What is ACH in banking?

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Definition: Automated Clearing House​

In banking, ACH stands for Automated Clearing House, which is a network that coordinates electronic payments and automated money transfers.

ACH is a way to move money between banks without using paper checks, money orders, credit card networks, or cash.

References to ACH can mean several things, depending on where you see them.

On bank statements​

On your statements or in your transaction history, ACH means that an electronic payment has been made to or from your account using your checking account information. Common examples of ACH transfers are listed below. For any ACH transfer to move funds to or from your account, you must authorize these transfers and provide your bank account number and routing number.

On the invoices issued to you​

ACH on your bill means you have the option to pay your bills electronically. Other options include eChecks, EFT, or AutoPay. Instead of writing a check or entering a credit card number each time you pay, you can provide your checking account information and pay directly from your account. In some cases, you control when you pay (the funds are only transferred when you request payment). In other cases, the entity billing you automatically debits your account when your bill is due, so you need to be sure there are funds available.

Tip: Keep track of your accounts and when various payments are made, even if payments are made automatically.

Content:

• What does ACH mean?
• Examples of ACH transactions
• What does ACH do for customers?
• What does ACH do for businesses?
• Talking computers
• Types of operations

What does ACH mean?​

What exactly does "Automated Clearing House" mean? Defining the terms may help.

Automated​

The ACH system consists of computers working together to process payments automatically. There is no need to manually process payments (either on your part or on the part of the entity that billed you). ACH is a "batch" processing system that processes millions of payments at the end of the day.

Clearing House​

The network uses two central "clearing houses". All requests are routed through either the Federal Reserve or the Clearing House. This allows for efficient matching and processing of data between multiple financial institutions.

Examples of ACH transactions​

You probably have more experience with ACH than you think. Individuals and businesses use ACH for everyday transactions such as:

• direct deposit of your salary into your account (from your employer to your bank account);
• Automatically pay recurring bills such as energy bills, insurance premiums, and homeowners association (HOA) dues. When you present a voided check to the billing entity, you set up ACH;
• payments from businesses to sellers and suppliers;
• transfer money from your regular bank to your Internet bank.

As with any technology, using ACH means accepting all the pros and cons. Let's look at them below.

Pros:

FOR CLIENTS:

• receive payment faster with automatic payment without waiting for the bank to accept the check;
• Automate bill payments to avoid late payments and missed payments;
• online shopping without the need for a credit card or check;
• minimizing paper documents containing confidential banking information.

FOR LEGAL ENTITIES:

• makes money transfers easy with minimal effort and cost;
• allows you to make payments to employees without printing checks, filling out envelopes and paying postage;
• facilitates regular customer payments without the need to transport actual paper checks to the bank;
• provides lower fees than credit card payments;
• The electronic process makes payments to vendors and suppliers easier and faster, while maintaining electronic records of all transactions;
• Automatic operations may be less error-prone than operations performed manually every month.

Cons:

FOR CLIENTS:

• companies have direct access to your bank account;
• Autopayments are deducted regardless of whether you have funds in your account, which may result in an overdraft fee.

FOR LEGAL ENTITIES:

• allows other companies to have a direct link to your bank account;
• customers can cancel their payments, although not as easily as with a credit card;
• It is necessary to monitor transactions for fraud, as business accounts have less protection than customer accounts;
• Companies may need to purchase software and invest in training to process ACH payments.

What does ACH do for customers?​

If you are an individual, you may have access to the following:

• Get paid quickly, safely and securely from your employer. You avoid the hassle of waiting for your paycheck or depositing a check into your bank;
• automate your payments so you never forget to pay (and your payments arrive on time);
• Make purchases online without using a check or credit card. You pay quickly and avoid credit card processing fees;
• Minimizing the amount of paperwork with information about your bank account. This helps reduce the likelihood of fraudulent activity on your accounts.

The main drawback for customers is that the ACH setup gives businesses direct access to your checking account. They take money to pay your bills, whether you are ready to pay or not. If you are short of funds, you can choose to pay by another method. Additionally, you can prioritize certain payments when you are short of funds, paying the most urgent bills first.

For more information on how customers use ACH, please review the section on setting up ACH debits.

What does ACH do for businesses?​

If you run a business, the following is available to you:

• an inexpensive and easy way to transfer money;
• Pay your employees without having to print checks or pay postage;
• easy, fast and regular acceptance of payments from customers - no more interruptions in the flow of funds that depend on when you can get to the bank;
• processing fee that is lower than the credit card processing fee;
• secure and easily traceable receipt of payments from suppliers or payments to suppliers (there is instant electronic registration of each transaction).

Businesses face the same problem as customers: There is a direct link to your checking account, and any errors or unexpected withdrawals can cause problems. Moreover, businesses may face the problem of customers canceling payments and refunding them. However, reversing an ACH payment is more difficult than reversing a credit card payment.

Warning: Businesses should be especially vigilant about monitoring for fraudulent activity. Consumers enjoy a high degree of protection against errors and fraud in their checking accounts, but business accounts do not have the same level of protection. If funds leave your account, you may be responsible for paying them back (or suffer losses).

Finally, companies may need to purchase software or invest time and resources to migrate to ACH transfers. However, they will likely easily recoup these costs in the long run.

For more information about how companies use ACH, see the section on processing ACH transfers.

Talking computers​

The ACH system is a network of computers that communicate with each other to make payments. For each payment, two sets of computers work:

• the party that makes the request;
• the party that grants the request (assuming all goes well, which it usually does).

IDFI​

Using direct deposit as an example, an employer (via the employer's bank) creates a request to send money to an employee's account. The employer is known as the originator, and the employer's bank is the initiating depository financial institution (IDFI). This request is sent to the ACH operator, which is the clearinghouse, receives multiple requests throughout the day, and then routes the request to the destination.

RDFI​

The receiving financial institution is the receiving depository financial institution (RDFI) that holds the account of the ultimate account holder (the employee receiving the salary in this case), known as the recipient.

Types of operations​

ACH transactions come in two forms:

1. Direct deposits are payments to a recipient, such as wages from your employer or Social Security benefits, paid into your checking account.
2. Direct payments are requests to withdraw funds from an account. For example, direct payments occur when billing agencies automatically deduct utility payments from your checking account.

Note: Currently, ACH transactions do not occur in real time. Instead, banks use “batch processing” to process the entire day’s worth of requests at once. As a result, you do not receive your paycheck immediately after your employer authorizes the payment. Instead, the transaction takes one or two business days to clear through the system. Plans are underway to speed up ACH payments, and same-day payment systems are already in place for select transactions.

Sources of the article:
1. Consumer Financial Protection Bureau (CFPB) - What Is an ACH?
2. Office of the Comptroller of the Currency – Checking Accounts: Understanding Your Rights
3. Consumer Financial Protection Bureau (CFPB) - How Do Automatic Debit Payments From My Bank Account Work?
4. Nacha – History of Nacha and the ACH Network
5. Nacha - Electronic Payments for Businesses
6. Federal Deposit Insurance Corporation (FDIC) - FDIC Consumer News Need to Stop a Payment? Know Who to Contact and How
7. Nacha - Electronic Payments for Businesses: FAQs
8. Federal Financial Institutions Examination Council - The ACH Network
9. Nacha - Electronic Payments for Consumers

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