Automated Clearing House (ACH)
Summary Definition: An extensive electronic network of efficient and secure fund transfers between individuals, businesses, and financial institutions.
What is ACH?
An automated clearing house (ACH) is an electronic payment network that facilitates fund transfers between various entities. Within the U.S., the ACH Network, overseen and regulated by the National Automated Clearing House Association (NACHA), is the primary system used for these transactions.
Organizations of all sizes, as well as individuals, routinely use ACH to safely and reliably send and receive money. This includes direct deposits, bill payments, and peer-to-peer transfers.
In 2023 alone, the ACH Network processed over 31 billion ACH financial transactions, involving over $81 trillion.
Key Takeaways
- Automated clearing houses are payment systems that electronically transfer and transact funds between two entities.
- Transfers are either credits (one person sends or deposits funds) or debits (one person requests funds or payment).
- ACH transfers have far fewer fees than wire transfers (if any) but take longer to process and sometimes have inconvenient limitations.
ACH Network’s Main Operators
Within NACHA’s ACH Network are two primary operators that serve as middlemen for exchanging and routing transactions between financial institutions:
- Electronic Payments Network (EPN) – Administered by The Clearing House (a payments company and banking association comprising the country's largest commercial banks), this privately owned service settles transfers in real time.
- FedACH – Administered by the U.S. Federal Reserve, this government service settles transfers in large batches by the end of each day. In 2023, however, the Federal Reserve launched the new FedNow service that also settles payments in real time.
How Does an ACH Payment Work?
Each Automated Clearing House Transfer involves at least five entities:
- Originator: The person or business initiating the transfer.
- Originating Depository Financial Institution (ODFI): The originator’s financial institution (e.g., bank, credit union, etc.)
- ACH Operator: One of the two service providers mentioned above.
- Receiving Depository Financial Institution (RDFI): The recipient’s financial institution.
- Receiver: The person or business responding to the transfer.
Simply, put, an originator submits a transaction to their ODFI, which reviews and approves the transfer before sending it to an ACH operator for processing.
The operator then sorts and routes the transaction to the correct RDFI, which, in turn, asks the receiver to accept it. In some cases, originators also work with a processing partner or app to organize and submit the transaction request to the OFDI.
Aside from certain high-value transactions between commercial banks or other financial institutions, most transfers are collected, submitted, sorted, and routed in large groups called “batches.”
Similar to a bus or train schedule, batch processing occurs at specific times staggered throughout the day, which can affect how long it ultimately takes for a transaction to complete. According to NACHA estimates, however, 80% of transfers are still settled within one banking day.
ACH Transaction Types
Each transaction can have several unique characteristics, but the one distinction they share is whether they’re an ACH credit (e.g., direct deposit, refund, etc.) or an ACH debit (e.g., direct payment, bill payment, etc.).
| Transaction Type | Other Names | Details |
| ACH Credit |
ACH Deposit ACH Direct Deposit |
Credit transfers push funds from one account to another, such as an employer's direct deposit or a government tax refund. In other words, the originator sends funds to the receiver, which the RDFI credits to the receiver’s account. |
| ACH Debit |
ACH Withdrawal ACH Direct Payment |
Debit transfers pull funds from one account to another, such as monthly credit card statements or utility bills. Essentially, the originator requests funds from the receiver, which the RDFI debits from the receiver’s account when the receiver makes the payment. |
ACH Payment vs. Wire Transfer
ACH transfers and wire transfers are common methods for transferring money, but their distinct traits make them suitable for different situations.
ACH payments and deposits are mostly limited to the U.S. and can take up to a few days to settle due to batch processing, their bi-directional nature (i.e., funds can be sent and credited or requested and debited), and the added complexity of involving an ACH operator.
Moreover, those involved can recall or dispute the transaction, further delaying resolution. Regardless, these transfers are often very inexpensive. If fees occur, they’re usually paid by one of the financial institutions or processing partners.
Wire transfers, on the other hand, are faster and more straightforward but also more expensive. Since transactions are made directly between financial institutions and only by someone sending money instead of requesting them, they’re much easier to process in real time across the globe.
Furthermore, wire transfers are nearly irrevocable except for correcting an error from one of the financial institutions involved. Unfortunately, wire transfers usually impose significant fees on both the sender and recipient to facilitate all these advantages.
In summary, wire transfers are ideal for high-value, time-sensitive money transfers, while the cost-effectiveness of ACH transfers makes them more viable for recurring or low-value transactions.
Automated Clearing House Pros and Cons
One of the most appealing aspects of using an ACH payment method is its convenience. ACH banking and transfers streamline the transaction process in multiple ways:
- Speed: ACH transfers resolve within a couple of days (if not sooner), making them a much faster option than sending paper checks in the mail or scheduling an in-person exchange. Recurring payments, such as monthly bills, can even be automated if a recipient completes an ACH authorization form for future debits.
- Security: Automated Clearing House transfers tend to be more secure than other payment methods. They reduce the risk of fraud by passing through highly regulated networks that track and verify ACH information throughout the process.
- Cost: ACH transactions typically incur no processing fees outside of frequent, high-value transfers. Yet, even when they do, the fees are usually less than a dollar or even fractions of a penny.
While these transfers offer convenience and affordability, they also come with several limitations that users should be aware of:
- Account Limits: Some ACH banks cap the amount of money a single transaction can transfer or limit the total amounts moved across a day, week, or month. Splitting or spreading large sums across multiple transfers can be time-consuming and frustrating.
- Frequency Limits: Some banks also limit the number of monthly ACH transactions an individual can make if they use a savings account instead of a checking account for their ACH activity.
- Batch Processing Discrepancies: Financial institutions don’t always align on when they submit a batch for processing during the day. These different schedules can cause a transfer to take longer and prove problematic for those trying to make timely payments.
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