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Understanding ACH: What is the Automated Clearing House?


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ACH transactions, which are bank-to-bank transfers, are processed as either a credit or a debit. The meaning of ACH credit and ACH debit follows. 

An ACH credit is initiated by the payer. Money is being pushed from the sender’s account (ODFI) to the receiver’s (RDFI). This is sometimes called a “push” transfer, with the most popular type being direct deposit, or recurring payment of bills. 

An ACH debit is initiated by the receiver. It means money is being pulled from the sender’s account (ODFI) and placed into the recipient’s account (RDFI). This is called a “pull” transfer and is initiated when the receiver provides their bank account and routing number to the sender. It is also referred to as an ACH withdrawal.

For this reason, ACH debit transactions are seen as a little less secure than ACH credit transactions. Visit our blog for more on ACH credit vs ACH transactions.

ACH Payment Processing

Many companies operating in the United States choose to use ACH payment processing to ensure both employees and suppliers are paid. They can use this electronic method to enhance the payment reconciliation process and streamline supplier management. 

An ACH payment can occur as a single entry or set up on a recurring basis with your bank account and routing number. ACH works with either a designated checking account or savings account. ACH is often used in lieu of paper checks, credit or debit cards, and wire transfers for making payments.

Visit our full ACH Payment Guide for more on how ACH payments work. 

KEY TAKEAWAYS

  • The Automated Clearing House (ACH) facilitates electronic funds transfers in the U.S.
  • ACH transfers are interbank digital money transfers that are processed through the ACH.
  • Most ACH credit and debit transactions clear on the same business day.
  • An ACH routing number is a 9-digit, unique ID assigned to every U.S. bank.
  • ACH payments are slower, but cheaper and more secure than wire transfers.
  • For most, receiving ACH payments is free and sending them is a small fee.
  • ACH software automates the processing of ACH credit and debit transactions.

What is the Automated Clearing House (ACH)?

ACH is short for the Automated Clearing House and is run by the National Automated Clearing House Association (Nacha). It’s a system that facilitates electronic payments in the United States using EFTs (electronic funds transfers). 

The ACH Network exists as a financial hub and helps people and companies move money from one bank account to another. 

Recent rule changes enable most credit and debit transactions made through the ACH, to clear on the same business day. All financial institutions that deal with the Federal Reserve directly are required to have an electronic link to a mainframe computer (or personal computer) to participate in the ACH. ACH members include banks and credit unions. 

ACH Transfers

ACH transfers are any interbank, digital money transfers processed through the Automated Clearing House Network. They are generally sent in batches, and are often free to receive. 

In the past, the ACH process has taken a few days but recent Nacha rules allow for same-day processing in most cases. They are best used for making direct deposits and recurring payments, or to get away from paper checks.

ACH transfers are often referred to by many names, including ACH transactions, ACH payments, direct deposit, EFT, ACH debits, and/or ACH credit transfers. Most of it is referring to the same digital process; which is simply sending and receiving money electronically. 

In general terms, ACH transfers may be categorized as direct deposits or direct payments. 

ACH Debit vs ACH Credit

  • Consumers moving funds from one bank to another
  • Employers sending direct deposits to employees’ bank accounts
  • Tax refunds and other government payments
  • Online shopping

Benefits of the ACH Network

The ACH Network offers a fast and efficient way for people to send and receive money. There are a variety of benefits to this hassle-free payment method, including (but not limited to):

Speed and Efficiency

The number one advantage of the ACH Network is that it’s much faster than a paper check. Rule changes in March 2021, expanded access to same-day ACH transactions, which allows for same-day settlement of most as well. In March 2022, Nacha increased the same-day ACH limit to $1 million per transaction. 

Additionally, because the ACH Network batches transfers and submits them multiple times throughout the day, online transactions happen at record speed.

Convenience and Accuracy

One-time ACH transactions are much more convenient than writing a check and less susceptible to human mistakes. The less physical handling, the less room for error.

