What Is ACH Prefunding?

Automated Clearing House (ACH) transactions are booming. In 2024 alone, the ACH network transferred 8.6 billion commercial and government direct deposit payments (totaling $15.8 trillion) for things like payroll, retirement distributions, Social Security and tax refunds. Imagine what would happen if the money wasn’t there to back those payments. Banks, who are ultimately on the hook, would be in hot water.

That’s where ACH prefunding comes in. Prefunding ACH transactions guarantees there’s enough money in the payer’s account before the payments are approved—reducing the credit risk and keeping the system running smoothly.

Keep reading to learn how ACH prefunding works and why it matters for banks, businesses and payees.

 

What Is ACH Prefunding?

ACH transactions refer to the electronic transfer of money between bank accounts. ACH transactions move funds electronically through the ACH network to cover a range of payments, such as direct deposit of paychecks, recurring bill payments and online purchases.

ACH pre-funding is a financial practice used primarily when processing ACH credit payments (when money is “pushed” from one bank account to another through the ACH network). To prefund ACH transactions, the financial institution debits the funds from the originator’s (the party sending the money) account in advance, guaranteeing sufficient funds are available to cover the outgoing payments.

 

How ACH Prefunding Works:

1. Initiation of ACH credit transaction: A company, agency or individual (the originator) initiates an ACH credit transaction to send funds to another party. This could be for payroll, vendor payments, Social Security payments or other large disbursements. The payer or the payer’s processing partner provides an originating depository financial institution (ODFI) with the payee’s account information, the amount to be sent, a categorization code and a target settlement date.
2. Funds verification: The ODFI verifies that the originator’s account has enough funds to cover the total amount of the ACH credit transaction.
3. Prefunding process: Instead of immediately sending the ACH transaction, the ODFI prefunds the transaction. This means:
   1. The ODFI debits the originator’s account for the total amount of the ACH credit transaction—usually one or two days before the effective date of the ACH transaction (when the funds are intended to be available to the recipient).
   2. The funds are then held in the ODFI’s settlement account until the credit file is released by the ODFI.
4. Settlement: On the effective date, the ACH network processes the transaction, transferring the funds to the receiving depository financial institution (RDFI), which then credits the recipient’s account.

 

What Are the Benefits of ACH Prefunding?

ACH pre-funding is a safety measure that adds a step in the ACH credit process to guarantee the availability of funds by debiting funds from the originator’s account prior to releasing ACH credits.  Prefunding ACH transactions decreases the bank’s credit risk associated with ACH origination by reducing the risk of the originator’s account having insufficient funds at the time of ACH prefunding settlement. If the originator doesn’t have sufficient funds in its bank account on the effective date, the ODFI is responsible for those transactions.

Prefunding ACH transactions offers several other advantages for financial institutions, businesses and recipients:

• Guaranteed settlement: Funds are verified and secured before processing, eliminating the risk of rejected payments due to insufficient balances.
• Lower return rates: Prefunding guarantees that the originator (sender) has the necessary liquidity, reducing ACH returns.
• Faster settlement times: Prefunding ACH transactions supports smooth and timely settlement. Prefunded ACH credits often qualify for same-day or next-day availability of funds.
• Better cash flow predictability: Businesses can accurately forecast outgoing payments without surprises.
• Improved vendor and payee trust: Employees, suppliers and contractors get paid on time, strengthening business relationships.

 

What Are the ACH Originator’s Responsibilities?

In the ACH payment process, the originator is the individual, business or entity that initiates the ACH transaction. Originators have several responsibilities within the ACH process, including:

• Authorizations: Obtain the proper authorizations from the transaction recipient to originate one or more entries to the recipient’s account. Provide authorization to the bank within a specified time, if requested to do so. Retain proper authorizations for at least two years following the termination of the authorization.
• Security: Protect the recipient’s banking information. Protect sensitive financial data, including employees’ identities and credentials.
• Account updates: Make necessary changes to the payee’s account information within a specified time frame or prior to the next origination, when notified.
• Transactions: Send ACH entries on the correct date and cease entries when notified. Notify the recipient regarding changes in transaction amounts or dates. Prefunding ACH transactions minimizes changes in transaction dates.

 

What Happens if Prefunding Fails?

If the originator’s account doesn’t have sufficient funds for the ACH credit payment during prefunding, the bank sends a notification indicating the ACH transaction failed funding attempts. This notification will also indicate a specific date/time by which the originator must fund the account. If funding doesn’t occur before the cutoff, the ACH payment will fail and the originator must reinitiate the payment. If sufficient collected funds are still not available before processing begins on the evening before the file settlement date, the file may not be processed.

 

How to Reduce ACH Fraud Risk

ACH credits are becoming a prime target for business email compromise (BEC), a scam where fraudsters posing as executives or (more commonly) vendors send emails to trick employees into making unauthorized payments. According to the 2025 Association for Financial Professionals’ Payments Fraud and Control Survey Report, 63% of respondents cited BEC as the number one avenue for attempted and actual payments fraud, with ACH credits the second most vulnerable payment target (reported by 50% of respondents, behind wire transfers at 63%).

While ACH prefunding doesn’t prevent fraudulent transactions (it just makes sure the money is available for transfer), originators and financial institutions can take these steps to reduce ACH fraud risk:

• Perform an internal risk assessment and controls evaluation: What types of controls are in place to combat ACH origination fraud?
• Strengthen identify verification before sending payments: Know to whom the money is going before sending payments.
• Implement security measures: It’s imperative that you protect employees’ computers and credentials.
  • Regularly update firewalls and anti-virus, anti-malware and anti-spam protections.
  • Protect and keep confidential all user IDs, passwords and authentication methods.
• Send alerts: Do this when an employee’s password has been changed, or when an ACH credit transaction has been generated.
• Monitor accounts online daily: Review the balances and account transactions so you are aware of all ACH transactions, even when they have not yet posted to your account. Early detection of fraud is critical to minimize the damage.
• Use dual-approval procedures: One bank employee generates the ACH batch and a second employee logs in and approves the batch.

 

Send and Receive ACH Secure, Reliable Payments With CSG Forte

CSG Forte makes it simple to disburse funds and collect payments instantly and reliably via ACH transfer. You can make payments to a supplier, to your employees or as a refund to a consumer just as easily as you accept customer payments.

CSG Forte supports same-day payment options to make ACH transfers even more convenient. Our payment platform protects financial data and provides payment confirmation, offering account status validation and account ownership solution, as well. These features reassure users that payments reached the right recipient.

With CSG Forte, it’s easy to accept—and make—digital payments. Ready to get started?  Contact us today.