ACH stands for “Automated Clearing House”, and the ACH Network is the electronic payment-transfer system run by the National Automated Clearing House Association (Nacha). The system coordinates direct electronic payments and automated money transfers as a safer and more efficient alternative to paper checks, credit card networks, wire transfers, or cash. ACH transactions are most commonly used for payroll, direct deposit, consumer bills, tax payments and refunds, and many other payment services.
What Makes It Automated?
Computers in the ACH Network work together to process payments automatically, thereby eliminating the need to manually handle individual payments for all parties involved in a transaction.
What Are The Clearing Houses?
All transactions within the network are run through one of two “clearing houses,” the Federal Reserve or The Clearing House. Each clearing house ensures the efficient matching and processing of transactions between financial institutions.
What is ACH & How Do ACH Payments Work?
The ACH Network uses a batch processing system to settle the millions of transactions that occur every day. The network batches together transactions and processes them at specific times throughout the day instead of completing them in real-time. This is why whenever you make an electronic payment via an ACH processor or ACH transfer, there are typically 1-2 business days of processing depending on the time of day you initiated the transaction, and the type of transaction you’re making.
ACH transfers and payments are constantly being processed and settled automatically, and allow banks to move money much faster, safer, and more easily than other electronic money transfers like wire transfers.
While both qualify as electronic transactions, wire transfers require actionable steps from operators at both banks or financial institutions involved in a transaction. ACH transactions are batched, processed, and sent out appropriately and accurately—all automatically. They offer banks, businesses, and individuals a way to move money with a faster, more secure, and cost-saving process.
All ACH transaction files are standardized with a 94 character limit that includes transaction information like invoice numbers, the receiver’s name, the number of transactions and amount for each, and purpose for payment. They help ensure the process is secure and accurate without required action from either party in a transaction. To learn more about ACH, read our complete ACH Primer.
What are ACH Payments?
ACH payments are the direct transfer of funds between originating and receiving bank accounts on the ACH network. They can be made via ACH credit or debit transactions.
ACH credit payments are direct payments from an originating bank account to a receiving bank account. When you receive direct deposit from your employer every pay day, that’s an example of ACH credit. Your employer’s bank sends funds directly to the receiving accounts of employees enrolled in direct deposit. ACH credit also includes direct payment transfers to credit card bills.
ACH debit payments are initiated by the receiver who requests to pull funds from an originator’s account with the originator’s permission. When utility companies automatically remove funds from your checking account every month to make payment, that’s an example of ACH debit.
The ACH Payment Process
The bank of the originator, or the originating depository financial institution (ODFI), batches your ACH transaction with others to be sent out to The Federal Reserve or The Clearing House at regularly scheduled times every day.
The clearinghouses receive that batch of ACH transactions, and automatically sort through it to make transactions to the intended recipients bank or financial institution, or the receiving depository financial institution (RDFI), available.
Examples of ACH Transactions
There are a number of different ACH transactions you can make, including:
- Direct payments, such as bill payments to utility companies, merchant transactions, consumer transactions, and government transactions.
- Direct deposits from your employer or social security.
- Bank account transfers between your own accounts and other banks or financial institutions.
- Electronic payments to your credit card bill.
What are the Benefits of ACH?
- ACH transactions have lower costs.
With automatic processing of all payments, ACH transactions are faster and more efficient than electronic wire transfers, credit card networks, paper checks, or cash. Money moves faster between banks so people are typically paid faster, save on costs and fees, and eliminate manual processes.
- ACH transactions are faster.
The batch processing system of the ACH Network streamlines efficiencies in transferring millions of transactions throughout the day. While funds are accessible in near real-time, the processing typically takes 1-2 business days to settle. Time varies for types of transfers and by certain days of the week or holidays, but ACH transactions are increasingly becoming same-day.
- ACH transactions are safer.
Thanks to account verification and recurring payments, ACH transactions are more secure and mitigate risk of fraud more than wire transfers or transferring money through paper checks.
ACH money transfers eliminate the need for manual processing of transactions. ACH transactions are typically free of processing fees compared to credit card networks.
ACH direct deposits streamline payroll processing so employees get paid faster.
- Better Records
Businesses can quickly send and receive payments to vendors and suppliers while keeping electronic records of all transactions.
Bank account verification and fraud detection provide protection and security.
How ACH Helps Consumers
Send and receive money without the need for a paper check with electronic records made for all transactions.
- Auto-pay bills
Consumers that sign up for automatic bill payments transfer funds directly from a bank account for greater convenience and on-time bill payment.
- Direct deposit
Automated payments pay employees faster without the need for a check to clear.
ACH Payments With Envestnet | Yodlee
As a Nacha Preferred Partner, Envestnet | Yodlee is committed to Nacha’s efforts to improve the payments ecosystem. Nacha's rule requires that all businesses that debit funds from ACH payments require an account verification solution to protect against fake accounts and increase customers’ safety.
PayPal uses Envestnet | Yodlee Account Verification to speed up their account linking and verification process. Read about how PayPal uses Envestnet | Yodlee.
NACHA's New ACH Debit Rules
NACHA has also implemented a new rule that will take effect March 19, 2021:
Currently, ACH Originators of WEB debit entries are required to use a "commercially reasonable fraudulent transaction detection system" to screen WEB debits for fraud. This existing screening requirement will be supplemented to make it explicit that “account validation” is part of a "commercially reasonable fraudulent transaction detection system." The supplemental requirement applies to the first use of an account number, or changes to the account number.
The new NACHA rule will impact a variety of industries, who will all need to begin evaluating different account validation and verification solutions, such as instant account verification, in order to quickly and easily continue to receive ACH debit payments.
For more information about how to use ACH debit and ACH credit payments, or to use instant account verification for NACHA's new screening requirements, please watch our on-demand webinar, Meeting New NACHA Rules for Fraud Detection in ACH Web Debits.
To continue learning about ACH read our complete ACH primer.