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ACH (Automated Clearing House) is a payment processing network that’s used to send money electronically between banks in the United States. It allows for automated, electronic debiting and crediting of both checking and savings accounts. It's the most widely used electronic processing network for bank transfers in the United States.
The ACH Network allows banks to work with one another in debiting, crediting, and transferring money without having to build and manage a network of connections themselves. Instead NACHA (National Automated Clearing House Association) governs the rules and regulations of ACH to provide clarity and cohesion amongst the various institutions using ACH.
ACH is a critical ingredient in many people’s financial lives although they might not know it. When you receive your paycheck from your employer directly in your bank account, pay your utility bill, or receive a tax refund from the United States government, that’s ACH at work.
History of ACH
In its infancy in the early 1970s, ACH was primarily used as a more scalable, secure way to manage payment and payroll. Paper checks were too cumbersome and difficult to track. A number of check clearing houses banded together with the federal government to try and build more automated forms of payment that could be used nationwide. With a regulated, national network of automated clearing houses, U.S. citizens and businesses could buy goods, get paid, and send payments much easier and much faster. In 1974, NACHA was founded to regulate ACH as it still does all these years later.
How do ACH payments work?
So, how do ACH transactions actually work? There are two types of transactions: debits and credits. ACH debits let you pull money from another account and ACH credits let you push money. The ACH network processes both types similarly.
Let’s say you just bought insurance for your car and need to make monthly premium payments. You provide your bank account information to the insurance company so that they can debit the premium payment amount from your account automatically. On the day your premium payment is due each month, the insurance company’s bank will automatically create an ACH entry, requesting to withdraw the funds they’re owed from your bank account. That request is forwarded to an ACH operator, the third party managing requests and settlement of ACH credits and debits between banks. There are two ACH operators in the US - the Fed and the EPN.
The ACH operator sends a request to your bank from the insurance company's bank to collect money for the premium payment from your account. Those ACH requests are batched and processed in bulk. Your account is then debited. Once that debit is cleared by the operator, the payment is settled and the money arrives in the insurance company’s bank account. A typical ACH transactions takes 2 - 3 days to clear. However if you use same-day ACH or RTP, transactions can get cleared on the same day. Dive deeper into how ACH works with this guide.
How does ACH compare to other payment methods?
When comparing payment methods, you need to consider their speed, cost and coverage. Speed is typically measured by settlement time, or how long it takes for funds to move from the originating account to the receiving account. Cost is measured per payment and coverage refers to how many banks and financial institutions in the US support the payment method. The direction supported by the method is also important. Some methods like ACH support both pulling (debiting) from and pushing (crediting) funds to a counterparty's bank account, while others like Wires only support pushing.
Here's how ACH and same-day ACH compare to Wire Transfer and RTP, two other prominent electronic payment methods in the United States.
| Payment method | Cost per payment | Settlement time | Payment direction | Bank coverage |
|---|---|---|---|---|
ACH | $0.20 - $1.50 | 2-3 business days | Credit & Debit | Every Bank |
Same-Day ACH | $1 - $5 | Same business day | Credit & Debit | Every Bank |
Wire Transfers | $25 - $50 | Within minutes | Credit | Most Banks |
RTP | $0.25 - $1 | Instant | Credit | Some Banks |
Note that the costs per payment for each method are in approximate ranges. In practice, they vary significantly depending on your bank, transaction volume, average transaction size and other factors.
To learn more about ACH, take a look at these articles:
- What is an example of an ACH payment?
- What is ACH versus direct deposit?
- Are ACH and Zelle the same?
- Do all banks allow ACH transfers?
- Why use ACH instead of wire transfer?
- What is the maximum ACH transfer limit?
To learn more about costs, coverage and speed, take a look at these articles:
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ACH (Automated Clearing House) is a payment processing network that’s used to send money electronically between banks in the United States.
ACH APIs enable companies with high transaction volumes to write software that automates payments over the ACH network.
An ACH credit refers to the process of electronically depositing, or “pushing,” funds into a bank account using ACH.
In an ACH debit, funds are electronically withdrawn, or “pulled,” from a bank account using ACH.
A Notification of Change (NOC) is used to notify the sender of an ACH payment to correct or change information related to a customer’s bank account.
A return is a credit or debit entry initiated by the Receiving Depository Financial Institution (RDFI) that returns a previously originated payment to the Originating Depository Financial Institution (ODFI).
ACH return codes identify the reason an ACH payment was returned by the recipient's bank. They make it easier to spot and resolve payment failures.
An ACH reversal refers to an erroneous ACH payment that a payment originator requests to take back, or reverse.
Credits and debits are two kinds of ACH transactions. Whereas a credit involves depositing, or “pushing,” funds into a bank account, for a debit, funds are withdrawn, or “pulled,” from an account.
FedACH is the automated clearing house (ACH) service of the Federal Reserve Banks.
Part of the FedACH system, FedGlobal ACH offers low-cost and efficient cross-border ACH payments.
The two kinds of financial institutions in the ACH network are ODFIs (Originating Depository Financial Institution) and RDFIs (Receiving Depository Financial Institutions).
A Standard Entry Class or SEC code is a three letter code that describes how a payment was authorized by the consumer or business receiving an ACH transaction.
US companies moving money internationally will likely weigh the pros and cons of SWIFT vs. Global ACH when it comes to attributes like speed and cost.
Payment rails are the underlying systems and networks that facilitate the movement of funds between parties in financial transactions.
ACH (Automated Clearing House) is a payment processing network that’s used to send money electronically between banks and financial institutions in the United States.
An electronic funds transfer (EFT), also known as a direct deposit, is the digital transfer of money between bank accounts. As digital transfers, they reduce the need for manual input and paper documents.
Global ACH can help companies move money from US-domiciled accounts across borders using local rails. Learn how and when to use this payment rail.
A Request for Payment (RFP) is an ACH Network message that can be used by businesses to send electronic invoices to their customers.
Same-Day ACH is an improvement to the ACH network that allows the processing of credit, debit, and return transactions several times a day.
A pre note or prenotification is a zero dollar payment to validate the account and routing details of a bank account before debiting or crediting it.
An International ACH Transfer—also known as Global ACH—is an ACH payment made cross-border from a US-domiciled account.
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