Payments can be set up to reoccur without all the extra labor or costs attached to writing checks. 

Lower Costs and Improved Cash Flow

Accepting debit or credit cards means processing fees. ACH tends to be the more affordable method for modern business. It also makes it easier for people to pay, which leads to improved instances of cash flow. ACH creates a more consistent and reliable revenue stream. 

Security and Fraud Protection

Paper checks have the highest rate of fraud. Individual and business-to-business transactions are more protected when they are overseen by the ACH. Digital security measures continue to evolve, as do Nacha rules and regulations

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What are Examples of an Automated Clearing House Payment?

Anytime money is digitally transferred between two entities in the United States, ACH transactions can be used. Whether it’s receiving money from customers, government tax refunds, or paying employees, there are many uses for ACH payment processing. Some prime examples include:

  • Businesses paying suppliers for products/services
  • Recurring bill payments, like utility bills or rent
  • Customer invoice paymentsEvery year, more than 26 billion ACH transactions are processed by the Automated Clearing House (ACH) Network. It moves the equivalent of the United States GDP, twice, in 12 months. 

ACH is driving the future of financial transactions, so you should know what it is, how to use it, and what makes it such an effective payments network.

Brief History of the Automated Clearing House

As business growth escalated in the United States, the increasing volume of paper checks became too much to process in a single business day. The computer systems were overloaded.

This led to the establishment of the first automated clearing house in 1972, operated by the Federal Reserve Bank in San Francisco. They provided the technology necessary to process and settle ACH items between depository institutions, at a higher rate of speed.

By 1974, the regional ACH associations formed Nacha to coordinate and establish rules that would facilitate nationwide ACH payment processing. Initially, the system relied on magnetic tapes and diskettes to exchange ACH files. This clunky process required the physical transport of tapes between the ACH system. 

Fast forward to 1994. The Federal Reserve mandated all ACH files to be deposited electronically, and all output files digitally delivered. All banks thus required an electronic link to a mainframe computer to participate in ACH.

How Does the ACH Network Operate?

Nacha oversees the ACH Network with management, administration, development, and operating rules. These standards are designed to facilitate growth in the scope and size of electronic payments in the network. 

The ACH process commences when an originator begins a direct payment or direct deposit using the ACH Network. This can be anyone that wishes to send money, from individuals to businesses and government agencies. 

The originator’s bank is called the originating depository financial institution (ODFI). It takes the single ACH transaction and batches it together with other ACH transfers to be sent out at periodic times throughout the day.

An ACH operator (either a clearinghouse or the Federal Reserve) will then receive the batch of ACH transactions from the ODFI. This entity will sort the batch and make transfers available to the bank or financial institution of the intended recipient. This company is known as the receiving depository financial institution (RDFI). 

Once the ACH transaction is received by the RDFI, both accounts are reconciled and the process is complete. 

What is an ACH Routing Number?

An ACH routing number is a unique, 9-digit ID assigned to each financial institution in the United States, that wishes to do business with the Federal Reserve. This number is needed so the digital system can identify where payments can be pulled from, and where they are sent to. Think of it as a virtual street address.

How do I Find My ACH Routing Number?

There are four simple ways to find your bank routing number:

  1. ​Look on the bottom of a physical check, next to the account number.
  2. Log into your digital banking platform.
  3. Search online for “ACH routing number” and your bank’s name.
  4. Call the bank and ask customer service.

What is an ACH Direct Deposit?

93% of American workers get paid through direct deposit. This is a recurring ACH transfer from an employer to their employee on a pre-determined basis (weekly or bi-weekly). The transfer of funds moves directly into the employee’s checking or savings account. 

ACH direct deposit can also be used for federal or state funds, like social security or unemployment. 

Direct deposit gives people quick access to their money, with no extra fees for receiving it. In addition to payroll and government benefits, it can also be used for reimbursements, bonuses, and separate staff payments. Visit our blog for more on direct deposit via ACH.

