ACH

Overview[1]#

ACH or Automated Clearing House, is an electronic Funds Transfer System (network) for Payment Transactions in the United States

Normally ACH refers to the Automated Clearing House used in the United States. The ACH Network serves as a network for direct consumer, business, and government payments, and annually facilitates billions of payments such as direct deposit and direct payment.

ACH direct debit transfers include consumer payments on insurance premiums, mortgage loans, and other kinds of bills. Debit transfers also include new applications such as the point-of-purchase (POS) check conversion pilot program sponsored by NACHA.

Both the government and the commercial sectors use ACH payments. Businesses often use ACH online to have customers pay, rather than via Payment Cards.

Rules and regulations that govern the ACH network are established by National Automated Clearing House Association (NACHA) and the Federal Reserve.

The Federal Reserve Banks, through the FedACH system, are collectively the nation's largest ACH operator composed of 60% of commercial interbank ACH transactions; the remaining 40% was processed by the Electronic Payments Network (EPN), the United States' only private-sector ACH operator. Electronic Payments Network and the Federal Reserve Banks rely on each other for the processing of some Transaction Accounts when either party to the transaction is not their customer. These interoperator transactions are settled by the Federal Reserve Banks.

Payment Cards transactions NOT handled by ACH networks but rather by private Payment Card Payment Networks

How ACH Payments Work#

The direct deposit of a paycheck is a common example of ACH payments. To understand how a payment moves through the ACH, let’s look at how a paycheck goes from your employer into your bank account.

The payment starts with the originator. The originator is the person or organization that initiates an ACH transaction. In this case, your employer is the originator. Your employer requests to send a payment from their account to your account.

Next, the ACH request goes to the originator’s financial institution, or Originating Depository Financial Institution (ODFI). This would probably be your employer's bank. ODFIs collect all ACH requests and send them to an ACH operator.

The ACH operator is a middleman that processes all transactions moving through the ACH. ACH operator receives requests from the ODFI and distributes them to the appropriate institution. There are two ACH operators in the United States. One is FedACH, which stands for Federal Reserve Banks’ Automated Clearing House which is the collection of all the Federal Reserve Banks Banks and handles the majority of ACH transactions between commercial banks in the United States The other operator is the Electronic Payments Network (EPN) which is a private-sector ACH operator.

The ACH operator will then send the ACH request to the Receiving Depository Financial Institution (RDFI). The RDFI will then credit (or debit) the funds to the receiver's account. In this payroll example, your bank is the RDFI and you are the receiver. You, as the receiver, will have already set up direct deposit  by providing your employer with your bank account information and authorized the transactions.

How Long Do ACH Payments Take?#

ACH transactions do not send in real time because ODFIs don’t send transaction requests as soon as they get them. Instead, an ODFI collects a number of requests and sends them in a batch. The ACH operator then collects a whole day's worth of requests before processing and sending them to the appropriate RDFI.

Because of this, ACH payments can take a few business days to move through the system. Rules from NACHA (National Automated Clearing House Association) dictate that ACH debit transactions must now be processed by the next business day. This is only one kind of payment but it represents an increase in transaction speed.

ACH transactions can take even longer due to reversals. If there is an error in your bank account number or your employer’s information, a transaction can be reversed. The RDFI will notify the  Federal Reserve  about the returned payment. Then it is up to the ODFI to check with the Federal Reserve if any of their payments have been returned.

More Information#

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