In banking, ACH stands for Automated Clearing House, which is a network that coordinates electronic payments and automated money transfers.
ACH is a way to move money between banks without using paper checks, wire transfers, credit card networks, or cash.
References to ACH can mean several things, depending on where you see it.
On Sank Statements
On statements or in your transaction history, ACH means that an electronic payment has been made to or from your account using your checking account information. Common examples of ACH transfers appear below. For any ACH transfer to move funds to or from your account, you must authorize those transfers and provide your bank account and routing numbers.
On Your Bills
When viewing a bill, ACH means you have the option to pay your bills electronically. Other terms include eChecks, EFT, or AutoPay. Instead of writing a check or entering a credit card number every time you pay, you can provide your checking account details and pay directly from your account. In some cases, you control when payment takes place (the funds only move when you request a payment). In other cases, your biller automatically pulls funds from your account when your bill is due, so you need to be sure you have funds available in your account.
Keep an eye on your accounts and when various payments go through, even though payments are automatic.
What Does ACH Mean?
What, exactly, does Automated Clearing House refer to? A definition of the terms might help:
The ACH system consists of computers working together to process payments automatically. There’s no need to manually handle payments (on your part or the biller’s). ACH is a “batch” processing system that handles millions of payments at the end of the day.
The network uses two central “clearing houses.” All requests run through either The Federal Reserve or The Clearing House. This allows for efficient matching and processing among numerous financial institutions.
Examples of ACH Transactions
You probably have more experience with ACH than you realize. Individuals and businesses use ACH for everyday transactions such as:
- Direct deposit of your wages (from your employer to your bank account)
- Automatic payment of recurring bills such as energy bills, insurance premiums, and Homeowners Association (HOA) dues. When you provide a voided check to your biller, you’re setting up ACH.
- Payments from businesses to vendors and suppliers
- Transferring money from your brick-and-mortar bank to your online bank
As with any technology, using ACH means embracing the pros and cons. Let’s review those below.
Get paid faster with an automated payment, and without waiting for a check to clear
Automating bill payments to avoid late fees and missed payments
Making online purchases without having to use a credit card or check
Minimize paper records that carry sensitive banking information
Makes money transfers easy with minimal labor and cost
Allows employee payments without printing checks, stuffing envelopes or paying for postage
Facilitates regular customer payments without having to transport actual paper checks to the bank
Has lower fees than credit card payments
Electronic process makes vendor and supplier payments easier and faster, while keeping electronic records of all transactions
Automated transactions may be less prone to error than a manual monthly task
Companies have direct access to your bank account
Auto payments are deducted whether or not you have the funds in your account, which can trigger overdraft fees
Allows other companies to have a direct link to your bank account
Customers can reverse their payments, although not as easily as with a credit card
Must monitor the transactions for fraud, as business accounts have fewer protections than consumer accounts
Companies may need to buy software and invest in training to process ACH payments
What Does ACH Do for Consumers?
If you’re an individual, you may enjoy:
- Getting paid by your employer quickly, safely, and reliably. You avoid the hassle of waiting for your paycheck to arrive or depositing the check at your bank.
- Automating your payments, so you never forget to pay (and your payments arrive on time)
- Making purchases online without using a check or credit card. You pay quickly and avoid credit card processing fees.
- Minimizing the number of pieces of paper floating around with your bank account information. This helps reduce the chances of fraud in your accounts.
The main drawback for consumers is that setting up ACH provides businesses with direct access to your checking account. They take the money to pay your bills whether you’re ready to pay or not. If you’re short on funds, you might prefer to pay a different way. Alternatively, you might want to prioritize certain payments when you have limited funds, paying only the most urgent bills first.
For more details on how consumers use ACH, read about setting up ACH debit.
What Does ACH Do for Businesses?
If you run a business, you benefit from:
- A low-cost, non-labor-intensive way to transfer money
- Paying employees without the need to print checks or pay postage
- Receiving customer payments easily, quickly, and regularly—no more cash-flow crunches dependent on when you can get to the bank
- Processing fees that are lower than credit card swipe fees
- Getting paid by vendors—or paying suppliers—in a way that’s safe and easy to track (there’s an instant electronic record of every transaction)
Businesses face the same problem as consumers: There’s a direct link to your checking account, and any errors or unexpected withdrawals can cause problems. What’s more, businesses can face the issue of customers reversing charges and taking back payment. That being said, it’s harder to reverse an ACH payment than it is to reverse a credit card payment.
Businesses need to be especially vigilant about monitoring for fraud. Consumers enjoy a high degree of protection against errors and fraud in their checking accounts, but business accounts do not receive the same level of protection. If funds leave your account, it may be your responsibility to recover the funds (or take the loss).
Finally, businesses may need to purchase software or invest time and resources into transitioning to ACH transfers. However, they’ll most likely recoup those costs easily over the long run.
For more details on how businesses use ACH, read about ACH processing.
Computers That Talk
The ACH system is a network of computers that communicate with each other to make payments happen. Two sets of computers are at work for each payment:
- The side that creates a request
- The side that satisfies the request (assuming all goes well, which it 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 then routes the request to its destination.
The receiving financial institution is the Receiving Depository Financial Institution (RDFI), which adjusts the account of the final account holder—the employee receiving pay in this case—who is known as the Receiver.
Types of Transactions
ACH transactions occur 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. For example, direct payments take place when billers deduct utility bills automatically from your checking account.
Currently, ACH transactions don’t happen in real-time. Instead, banks use “batch processing” to process the entire day’s worth of requests 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 same-day payments have already begun for selected transactions.