What is an Automated Clearing House - ACH
An automated clearing house (ACH) is an electronic funds-transfer system run by the National Automated Clearing House Association (NACHA). This payment system deals with payroll, direct deposit, tax refunds, consumer bills, tax payments and many more payment services.
The use of the ACH network to facilitate electronic transfers of money has increased the efficiency and timeliness of government and business transactions. More recently, ACH transfers have made it easier and cheaper for individuals to send money to each other directly from their bank accounts by direct deposit transfer or e-check. ACH for individual banking services had typically taken two or three business days for monies to clear, but starting in 2016, NACHA has been rolled out in three phases for same-day ACH settlement. Phase 3, which launched in May 2018, requires Receiving Depository Financial Institutions (RDFIs) to make same-day ACH credit and debit transactions available to the receiver for withdrawal no later than 5 p.m. in the RDFI’s local time on the settlement date of the transaction, subject to the right of return under NACHA rules.
BREAKING DOWN Automated Clearing House - ACH
ACH is an electronic network of financial institutions that facilitates financial transactions in the United States. This ACH network acts as a financial hub and helps people and organizations move money from one bank account to another. ACH transactions consist of direct deposits and direct payments, including B2B transactions, government transactions and consumer transactions.
Benefits of the ACH Network
The ACH network is a system that batches financial transactions together and processes them at specific intervals throughout the day. This makes online transactions extremely fast and easy, with average ACH debit transactions settling within one business day, and average ACH credit transactions settling within two to three business days. However, recent changes to NACHA's operating rules now allows for same-day settlement of most, if not all, ACH transactions.
The ACH system oversees more than 90 percent of the total value of all electronic payment transactions in the United States. NACHA reports that the ACH network increases by upward of $40 trillion a year, on average.
How the ACH Network Works
An originator starts a direct deposit or direct payment transaction using the ACH network. Originators can be individuals, organizations or government bodies, and ACH transactions can be both debit or credit. The originator's bank, or the originating depository financial institution (ODFI), takes the ACH transaction and batches it together with other ACH transactions to be sent out at regular times throughout the day.
An ACH operator, either the Federal Reserve or a clearing house, receives the batch of ACH transactions from the ODFI, with the originator's transaction included. The ACH operator sorts the batch and makes transactions available to the bank or financial institution of the intended recipient, or to the receiving depository financial institution (RDFI). The recipient's bank account receives the transaction, thus reconciling both accounts and ending the process.
NACHA is the overseer of the ACH network, giving the system its management, development, administration and rules. The organization manages more than 10,000 financial institutions and is a self-regulating institution. NACHA has a set of operating rules that are designed to facilitate growth in the size and scope of electronic payments within the ACH network.