What Is the Automated Clearing House (ACH)?

The automated clearing house (ACH) is an electronic funds-transfer system run by the National Automated Clearing House Association (NACHA) since 1974. This payment system deals with payroll, direct deposit, tax refunds, consumer bills, tax payments, and many more payment services in the United States.

NACHA is a self-regulating institution, and it gives the ACH system its management, development, administration, and rules. The organization's operating rules are designed to facilitate growth in the size and scope of electronic payments within the ACH network.

How the ACH Network Works

The ACH Network is an electronic network of financial institutions that facilitate financial transactions in the United States. It represents more than 10,000 financial institutions and moves more than $43 trillion each year by enabling more than 25 billion electronic financial transactions, according to NACHA.

The ACH Network essentially 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.

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 either debit or credit. The originator's bank, also known as 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 clearinghouse, 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, also known as the receiving depository financial institution (RDFI). The recipient's bank account receives the transaction, thus reconciling both accounts and ending the process.

Benefits of the ACH Network

Since the ACH Network batches financial transactions together and processes them at specific intervals throughout the day, it makes online transactions extremely fast and easy. NACHA rules state that average ACH debit transactions settle within one business day, and average ACH credit transactions settle within one to two business days.

[Important: Changes to NACHA's operating rules will expand access to same-day ACH transactions, which will allow for same-day settlement of most, if not all, ACH transactions starting by 2020.]

The use of the ACH network to facilitate electronic transfers of money has also 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 rolled out in three phases for same-day ACH settlement. Phase 3, which launched in March 2018, requires 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.

Key Takeaways:

  • The automated clearing house (ACH) is an electronic funds-transfer system that facilitates payments in the U.S.
  • The ACH is run by the National Automated Clearing House Association (NACHA).
  • Recent rule changes are enabling most credit and debit transactions made through the ACH to clear on the same business day.