What Is the Automated Clearing House (ACH)?

What Is the Automated Clearing House (ACH)?

The Automated Clearing House (ACH) is an electronic funds-transfer system run by Nacha. The Automated Clearing House traces its roots back to the late 1960s but was officially established in the mid-1970s. The payment system provides many types of ACH transactions, such as payroll deposits. It requires a debit or credit from the originator and a credit or debit on the recipient's end.

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 Nacha.
  • Recent rule changes are enabling most credit and debit transactions made through the ACH to clear on the same business day.
  • ACH transactions make transferring money quick and easy.
  • Banks may limit the amount you can transfer and impose fees.
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How the Automated Clearing House (ACH) Works

The ACH Network is an electronic system that serves financial institutions to facilitate financial transactions in the U.S. It represents more than 10,000 financial institutions and ACH transactions totaled more than $72.6 trillion in 2021 by enabling over 29 billion electronic financial transactions.

The network essentially acts as a financial hub and helps people and organizations move money from one bank account to another. ACH transactions consist of deposits and payments, including:

Here's how the system works. An originator starts a direct deposit or direct payment transaction using the ACH network via debit and credit. The originator's bank, also known as the originating depository financial institution, 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 originating institution with the originator's transaction. 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. The recipient's bank account receives the transaction, thus reconciling both accounts and ending the process.

Changes to NACHA's operating rules expanded access to same-day ACH transactions, which allows for same-day settlement of most (if not all) ACH transactions as of March 19, 2021.

Special Considerations

The ACH payment system is offered by Nacha. Formerly known as the National Automated Clearing House Association, it's a self-regulating institution. The ACH network's history dates back to 1968 but wasn't officially established until 1974.

This network manages, develops, and administers the rules surrounding electronic payments. The organization's operating rules are designed to facilitate growth in the size and scope of electronic payments within the network.

Types of ACH transactions include payroll and other direct deposits, tax refunds, consumer bills, tax payments, and many more payment services in the U.S.

Advantages and Disadvantages of the ACH

Advantages

Because 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 the average ACH debit transaction settles within one business day, and the average ACH credit transaction settles within one to two business days.

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 typically took 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.

Disadvantages

Certain financial institutions may restrict the amount of money you can transfer. If you want to do a large transfer, you may have to do this in multiple steps. For instance, if you're transferring money to your child who's away in college, you may be limited to transfers of $1,000. If they need more for books and rent, you will be required to send more than one transfer.

Some banks charge fees for ACH transactions. And this can be a per-transaction fee. If you're used to doing multiple transactions, this can add up and put a big dent in your bottom line.

The ACH network only works between U.S. accounts. This means that you can't conduct any transactions that are meant for international transfers using this payment system. So if you want to send money to someone abroad, you must do so using a wire transfer or other similar payment processing network. As such, the transaction will not necessarily be executed on the same day.

Pros
  • Makes online transactions quick and easy

  • Increases efficiency and timeliness

  • Provides same-day banking transactions

Cons
  • Banks may limit transaction amounts

  • Fees

  • Can't be used for transactions outside the U.S., which may result in longer processing times

How Does the Automated Clearing House Work?

An Automated Clearing House or ACH transaction begins with a request from the originator. Their bank batches the transaction with others that are to be sent out during the day. The batch is received and sorted by a clearinghouse, which sends individual transactions out to receiving banks. Each receiving bank deposits the money into the recipient's account.

What Is an Automated Clearing House Transaction?

An Automated Clearing House or ACH transaction is an electronic transaction that requires a debit from an originating bank and a credit to a receiving bank. Transactions go through a clearinghouse that batches and sends them out to the recipient's bank. Transactions are normally executed on the same day as long as they are done before 5 p.m.

Are There Any Disadvantages to Automated Clearing House Transactions?

ACH transactions may come with fees, depending on your bank. This means the more you do, the more you'll spend on fees. Certain banks limit the amount of money that you can transfer through the system so if you want to transfer large amounts of money to other people, you may have to do so through multiple transactions. Another drawback is that the system is only equipped to handle domestic transfers. As such, you can't use the ACH network to make transfer money internationally.

The Bottom Line

Sending money to someone else used to be a big hassle. But the advent of electronic technology is making things much easier. The Automated Clearing House or ACH facilitates transfers between banks. This eliminates the need for withdrawing money from one account and depositing it into another. The network is updated to allow businesses and individuals to execute transactions on the same day. But keep in mind that there are restrictions—notably, that you can't send money internationally. You may also be limited in how much you can transfer and you may end up incurring fees. Check with your bank about how it handles ACH transactions.

Article Sources
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  1. Nacha. "ACH Network Sees 29.1 Billion Payments in 2021, Led by Major Gains in B2B and Same Day ACH."

  2. Nacha. "Expanding Same Day ACH."

  3. Nacha. "History of Nacha and the ACH Network."

  4. Nacha. "Same Day ACH: Moving Payments Faster (Phase 3)."

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