- Send a payment request via email or SMS, take an agent-initiated payment, or link to an online payment portal.
Understand ACH Payment Regulations and Nacha Rules
There are a number of payment regulations and industry standards in place to keep customer payment details safe and fight fraud.
When learning how to set up ACH payments, companies must also focus on compliant payment processes to avoid fines and fees and keep customer payments secure.
There are two main areas of ACH payment compliance to keep in mind:
- Regulation E: ACH payments are considered a type of electronic funds transfer (EFT). This means that any business that uses them must follow Regulation E of the Electronic Funds Transfer Act (EFTA).
The most relevant requirement for ACH is that merchants must get authorization from customers before beginning a recurring payment schedule.
- Nacha: The ACH governing body, Nacha, also comes with rules merchants must follow. They are the body that governs and monitors ACH activity. Nacha has created guidelines intended to make ACH transactions safe and reliable.
For example, bank account verification and payment authorization are two important areas of compliance.
PDCflow follows payment regulations and industry standards closely. We monitor changes and enhance our features in line with these rules. PDCflow offers many ways to help you stay compliant:
- ACH Verify: Nacha’s web account validation rule makes it easier to weed out fraudulent ACH transactions online. It says accounts should be validated as authentic before payments are submitted.
PDCflow’s ACH Verify feature validates accounts before payments are submitted to keep you compliant, fight returns, and reduce fraud.
- Secure, all-in-one Requests: Many payments should be approved by the customer before submission. For example, recurring payment schedules must be authorized before you start to take payments.
PDCflow lets you send schedules to your customers by email or text. They can review and sign their approval in minutes, right from their inbox or mobile device.
Implement a Proof of Authorization Process
Occasionally, your ACH processor will want to verify that your company is following the rules to take ACH payments safely, with authorization from customers.
Your company needs to know how to set up ACH payment authorization processes, so you can prove that your customers approve of the payments you are taking.
Proof of authorization will look different depending on how the transaction is processed. Here are the main ACH transaction types:
- TEL one-time: This is a single transaction being processed over the phone. You can either give prior notice before the ACH debit or record oral authorization.
- TEL recurring: This is when your company sets up a recurring payment schedule for customers to pay their bill in installments over the phone. This must include a notice before debit AND a recording of oral authorization.
- WEB: WEB payments are ACH transactions submitted through an online source (like a payment page). To prove WEB authorization, you must authenticate the customer’s identity in some way, gather some type of proof that they approve of the transaction, and display revocation language so customers know how to revoke permission.
- CCD: CCD payments are ACH credits or debits to a business account. These require a legal signature authorization, such as a digital signature gathered through a Flow request.
What Are the Typical ACH Processing Fees for Businesses?
When determining how to set up ACH payments for your business, the fee structure you choose can significantly impact your bottom line. Most processors offer two primary models: flat fees and percentage-based fees.
Flat fees make it easier to predict merchant costs each month based on how many transactions are processed. Percentage models are good for small-ticket businesses by minimizing costs.
The "Invisible" Costs of ACH: Managing Returns and NSF
While ACH payment processing is more cost-effective than credit card processing, there are additional costs that can add up if merchants aren’t careful.
Any time an ACH payment can’t be processed, the payment is returned with an ACH return code to explain what went wrong.
The originating bank will charge a return fee for each of these failed transactions, ranging from $2 - $35 per return. A transaction’s reason for failure determines how much a merchant is charged.
In addition, companies that receive a high rate of returned ACH payments might be investigated and fined by Nacha. Take care to stay under the required return rate thresholds to avoid investigation and fines.
Ultimately, a proper ACH setup ensures secure, authorized transactions that benefit both the merchant and the customer.
Learning how to set up ACH payments and gather proofs of authorization will enhance your payment offerings to customers, make processes easier for your staff, and keep your business compliant.
Frequently Asked Questions About How to Set Up ACH Payments
▸What are the two types of ACH payments (ACH Credit vs. ACH Debit)?
▸How long do ACH transfers take to clear?
▸What specific banking information is needed to set up an ACH transaction?
▸Can an ACH payment be voided or reversed once it has been initiated?
▸What is an ACH payment gateway?
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- ABOUT THE AUTHOR -
Hannah Huerta, Marketing Specialist
Hannah Huerta is a Marketing Specialist at PDCflow. She creates content for the accounts receivable and payment industry.
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