ACH - Automated Clearing House
Definition and Overview of ACH
ACH stands for the Automated Clearing House network. If you’re like most people, that’s more than you need to know – the important thing to understand is that ACH refers to electronic payments. When your employer pays you with direct deposit, you pay your bills electronically, or a check is converted to an e-check, ACH is at work.
If you’re just interested in understanding whether or not you should take advantage of electronic fund transfers, read about the basics here (or skip to a discussion of why businesses use ACH, and how it makes life easier for individuals).
If you’re interested in some of the nuts and bolts of these transactions, read on.
Computers that Talk
The ACH system is a network of computers that communicate with each other to make payments happen. Essentially, you’ve got two sets of computers for each payment – one that creates a request, and another that satisfies the request (assuming all goes well, which is usually does).
Using direct deposit as an example, an employer (through the employer’s bank) creates a request to send money to an employee’s account. The employer is known as the Originator, and the employer’s bank is the Originating Depository Financial Institution (ODFI). That request goes to an ACH Operator, which is a clearinghouse that gets numerous requests throughout the day, and which routes the request to their destination.
The receiving financial institution is the Receiving Depository Financial Institution (RDFI), which will adjust the account of the final accountholder – and employee receiving pay in this case – who is known as the Receiver.
Types of Transactions
ACH transactions come in two forms:
- Direct deposits are payments to a receiver, such as wages from your employer or Social Security benefits paid into your checking account
- Direct Payments are requests to pull funds from an account, which might happen if you pay your utility bills automatically from your checking account
Transactions (currently) don’t happen in real-time. Instead, “batch processing” is used so that a whole day’s worth of requests are sent all at once. As a result, you don’t get paid immediately after your employer authorizes payment. Instead, the transaction takes one or two business days to move through the system. There are plans to speed up ACH payments, and there’s every reason to believe same-day payments will be a reality someday.
Benefits of the ACH Network
Why use computers to process payments? Every day countless payments are made. In the past, those payments were usually made by check, and paper checks have several drawbacks:
- It takes time for them to move through the mail
- They can be lost or stolen in transit
- Errors can be made when printing the check and when reading the check
- Fake checks are easily printed
- Tracking payments you’ve made by check is cumbersome
- It’s not as easy to automate check payments
With the ACH network, transactions move through the system in one or two business days. They can be set up once, and repeat month after month. That means there’s less opportunity for data entry errors, and of course there is no check to get lost in the mail. Nobody has to pay for postage (although ACH payments cost more than nothing, they are very inexpensive – generally less than a postage stamp).
Consumers benefit from ACH payments because they can automate payments if they choose to do so. Instead of spending time paying bills each month, you can simply review transactions in your account. If there’s an error, federal law protects you as long as you act quickly. All transactions are easily found online, and they can be imported into any personal financial management software you like.