What is the automated clearing house (ACH)?
The Automated Clearing House Network (ACH) is an electronic fund transfer system managed by NACHA, formerly the National Automated Clearing House Association, since 1974. This payment system provides ACH transactions for use with payroll, direct deposit , tax refunds, consumer bills, tax payments and many other payment services in the United States.
The NACHA is a self-regulating institution and it confers on the ACH network its management, development, administration and rules. The organization’s operating rules are designed to facilitate the growth of the size and scope of electronic payments within the network.
Key points to remember
- The Automated Clearing House (ACH) is an electronic funds transfer system that facilitates payments in the United States.
- The CHA is managed by the National Automated Clearing House Association (NACHA).
- Recent rule changes allow most credit and debit transactions made through the ACH to clear on the same business day.
ACH network operation
The ACH network is an electronic system serving financial institutions to facilitate financial transactions in the United States. It represents more than 10,000 financial institutions and ACH transactions total more than $ 43 trillion each year, enabling more than 25 billion electronic financial transactions, according to NACHA.
The ACH network essentially acts as a financial center and helps people and organizations to transfer money from one bank account to another. ACH transactions consist of direct deposits and direct payments, including B2B transactions, government transactions, and consumer transactions.
A shipper begins a direct deposit or direct payment transaction using the ACH network. The initiators can be individuals, organizations or government agencies, and ACH transactions can be debit or credit. The initiator’s bank, also known as the original depositary financial institution (ODFI), takes the ACH transaction and consolidates it with other ACH transactions to be sent at regular times throughout the day.
An ACH operator, either the Federal Reserve or a clearing house, receives the batch of ACH transactions from ODFI with the initiator’s transaction included. The ACH operator sorts the batch and makes the transactions available to the recipient’s bank or financial institution, also known as the receiving depositary financial institution (IFDR). The recipient’s bank account receives the transaction, reconciling the two accounts and ending the process.
Advantages of the ACH network
Since the ACH network aggregates financial transactions and processes them at specific intervals throughout the day, it makes online transactions extremely fast and easy. NACHA rules stipulate that average ACH debit transactions are settled within one business day and that ACH average credit transactions are settled within one to two business days.
Changes to the CNAVS operating rules will broaden access to ACH transactions on the same day, which will allow most, if not all, of ACH transactions to be settled on the same day starting in September 2020.
Using the ACH network to facilitate electronic money transfers has also increased the efficiency and speed of government and business transactions. More recently, ACH transfers have allowed individuals to send money directly from their bank account by bank transfer or electronic check.
ACH for Individual Banking generally took two or three business days for funds to be released, but as of 2020, NACHA deployed in three phases for ACH settlement on the same day. Phase 3, which was launched in March 2020, requires DFIs to make ACH credit and debit transactions available to the recipient at 5 p.m. the same day. at the local time of the RDFI on the date of settlement of the transaction, subject to the right of return under the rules of the CNAVS.