Three essentials for streamlined ACH processing
ACH payments offer a secure solution that adapts to the evolving needs of consumers and businesses. As the payment landscape continues to change, streamlining the ACH payment process is crucial to preserving these benefits. There are three steps businesses can take to streamline ACH processing.
1. Navigating cut-off times
ACH processing times are established between the Originator and the ODFI (or the Originator’s payment processor) and processing generally occurs three and six times per day, depending on the relationship between the two and whether the payment is same-day or next-day ACH. Payments sent after these cut-off times will be processed on the following business day.
This means, for example, if you send a payment to be processed after the cut-off time on Friday, the payment will not be processed until Monday of the following week. Different banks and payment processors may also have different cutoff times, which can impact when payments settle.
Tyler Nappy, Product Manager at Plaid shares, "It’s imperative to know your payment provider’s cut-off times for same-day and next-day ACH so you can appropriately route to the rail that will help you meet the expected date for settlement of funds."
For example, if a payment gets sent at 5 pm ET, you’ve already passed the cut-off time for same-day ACH. In that case, it makes more sense to use next-day ACH for a lower price point, as it will settle at 8:30 am ET on the next business day. For a payment that came in at 4 pm ET, you can route it to same-day ACH and expect same-day settlement as long as you meet your bank or processor’s cut-off time.
Knowing these times and routing appropriately can save you money on processing costs and prevent delays since you know when payment needs to get submitted.
2. Communicate hold times and use tools to reduce them
Hold times are used to make sure funds actually settle and are not clawed back due to an ACH return before they are sent to the receiving account. For example, if a new crypto trading user sends funds to their account, these funds might be held for 3-5 days to ensure there isn’t a return. The crypto platform could hold funds past the time when returns would be expected to be seen, which ensures the payment is accurate and funds are available. This can increase the length of time before the user has access to the funds.
Although this delay is less ideal for customers, it's a simple and effective method to manage payment risk. Communicating this step with customers can alleviate frustration and ensure customers know when to expect funds to deposit.
However, there is a solution to reducing ACH hold times for low-risk transactions. Using Plaid Signal, businesses can leverage Plaid’s machine learning risk engine to instantly generate a risk score based on 1,000+ risk factors such as Plaid connection history, account usage, and past ACH events. It’s likely that around 90% of transactions will be flagged as ‘low-risk’. For these low-risk transactions, companies that, for example, accept ACH transfers to fund new trading or bank accounts, can safely release funds instantly for use and only apply holds to customers that pose some level of risk.
3. Use reserves to mitigate risk
Reserves are a common payment industry practice where payment processors hold either a small percentage of all processed payments or a lump sum of cash in a reserve account to cover chargebacks.
There are two ways reserves are held:
Rolling reserves, which is the percentage hold method described above. For example, if a customer buys sunglasses for $10, a payment processor can hold on to 20% for 60 days, and then send the cash to the business.
Static reserves, which is a lump sum of money that doesn’t change over time. This pool of money is held as collateral.
This allows the processor to hold a small percentage of the overall payments to ensure funds are present in case of ACH returns—while still sending some of the payment immediately. This practice helps mitigate their credit risk and can effectively decrease hold times (the time funds collected are held before being released to the merchant) since there are always some funds available to cover returns before they are settled (a process that can take up to 60 days).
→ Watch the video below to see how investment company Public uses fast and efficient ACH processing for funding new customer accounts.
