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It takes time to process an ACH Network transaction — three working days in the majority of cases. This can be a little frustrating for business owners and other stakeholders who want their transactions to be processed straightaway without any delays. In the modern age, when digital payments and online banking have put ultra-convenience in the palms of our hands, we expect a speedy, almost instantaneous process.
This is what we're going to be discussing in this guide — why is ACH slow? Read on to learn more about what goes into the ACH Network process and discover more about why this is not an instant process. We'll also talk about what changes have taken place on the network over the years and what we can expect in the future.
Are ACH payments really slow?
There are many benefits to Automated Clearing House transactions, and it is easy to see why so many businesses and other institutions rely on this system for payment processing. Enhanced security and reliability, a high level of flexibility, the ability to create recurring payments — these are all key advantages to using the ACH Network.
However, one question remains — why is ACH slow?
ACH payments can take three working days to process or even longer in some cases. But is this really slow? Compared to other forms of payment and other clearing methods, it's not that slow. Traditional clearing methods may take longer than this, and it can even take several weeks to finalize and clear a transaction.
In fact, the ACH Network was designed to accelerate these processes. Back in the 1960s, there was a significant concern that the increasing volume of paper checks used as payments would overwhelm the manual clearing system. Automated processes were adopted to ease the strain on the manual system — these processes were successful, and this would eventually evolve into the Automated Clearing House system. The fact that this system is still in use several decades later is testament to its revolutionary nature in the payment processing market.
However, in the 21st century, when we are used to instantaneous technologies and a world of capability right at our fingertips, three working days feels like a long time. This is why we’ll examine why ACH is deemed slow.
Why do ACH payments take so long?
So what is actually going on here? Why are ACH payments a little slow to process, at least when compared to the real-time, instant technology that we have grown so used to in the modern age? There is no single answer here — instead, there are a number of reasons that justify the processing time.
A complex set of interactions
Perhaps the main reason that ACH payments can be slow is the complexity of the process. There are many different entities involved in completing and clearing a transaction, and all of these entities have their own role to play in the process. Each interaction must be completed according to a strict set of protocols, and any problem during the process can result in a failure of the entire transaction.
Let's take a look at these interactions in more detail:
Payment processors
The Automated Clearing House Network includes a payment processor that will analyze, assess, and make a decision on each transaction that is received. These processors handle the bulk of the work during the clearing phase.
Merchants
There will often be a merchant involved in the transaction. This merchant will send their information to the ACH Network in the form of an ACH file.
Originating banks
The ACH Network will need to communicate with the originating bank. In other words, the bank that holds the account the money will be transferred from.
Federal Reserve bank
ACH transactions are handled in association with the Federal Reserve bank. The network must communicate with the Federal Reserve bank while the transaction is finalized and cleared.
Originating Depository Financial Institution (ODFI)
The Originating Depository Financial Institution is also known as the ODFI. This is an interface between the different entities involved in the transaction, and funds will be held here while the transaction is in process.
Recipient banks
This is the bank that the money will eventually be sent to. Funds will need to be received by the designated account within this recipient bank.
Not all of these interactions will be required for each and every transaction, and the complexity of the process really depends on the type of transaction. The above outline is designed to provide a better understanding of why ACH payments can be slow in some instances.
Transaction batching
In most cases, single transactions are not processed on a "first come, first served" basis. Instead, they are batched with other transactions and processed together. Depending on the timing of the transaction, this can cause delays, and it is one of the reasons why ACH payments are sometimes considered to be slow.
If your transaction is received at the beginning of the creation of a new batch, it may not be processed until other transactions have been added to this batch. This may cause a slight delay, although it should not push the transaction processing time beyond the advertised three-working-day period.
Payment failure cut-offs
The payment failure cut-off is built into the typical three-working-day timeline for an ACH transaction. This is designed to give the payer time to alert the ACH Network if there is going to be a problem with the transaction, and to ensure that their account funds are sufficient to settle the transfer. After this cut-off point is reached, the transaction will be initiated.
