Same Day ACH: What It Means For Your Bill Payment
by Lenny DeFranco
We live in a world driven by instant gratification. If a friend recommends a great new album to you, you can pull it up online to give it a listen instead of driving all the way to a record store to invest in your own copy. Hungry for a burrito? You can order it from a restaurant through an app and expect it within a half hour instead of going to the store, filling a cart, then making a mess of your kitchen as you try to make your own. Forgot toothpaste at the store? Just place a Prime order and it’ll get delivered that day.
We expect everything to be delivered with speed—including our financial transactions. Think about how convenient it is to send electronic payments from person to person as you’re paying them back from a night out, booking a trip, hosting a baby shower. This convenience and speed is even more important on a business to business level.
In the hospitality world, you deal with a significant number of payments, both to internal employees and external vendors. Plate IQ’s Bill Pay was designed to help streamline all of those external transactions and approvals, offering visibility for entire finance and ops teams to ensure everyone is paid on time. Payments can be sent directly to vendors via traditional check, virtual card, or Automatic Clearing House (ACH).
Though virtual cards have plenty of their own benefits, ACH is incredibly common. It processes about 90% of all funds transferred within the United States; in 2020, the daily value of transactions was about $1.8 billion. ACH is outrageously popular because it enables businesses to automatically transfer funds from one entity to another, posting transactions on the same day.
If you’re an owner, operator, or accountant, you’re probably intimately familiar with ACH already. But that means you’re probably also painfully aware that automatic doesn’t always mean immediate. Let’s take a look at why that happens—and what you can do to speed things up.
A (very) brief introduction to ACH
Things moved a lot slower in the 60’s and 70’s, including the movement of money. Physical, paper checks were the way to pay. But things took forever going through the mail, and checks could easily get lost or stolen. Groups of bankers decided to take things into their own hands and explore how payments could be improved, and in 1972, the first ACH association was born.
Before payments could get sent electronically, guardrails needed to be put into place. There are a few entities involved in ACH: Nacha, the network administrator, and The Federal Reserve and The Clearing House (TCH), which are the network operators. Nacha sets the rules; the Fed and TCH actually move the money.
Nacha was established in 1974, and shortly thereafter the rules governing what would become Direct Deposit were put in place. The Air Force became the first employer to use Direct Deposit, and now, over 94% of all Americans are paid that way.
How ACH actually works
Nacha’s process for an ACH transaction begins with an instruction or alert from the originating bank to the recipient bank. This direction is sent through the Fed. All recipient banks are required to clear their backlog of payment instructions by 8:30 a.m. daily. This is called a “settlement window.”
The ACH operates under an electronic file transfer system that predates email, so the settlement window is the only way in which the originating bank can be sure that its instructions were received and processed by the recipient bank. But with so many people and businesses wanting to adopt ACH, the single settlement window began to create some issues.
A significant number of businesses operate on a 9 a.m. – 5 p.m. schedule. Let’s say your hotel accountant keeps those hours. Under standard ACH procedure, if they initiated an ACH transfer on Tuesday morning at 10 a.m., it wouldn’t actually be processed (or considered complete) until Wednesday morning at 8:30 a.m., when the recipient bank is required to process all ACH instructions.
ACH’s popularity pushes Same Day support
By the late 2010s, this slow pace of settlement started to frustrate Americans who, elsewhere in their money-sending lives, were getting used to instant transactions and drone-delivered packages. With such a significant number of transactions getting sent through ACH on a daily basis, it was a logical move for Nacha to start offering additional settlement windows for banks.
As of 2018, three settlement windows were established: the standard 8:30 a.m., an afternoon 1 p.m., and traditional close of business at 5 p.m. This meant that even if your hotel accountant came in late and didn’t start sending payments until 2 p.m., they could still be processed before the end of the day, during the 5 p.m. settlement window.
It was a huge improvement for businesses exchanging a lot of money, as well as businesses that needed to post same-day transactions. But keep in mind that not all ACH transactions will be Same Day—it’s simply an additional feature the service offers at a nominal fee. The user with the originating bank can decide if the transaction must be on the same day or if it can wait until the next morning’s settlement window. For businesses with bills that need to get paid ASAP, the small fee is worth the peace of mind.
For same-day payments, timing is everything
Remember that automatic doesn’t mean immediate. A similar principle needs to be applied to Same Day ACH: just because “same day” is in the name doesn’t necessarily mean funds will also be available that day. It simply means that transactions will be processed that same day.
Think about restaurants: in a business model with such tight margins, some owners might not be able to send a vendor payment until after the close of a busy lunch rush that same day. If a payment to a vendor is sent at 4:45 p.m. it might post at 5 p.m. at the recipient bank—but it will appear as Pending. The funds will not become immediately available.
It’s important to note that no debit transactions using ACH clear within the same day. This is by design to help protect banks; Nacha established a rule to give the bank that’s losing funds a two day period to stop the transaction before it’s settled. But Same Day ACH debits reduce that waiting period down to about a day and a half.
With Same Day ACH, and ACH in general, timing is everything. Hospitality businesses can avoid the uncertainty of settlement windows and pending vs. posted payments by using Plate IQ Bill Pay to schedule ACH transfers so all money is sent where it needs to go at exactly the right time.
Lenny DeFranco writes for Plate IQ about how businesses in hospitality, accounting, and more can gain efficiency and earn revenue through AP automation.
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