Do you use ACH transactions as part of running your small business? You do if you provide a direct deposit option for payroll, if you make electronic payments to the government for payroll taxes, if you use online banking to make bill payments, receive customer-initiated online banking payments for your invoices, or if you process direct debits from your customers’ bank accounts. (If you don’t you’re missing out on a major convenience and potential cash flow improvement– talk to your bank, your payroll processor, or a payment gateway like PaySimple to learn more.)
If your business does use ACH, you’ve probably heard rumblings about “Same Day ACH” which has been in the news recently as the date for initiating Phase 1 of the program approaches. That date is September 23, 2016. For consumers and businesses alike, it means the ability to move money faster, which is in most cases a good thing. But, will Same Day ACH help your small business operate more efficiently? If your business can benefit from sending and receiving funds more quickly, and the benefit warrants paying a premium for it, then Same Day ACH will be a welcome enhancement.
Before delving into the Same Day ACH topic, let’s begin with some ACH basics. ACH stands for Automated Clearing House, which is the network via which money moves amongst banks. At its very simplest, an ACH transfer is a command to move funds from one bank account to another. In practice, this command is created and fulfilled based on a complex set of rules designed to ensure error free funds transfers, as well as to protect financial data and prevent fraud. Those rules are created and maintained by NACHA, the National Automated Clearinghouse Association.
ACH transfers are an evolution of the paper check system consumers and businesses have long used to transfer funds. The information used to process an ACH transaction is the same information that appears on a paper check—Account holder’s name and address, checking account number and bank routing number (the numbers printed at the bottom of checks), date, payment amount, and authorization for the transfer (the signature line on a paper check).
The advantage of ACH over paper checks is processing time—when a transaction is electronically transmitted to the banking network it removes a number of intermediary steps (such as mailing a paper check, picking up the mail, creating a deposit, etc.) that can delay the availability of funds. With traditional ACH, funds are typically made available to the recipient 1-2 business days after the transaction enters the ACH network.
With Same Day ACH those funds can be made available on the same day the transaction enters the ACH Network—hence the excitement surrounding the Phase 1 launch. Faster funds availability is accomplished by adding additional ACH batches to the daily schedule (currently there is only one, which settles at the earliest the next business day). With the additional batches, a transaction entered in the morning batch can be settled in the afternoon and a transaction entered in the afternoon batch can be settled in the evening batch, enabling funds to be sent and received on the same day.
ACH Credits and Debits
There are two basic types of ACH transactions—those where money is pushed (ACH Credits) and those where money is pulled (ACH Debits).
The most popular types of ACH Credits are payroll transactions where money is deposited into an employee’s personal account, and online bill payments where a customer instructs their bank to deposit money into a business’ bank account (i.e. a credit card bill payment, a utility bill payment, or any other payment to a vendor or service provider). In order to initiate an ACH credit, the person making the payment must know the bank account and routing number for the funds recipient (as in the case of payroll), or the recipient must be on a directory banks use to route payments (as in the case of most utilities and credit card issuers).
Understandably, most small businesses don’t want to provide their bank account information to their customers. Many are also too small to appear on banking system directories. In those cases, the best way for a small business to utilize the ACH network for payment collection is to use ACH Debits. With an ACH Debit, customers provide a business with their bank account information along with authorization to process one-time or recurring transactions for a specified amount (the business never has to disclose its own bank account number). The business then initiates an ACH Debit to pull money from its customers’ accounts into its own. To use ACH Debits, a small business must typically obtain an ACH merchant account directly from their bank, or from a third-party provider. This provider processes the transactions on behalf of the small business merchant, and deposits funds into the merchant’s account once the transaction has cleared.
Phase 1 Same Day ACH: Credits
The first phase of Same Day ACH applies only to credits, and applies only to transactions between U.S. banks—it does not apply to international transactions, nor does it apply to transactions with the US federal government (which has declined to participate—go figure!) It also applies only to transactions under $25,000.
With Phase 1, banks will have the option of supporting initiation of Same Day ACH but will be required to process any same day payments submitted to them. This means that your bank may not enable you to transfer money for a same day payment, but if one of your customers initiates a same day payment to you, your bank must process it on the day it was initiated.
IMPORTANT CAVEAT: Just because your bank processes a payment same day does not yet mean that you will receive funds in your account on that day. While the funds will be withdrawn from the sender’s account immediately, your bank still has the discretion to hold those funds and credit them to you several business days later—just as it can hold funds for ACH payments and paper check transactions today. (Though a mandate for same day funding is coming—see phase 3)
Phase 2 Same Day ACH: Debits
In Phase 2, you as a small business owner will be able to initiate same day ACH-debits. This means that you can pull money from a customer’s account (with proper authorization of course) on the same day you initiate the transaction. As with Phase 1, ACH Debits can be for US banks only, and must be under $25,000.