The idea is to prevent the transaction from being returned due to insufficient funds or to avoid disputes at a later date. Both of these instances can result in an additional fee or charge — return or chargeback fees. However, it does cause significant delays to the ACH clearing process.
Other cut-offs
There are other cut-offs associated with the ACH payment process. These are essentially deadlines by which a new payment needs to be registered. The three-working-day processing time only applies if the deadline is met on the day the transaction is initiated. If the deadline is missed on that working day, it will be processed the following working day — this will add at least one day to the overall processing time.
There have been a few changes to these processing deadlines and cut-offs over the years, and we'll discuss these further below. However, the fundamental truth remains the same — if the transaction deadline is missed, the full processing time will extend beyond the stated three working days.
Business days and non-business days
As mentioned, the advertised processing time for an ACH transfer is three business days. This idea of a business/working day is something to bear in mind, as this can slow the overall process.
Missing the cut-off extends the process by one working day, but if this takes place on a Friday, the following working day will be Monday. This means two days are added to the overall processing time. If there is a public holiday on Friday or Monday, this may further extend the total processing time for the transaction. International transfers may add even more complexity, as users may encounter a situation in which different public holidays combine to increase processing times even further. Users need to remain aware of this and factor weekends and public holidays into their calculations.
The ACH payment timeline
To better understand why ACH payments are slow, it's useful to look at the typical payment timeline. This provides a good indication of what is going on at each stage of the process and offers a glimpse of what may be causing the delays. Take a look at a standard three-day timeline below.
Straight after the transaction is initiated
After the transaction has been initiated, the data will need to be processed in the form of an ACH file. This file is compatible with the automated processes and protocols used by the ACH Network. Once this file is submitted, the transfer begins — but this file needs to be received before the cut-off point for that business day; otherwise the processing begins on the following business day.
During the first business day
During the first business day, the funds outlined in the ACH file need to be accessed and then delivered to the Originating Depository Financial Institution or ODFI. The ODFI serves as the interface between the various entities involved in the payment transfer, including the Federal Reserve bank. Funds will be held at this point, before they are transferred into the recipient's bank account.
During the second business day
During the second business day, the payment failure cut-off deadline will apply. This is where the payer is given time to notify the ACH Network of any issues that may occur with the payment and also add any funds that may be required to settle the transaction balance. At the end of the cut-off time, the payment should be attempted. If the funds are still insufficient or if there are any other issues with the transaction after this deadline, it may be refused and returned, and a charge may be applied.
On the third business day
By the third business day, the transaction should be finalized and completed, with all parties notified and all accounts made up to date. If the transaction needs to be repeated or reversed, the process will need to begin again, and a further three-working-day timeline will apply.
Changes to ACH transaction times
The ACH Network has been around for decades. As you would expect, there have been many changes over this period, and this includes changes to the expected transaction clearance duration. The two biggest amendments of recent years took place in 2015 and 2017 — take a look below to learn more about these.
General improvements
If you believe ACH payments are slow nowadays, you should have seen the way they were before. Until 2015, it took up to five business days to process a payment — two whole working days longer than it takes today.
By the midpoint of the last decade, technology has improved significantly, and customer expectations had increased too. With this in mind, the ACH Network modernized significantly in 2015, slashing the payment processing time period.
Introduction of same-day payments
In 2017, the network was modernized once again. This time, the ACH Network was reorganized to accept expedited transactions, including same-day payments. In only a couple of years, the scope of the ACH Network was revolutionized, and the potential transaction timeline fell from five days to three days to a matter of hours. Fortunately, there are also other faster alternatives to ACH payments, such as wire transfers and digital wallets, which can process transactions almost instantly.
Expedited transactions do carry a charge on the ACH Network. Account holders will need to pay this charge before they can reap the benefits of same-day transactions and speedier services. However, this gives users more flexibility when it comes to managing their budgets and utilizing accelerated clearing processes when required.
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