Automated Clearing House

Automated clearing house (ACH) refers to a system of electronic fund transfer facilitating payments across the United States of America. It serves the purpose of transferring money quickly on the same business day. It seeks to become a financial hub aiding individuals and institutions to transfer money within banks.

The federal government regulates all the clearing houses managed by the National Automated Clearing House Association (NACHA). One also gets the facility to stop the payment before three days of scheduled payments if instructed by the customer to the bank. It manages tax refunds, tax payments, direct deposits, and payrolls. In addition, it supplements wire transfers, cash, cheques, and credit cards.

Key Takeaways                                                               

1. Automate Clearing House (ACH) is an electronic fund transfer between two banks or credit unions within the same day using NACHA to transfer funds. It fulfills the need for prompt money transfers over the same working day.
2. Within three business days of the planned payment, one can cancel an ACH-initiated payment by providing the amount and employer's name.
3.  Although it permits recurring billing and guarantees on-time payments, it does not carry out real-time financial transfers.
4.  It facilitates domestic money transfers within a country, while international wire transfers handle international money transfers.

Automated clearing house refers to transferring a client's funds from one bank to the bank account of the customer's bank and vice versa. It proves beneficial in paying salary, tender payments, direct government benefits, and faster business transactions. ACH has two parts - Originating Depository Financial Institution (ODFI) and receiving Depository Financial Institution (RDFI).

As a result, the automated clearing house (ACH) has a long history, having developed in response to the need for more economical and effective ways to process electronic payments. California formed the first ACH association, marking the initiation of efforts to create a nationwide network for electronic funds transfer.

Now let us see how the automated clearing house transfer works:

1. The originator, business, or employer starts payments or deposits through the ACH network. 
2. One can even set up either recurring or one-time payments.
3. Then, electronic entry puts the funds into the ACH network.
4. After this, businesses or employer's banks, known as Originating Depository Financial Institutions (ODFI), connect to the ACH network.
5. ODFI then collects all the payments to make the transfer in batches to the ACH operator. The ACH operator, serving as a middleman, facilitates the processing and settlement of ACH transactions.
6. After that, the ACH operator pushes the funds received from ODFI into the employees' or receiver's bank, called Receiving Depository Financial Institutions (RDFIs). 
7. Finally, the RDFI posts these amounts received into the respective employees' or receivers' bank accounts.

If the recipient receives money through ACH, it reflects as an automated clearing house deposit. In addition, financial institutions may provide various levels of services, each with its own automated clearing house fee structure. For example, some institutions may offer premium ACH services with additional features, such as enhanced reporting or fraud prevention, at an additional cost.

One can also stop the payment initiated through ACH within three business days before the scheduled payment, provided one gives the details of the amount and the employer's name. However, if the amount has been posted into ACH, it can only be reversed within the limit of five days when:

1. The entered amount was wrong
2. The wrong account number was punched
3. The same transactions were done more than once.

It's important to note that stopping an ACH payment is generally possible. Therefore, the success and ease of the process can depend on various factors, including the timing of your request and the policies of your bank. Additionally, some types of ACH transactions, such as payroll direct deposits, may have specific rules and procedures.

Let us look at some examples to understand the topic.

Example #1

Consider a hypothetical scenario where a small business owner, Sarah, uses Automated Clearing House (ACH) transactions to streamline her financial processes. Every month, Sarah's company pays its employees through direct deposit, leveraging the ACH network to transfer salaries directly into their bank accounts. This not only eliminates the need for paper checks but also ensures that employees receive their pay in a timely and efficient manner. Additionally, Sarah uses ACH for vendor payments. Instead of writing and mailing checks, she initiates ACH transactions to pay suppliers electronically, enhancing the speed and accuracy of her financial transactions.

Sara's business also utilizes the subscription service for automatic monthly billing for its clients. Customers provide authorization for ACH debits, allowing the company to collect recurring payments seamlessly. This automated approach not only simplifies Sarah's accounting processes but also enhances the overall efficiency of her business operations. Through this hypothetical example, we can see how this electronic funds transfer system can significantly improve the speed, security, and convenience of various financial transactions.

Example #2

In a news release on October 17, 2023, NACHA stated that the ACH Network achieved "robust results" in the third quarter of this year, attributed to the growth in business-to-business (B2B) payments and the ongoing use of same-day automated clearing house (ACH) payments.

The statement reports an increase of 20% and 27.1% from the third quarter of the previous year, with 212 million same-day ACH payments totaling $608 billion. The network has processed over 597 million same-day ACH payments worth $1.78 trillion thus far this year, showing an increase of 16% and 42.4% from the same period in 2022, respectively.

Businesses and other organizations using ACH have embraced same day ACH's ease and efficiency, according to a press statement from Jane Larimer, president and CEO of NACHA. "Same Day ACH is a great option for faster payments because of its one million dollar limit and three settlement times per business day," she quoted.

According to the organization, the B2B space continues to witness growth in the ACH Network. During the quarter, there was a 9.6% increase from the third quarter of 2022, with 1.7 billion B2B payments made.

Let us understand the advantages and disadvantages of ACH using the table below:

Let us learn the differences between ACH and wire transfer using the table below: