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A Guide to The Automated Clearing House Network

Ach Payments

The world is increasingly moving toward an interlinked and electronic infrastructure powered by mobile. This makes it essential for global electronic payment systems to deliver services safely and efficiently.

A Guide to The Automated Clearing House Network

The Automated Clearing House Network (ACH) facilitates the transfer of up to $39 trillion annually and over 22 million transactions. This article offers a quick guide to the ACH in the US and how it works.

What is ACH?

ACH stands for Automated Clearing House.  The ACH Network is a joined infrastructure that powers commerce in the US by facilitating the transfer of money and information from one bank account to the next through Direct Payment and Direct Deposit.  

The types of transactions the ACH facilitates include business-to-business transactions, consumer to business, government, recurring and single payments as well as credit and debit transactions.

Annually, the ACH facilitates as many as 23 billion electronic transactions valued at 23 billion. Up to 90 percent of all the electronic transactions in the US are done over the ACH Network. This makes the ACH one of the largest and most trusted payments infrastructures worldwide.

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How Does ACH Work?

The ACH Network is essentially a system that enables batch processing of transactions by financial institutions. Instead of using paper, financial institutions use the ACH Network to transmit information and payments electronically. This makes such transactions safe and cost-effective.

Two types of transactions take place across the ACH Network: 

  • Direct Deposits

  • Direct Payments

Direct Deposit done via ACH entails the depositing of funds for tax refunds, government benefits, payroll employee reimbursement, interest payments etc.

Direct Payments done via ACH involves making payments using ACH debit or ACH credit. A credit transaction forwards funds into an account while a debit transaction removes funds from an account.

According to industry regulations, ACH credit transactions should be settled in one or two business days while ACH debits should be settled by the next business day. Ideally, with the updated regulations, all ACH transactions should be settled on the same day they were initiated.

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How Does the ACH Transaction Process Work?

The ACH infrastructure works in a series of interconnected steps:

1.   Originator- An originator can be an organization or a person who starts a Direct Payment or Direct Deposit transaction via the ACH Network.

2.   Transmission of information- In place of paper, the ACH Network uses an electronic infrastructure to transmit payments quickly and safely.

3.   The Originating Depository Financial Institution (ODFI) initiates the transaction on behalf of the originator. The ODFI accumulates payments and sends them in piecemeal and regularly to an ACH Operator. The operator could be either the Federal Reserve or the Clearing House.

4.   The ACH Operator sorts out the payments and sends them to the Receiving Depository Financial Institution (RDFI).

5.   The Receiver’s account will either be credited or debited depending on the nature of the financial transaction. The Receiver may be an individual, corporation or any other entity.

6.   Whether a debit or a credit transaction is initiated, the transaction will settle in one or two business days for credit transactions and in one-business days for debit transactions.

In summary, the ACH Network facilitates numerous transactions in and outside of the US. Essentially, the ACH is the backbone of the financial payment system, enabling fast, efficient and safe payment from one individual or corporation to the other.

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