What is ACH? How does it work?
July 29, 2020
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The world is becoming paperless. People prefer digital payments to cash and checks. One of the biggest players in this movement is the Automated Clearing House, or ACH. You’ve likely heard of ACH payments but perhaps under the guise of eChecks. These terms are synonymous and represent the same quick, convenient, and inexpensive way to move money digitally.
ACH transfers represent a huge and growing portion of financial transactions in the US. In the first quarter of 2020 alone, 6.4 billion payments were made on the ACH Network, according to NACHA. This was an increase of 7.1% from 2019.
Real estate is no exception. ACH is a favored method of online rent collection among landlords for a few key reasons including its low cost, relative convenience, and familiarity. Below, we explain what ACH is, how it works, and the pros and cons of the ACH Network. You’ll be equipped with a new understanding of ACH, which will come in handy when deciding whether ACH is a good fit for your real estate business.
What is ACH?
ACH, or the Automated Clearing House, is an online technology that facilitates and automates the transfer of funds between bank accounts. It is considered “automated” because computers do most of the work for us. Payers and billers alike are free from the responsibility of manually handling payments.
Transactions are collected and submitted by authorized ACH gateways. At the end of each day, debits and credits are collected together in massive batches by the two central “clearing houses,” which are the Federal Reserve and The Clearing House. Requests can then be sorted and issued between bank accounts all at once. This results in a fast, efficient, and cost-effective way to move money from one account to another, and it all happens online. There is no need for paper checks, wire transfers, credit cards, debit cards, or cash.
You likely come in contact with ACH just about everyday. The form of ACH that you’re probably most familiar with is direct deposit, which allows your paycheck to appear in your bank account every other week. ACH is also used for online bill pay, transferring funds from one bank account to another, P2P platforms like PayPal and Venmo, and more.
How Does ACH Work?
While it’s good to know what ACH is, how it works is likely still a bit of a mystery. Let’s clear things up. As we’ve just noted, ACH is used widely and for many different kinds of online payments. To simplify our breakdown, however, we’ll look exclusively at how ACH is used for rent collection.
First, tenants must fill out an ACH form. In the past, this was done offline, however, increasingly, it’s collected as part of an online payment platform like property management software. This form collects information such as the tenant’s name, bank name, account number, routing number, and the transfer amount. The landlord then receives a notification that the tenant has authorized a direct payment from their bank account.
Next, if they have setup ACH payments through their bank themselves, the landlord electronically sends a file with the payment details to their bank. The landlord’s bank then makes an electronic ACH entry for the tenant’s payment and batches it together with other payments to send to an ACH Operator. The ACH Operator — either the Federal Reserve or the Automatic Clearing House — sorts the transactions.
A request for the payment amount is then sent to the tenant’s bank by the ACH Operator. The tenant’s bank checks to make sure there’s enough money in their account. If there is, it debits the account for the amount of the rent payment. Lastly, the tenant’s payment is batched with other ACH payments and transferred all at once.
How to Start Accepting ACH Payments
ACH is a great tool available to landlords who want to collect rent online. The ACH Network is a bit complicated, as you can likely now see, which makes setting it up feel daunting. The good news is that there are plenty of platforms whose goal is to make this process easier for you. We will gloss over your options here, but for an in-depth look at the methods of collection available to you, check out our article all about collecting rent online.
Primarily, the two main ways for landlords to get setup collecting rent through ACH are through their bank directly and through property management software. Many landlords start by setting ACH up through their bank because it’s a system they’re familiar with and trust, but there are some drawbacks. Getting setup can take time, the process is less tailored towards rent, and the reporting can be surprisingly lacking. What’s more, there are often setup fees and monthly minimums.
Property management software, on the other hand, is designed specifically for collecting rent and for that reason, can often be a better fit for landlords. Getting setup is typically as simple as signing up and verifying your bank. Rental software is cost-effective, provides landlord-specific services, facilitates quicker transactions, and more.
Both of these methods simplify the process of setting up ACH, but we encourage landlords to assess their needs and the services provided by each method in order to find the best fit for themselves.
Benefits of the ACH Network for Landlords
Convenient. Rent collection through ACH is extremely convenient. Everything is done online, meaning that you don’t have to worry about counting cash, bounced checks, or writing paper receipts. All ACH transactions are tracked, and records are automatically updated. Additionally, tenants can set their rent payments to be recurring. They don’t have to remember to pay each month, and you don’t have to track them down for payments.
Inexpensive. The ACH Network is one of the most cost-effective ways to move money digitally. Unlike credit cards, ACH is not subject to interchange or assessment fees. The specific fee depends on the method that you choose to access the ACH network. Typically, you’ll either see a flat fee of $0.20 – $1.50 or a percentage of 0.5% – 1.5% (both per transaction).
Secure. ACH has a strong reputation for being a secure method of online funds transfer. Of course, no method of payment is completely exempt from fraud, but because NACHA oversees every ACH transaction, this tends to be a safe way for landlords to collect rent.
Quick. While ACH has not always been known as the quickest method for the digital transfer of funds, they have done much to change this. Now, ACH payments typically take between 1-2 days to process and will hit your bank account in no more than 3-5. NACHA is still working to expand same-day processing, which has increased by 42% since the start of 2019.
Drawbacks of the ACH Network
Transaction Limits. Most banks put a limit on how much money can be transferred via ACH payments. This can come in the form of per-transaction limits, daily limits, and monthly or weekly limits. There are also other variables at play with transaction limits, all of which could create issues for tenants using ACH frequently.
Difficult to Access. The traditional process by which landlords submit ACH transactions directly themselves is difficult to access. It requires a relationship with a bank or some other financial institution, which can be costly and demand large swaths of your time to set up. Some platforms — such as property management software — try to minimize this problem by making ACH more accessible for landlords.
Bounced eChecks. Although they look a little different, ACH payments can bounce just like paper checks. If a tenant has insufficient funds at the time of the automated payment, the transfer will not go through. Landlords and tenants may not realize this until a few days later when the batch of ACH payments processes. This results in late fees for tenants and an interruption in your cash flow.
Hopefully the mystery of ACH payments is now a little clearer. As eCommerce continues to grow and we move away from cash and checks, knowing the ins and outs of ACH is incredibly useful. Landlords will find ACH to be especially important as more and more tenants prefer paying their rent online. The biggest question that remains is whether ACH is right for your real estate business and, if it is, which platform will be the best facilitator of rent collection. As always, we encourage landlords to shop around and find the best fit for their unique needs.