Phase 2 is still a year away, going into effect September 15, 2017—but when it gets here it will be extremely advantageous to small business cash flow. For example, recurring payments could be entered and settled on the same day. For service businesses, payments could be collected on the morning of a service appointment, settled by the afternoon, and ACH credits to pay your staff also processed and settled on the same day.
Just as with AHC Credits, in phase two the funds will be withdrawn from your customer’s account on the day the transaction is initiated, but your bank is not obliged to fund your account on the same day. If you have a merchant account with a third-party service provider, that provider will determine when funds are released to your bank account—and it may continue to take several business days to get them.
Phase 3 Same Day ACH: Funds Availability Mandates
The last phase of Same Day ACH goes into effect on March 16, 2018. Up until this point, banks had the option of depositing funds from Same Day ACH transactions into your account on the same day, but were not required to do so. With Phase 3 all banks are required to make same day ACH transactions available by 5PM on the day they are initiated. This means if your customer initiates a same day ACH Credit, your bank is required to have the funds in your account by 5PM on the same day.
If you initiate Same Day ACH Debits directly from your bank, it means that the bank must make those funds available to you by 5PM on the day the transaction is entered.
If you use an ACH merchant account from a third party (instead of your bank directly) to process ACH debits, that third party may agree to fund your account for them on the same day they are entered. But, since your relationship with the ACH merchant account provider is contractual, its terms may provide a different funding period—so be sure to check.
NOTE: Same Day ACH also means that funds will be withdrawn from your customers’ accounts on the same day you initiate ACH Debits—so make sure they know that so you don’t get a bunch of NSF (Non-sufficient funds) Returns.
The Costs of Same Day ACH
Initiating and settling Same Day ACH transactions does not come without cost. That is why the NACHA rules have built in a Same Day ACH surcharge for these transactions that is paid by the ODFI (the bank originating the transaction) to the RDFI (the bank to which the funds are being deposited).
With nothing in life being free, you can count on banks to pass this cost along (likely plus some) to customers initiating Same Day ACH transactions. Third party processors will likely also offer Same Day ACH for an added fee, and likely Same Day ACH settlement for an even higher fee.
As a small business owner, you’ll need to balance the advantages of sending and receiving funds sooner against these added costs. In many cases, traditional multi-day ACH transactions will be just fine. In others, particularly when you avoid a hefty fee for late payment, it can be well worth the cost.
Advantageous Uses of Same Day ACH Credits for Your Small Business
Getting paid more quickly is a clear advantage to using Same Day ACH for debits, but there are significant cash flow advantages to using it for ACH Credits as well.
For example, with traditional ACH funds are withdrawn from your account up to 3 business days before they are deposited into the recipients account—be that recipient an employee or a vendor. With Same Day ACH you can keep your money longer. (Though with the paltry interest rates currently available, the cost of money is rather negligible.)
Same Day ACH can also help you avoid late fees if you forget to make a payment; can enable you to process emergency payroll; and can even enable you to process payroll for hourly workers without having to guess at hours worked.
The ability to offer same day payment to your own vendors and service providers may enable you to get more advantageous pricing from them—and that savings may offset the costs of paying early and even the costs of processing the Same Day ACH transactions.
Same Day ACH Resources for Small Businesses
NACHA has created a website dedicated to Same Day ACH. Check out the Same Day ACH Resource Center for a large library of materials on the upcoming change. One key resource is the Same Day ACH for Businesses Essentials Guide, which helps you understand the upcoming changes, how exactly they will be implemented, and how they can benefit your small business.
If you’re interested in payroll applications of Same Day ACH (which will be available on September 23 this year), see Guidance for Employers and Payroll Professionals on Same Day ACH Direct Deposit.
The Faster Payments Tracker from PYMTS.com is a monthly newsletter that provides up-to-the-minute information on Same Day ACH and other fast payment processing technologies. Check out the August Issue, which features Same Day ACH.
Getting Your Small Business Ready for Same Day ACH
The best thing you can do to prepare your small business for Same Day ACH is to speak with your service providers and with your bank. If you’re interested in using Same Day ACH Credits for payroll, now is the time to have that discussion with your payroll provider. If you’d like to use Same Day ACH Credits with your bank online bill payment service, be sure to ask about that too—even if your bank is not planning to offer it starting on September 23, it might reconsider if enough customers demand it.
Looking forward to Same Day ACH Debits—it is never too early to start asking your bank and your payment processing providers about it. Significant customer interest is the catalyst needed to get your providers to offer the service.
As you have your discussions, be sure to find out how much the same day service will cost, steps you’ll need to take to utilize it, and in the case of Same Day ACH Debits how fast your processor will make funds available for these transactions before and after Phase 3.
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