ACH vs Wire

Many people confuse an ACH transfer with a wire transfer. Although used interchangeably, when comparing ACH vs wire transfer, the payment types slightly differ. 

Wire transfers move larger amounts but are less secure than domestic ACH payments. However, they are more flexible for cross-border payments and a landscape of shifting rules. It all depends on the circumstances like where the bank is located and the amount being sent.  

Here are a few quick comparisons for ACH vs wire transfers:

  • Wire transfers can be sent internationally, whereas ACH is domestic
  • ACH payments are cheaper than wire transfers and more secure
  • Wire transfers are faster than the ACH Network
  • ACH transactions are more ideal for processing payments in bulk

ACH is usually the preferred option for American companies that have a lot of daily transactions. It has lower costs and fewer risks than bank wires. 

However, wires come in handy when you’re short on time, so both methods have advantages and disadvantages—especially when doing business. The decision is usually circumstantial. 

ACH vs EFT

When comparing EFT vs ACH, an ACH is a specific type of electronic funds transfer (EFT). 

EFT is an umbrella term that includes ACH payments, but it also refers to wire transfers and other online electronic payment methods. 

The costs of different EFTs can vary so don’t assume it applies to an ACH unless specifically stated. For example, an EFT also refers to a bank wire, which can have considerably more costs than an ACH, yet both involve the electronic transfer of funds. 

What is a Global ACH?

A global ACH is used for cross-border payments made with international transfers. It works by leveraging the existing ACH capabilities of a country’s bank to execute global payments more efficiently. 

These transfers are managed by the National Automated Clearing House Network (Nacha) and are required to follow all Nacha rules and standards which include:

  • All identifying data for each party is provided
  • Gateway operators must classify payments coming to and from financial institutions outside of the U.S.

A global ACH has no rules or standards for a network of financial institutions, like those provided by Nacha in the United States. 

In Europe, the clearing entity is the Single Euro Payments Area (SEPA) and consists of 35 participating countries (with specific exclusions). However, there is no official global system to pay suppliers via ACH. That means not every country will accept this form of payment. 

Is PayPal an ACH?

PayPal is an online payment system that utilizes ACH transfers through your bank account. You can then use the service to make payments online, or in-person with the PayPal debit card.

When the PayPal system connects to your bank account, it uses an electronic digital interface (EDI) operated by the Federal Reserve. When PayPal initiates the transaction, it assumes the role of the originator (ODFI). It sends out the request for funds, or notice of deposit, through the ACH system to the user’s bank. The linked bank account then responds with confirmation. 

PayPal is essentially acting as a bank on your behalf.

Importance of the Automated Clearing House

We need the ACH Network to accelerate business in the United States. There’s no going back to paper checks; there are simply too many people trying to send and receive payments in a single day. 

The Automated Clearing House also helps to keep costs low. Companies can pay more employees at a higher rate of speed, with less error. There are no more checks getting lost in the mail or extra trips for postage. It’s a digitally refined process. 

ACH fees (if any) are much lower than wire transfers and it’s usually free to receive funds. Can you imagine paying to get your paycheck?

Companies that use ACH also have another means of vetting potential clients and suppliers. Multiple methods are available for the ACH verification process, depending on cost and convenience. This includes:

  • Microdeposits
  • Instant account verification  
  • Third-party verification

For an entire rundown of everything ACH, check out Tipalti’s Global ACH Banking Glossary.

The Future of ACH

Now that the majority of paper check processing has been automated, it’s time to raise the bar. ACH software is the next logical step. Also called treasury software, it helps to easily create and transmit ACH files in a secure, reliable, and timely fashion.

A business can maximize profitability and elevate the customer experience with a platform that includes real-time error checking and ACH visibility reports. You can originate commercial payments, receive tax refunds, or send out direct deposits, all from a single, universal dashboard.

ACH software means people can better manage risk and ensure tax compliance at every touchpoint of business. Just like the Automated Clearing House Network opened doors for the future of payment systems, accounting software is building the next bridge to complete financial singularity.

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