While there are benefits to accepting ACH for payments, like lower processing costs and ability to set up recurring transactions, the settlement process is notoriously long compared to debit and credit transactions. ACH payments are processed electronically, so why does it take so long to settle these transactions?
Who’s Involved in an ACH Transaction?
One of the reasons that ACH settlements take so long is the number of parties involved in the transaction. Payment processors collect payment data from merchants. The payment data is sent to an originating bank, which submits the ACH data to Federal Reserve for overnight processing. Finally, the Federal Reserve sends the ACH transaction to the customer’s bank.
Risk of Reversal
ACH transactions sometimes take longer to settle as a risk management measure. Credit and debit card transactions are authorized and approved immediately, so unless the consumer later says the transaction was fraudulent, the transaction will typically go through. However, ACH transactions aren’t authorized right away and can be rejected or reversed after they’re submitted to the receiving bank (the customer’s bank).
The originating bank and merchant never receive a “confirmation” that an ACH transaction has been successfully processed. There’s only communication when the transaction is rejected. The originator may give a few days to be sure the transaction isn’t reversed before depositing funds into the merchant’s bank account.
ACH transactions aren’t processed real-time. Instead, these transactions are processed in batches and each batch must be sent by a certain time of day to be processed overnight. Any requests made after the cutoff time won’t be processed until the next business day, which means that transactions processed after the cutoff time on Friday won’t be processed until the following Monday.
With ACH transactions, banks can’t simply transfer funds to each other. ACH transactions have to clear the Federal Reserve before they’re sent to the customer’s bank. This process happens once daily overnight. ACH transactions have to go through this process, which adds additional time to ACH settlement.
Reversals can delay the process, particularly if there was an error in the data submitted. If a transaction is reserved, the receiving bank notifies the Federal Reserve that the payment was returned. The Federal Reserve doesn’t notify the originating bank. Instead, the originating bank checks with the Federal Reserve daily to see if there are any returned transactions for them.
Some third-party ACH transactions take longer because the payment processor will debit the customer’s account first, wait until that transaction has cleared and then will credit the recipient’s account.
Future Same-Day Settlements
While the ACH settlement time can be frustrating at times, it’s still preferable to processing paper checks. With HealPay SettlementApp, you can offer multiple payment options, including ACH, debit, and credit, to make it easier and more convenient for customers to business with you.
– HealPay blogger, LaToya Irby.