In the United States, the ACH Network is the national automated clearing house (ACH) for electronic funds transfers. It processes financial transactions for consumers, businesses, and federal, state, and local governments. ACH processes large volumes of credit and debit transactions in batches. Short for "Automated Clearing House", ACH credit transfers include direct deposit for payroll, Social Security and other benefit payments, tax refunds, and vendor payments. ACH direct debit transfers include consumer payments on insurance premiums, mortgage loans, and other kinds of bills.
Rules and regulations that govern the ACH network are established by National Automated Clearinghouse Association (NACHA). In 2018, the network processed 23 billion transactions with a total value of $51.2 trillion. Credit card payments are handled by separate networks.
The ideas that would lead to the ACH were first developed in the late 1960s. One of the early predecessors was a US federal initiative used to help United States Air Force personnel get their paychecks on time. The success of this initiative led to an expansion to other employees and the government adopted it as a major payroll standard.
Separately in 1968 a group of check clearinghouse associations set up The Special Committee on Paperless Entries (SCOPE) to build an automated payment system after concerns for the number of checks being cleared for payrolls.
This led to the first ACH association, formed in California in 1972. Other regional ACH associations followed. The difficulty in compliance between different organizations led to them join together to form National Automated Clearinghouse Association (NACHA) in 1974.
NACHA consolidated and added new rules which led to ACH. As computer and telecommunication technology advanced over the next few years the system continued to develop. By 1978 electronic funds transfers were available.
From the late 1980s through to the 2000s the system continued to develop with a number of enhancements. In 2001 there was a major reorganization of NACHA which led to financial institutions insured by the Federal Deposit Insurance Corporation becoming direct members making it much easier for the ACH network to be used by banks. This year also saw internet payments go into effect which would go on to be big part of ACH payments.
Uses of the ACH payment system
- Bank treasury management departments sell this service to business and government customers
- Business-to-business payments
- Direct debit payment of consumer bills such as mortgages, loans, utilities, insurance premiums, rents, and any other regular payment
- Direct deposit of payroll, Social Security and other government payments, and tax refunds
- E-commerce payments
- Federal, state, and local tax payments
- Non-immediate transfer of funds between accounts at different financial institutions (when a real-time transfer is required, a wire transfer using a system such as the Federal Reserve's Fedwire is employed instead)
Types of ACH transactions
For each ACH payment from a Payor's bank account to a Payee's bank account there are in effect two ACH transactions created and transmitted i.e. an "ACH_Debit_transaction". and an "ACH_Credit_transaction"., unless the Payor and the Payee have an account at the same Financial Institution (in which case it's referred to "on-us" transaction)
ACH Debit transaction
An ACH Debit transaction is created, batched and transmitted from the "ODFI". to the Payor's bank i.e. RDFI (Receiving Financial Depository Institution ). It instructs the RDFI to withdraw and transmit the funds from the Payor's bank account to the "ODFI".. The RDFI has 2 working days (i.e. full working day when it received the transaction as well as up until the end of the next working day) to send the return to the "ODFI".. It is important to note that for ACH Debit the "ODFI". may not be the Payee's bank but a "third-party" bank. Similarly for an ACH Credit the "ODFI". may not be Payor's bank but the same "third-party" bank
ACH Credit transaction
An ACH Credit transaction is created, batched and transmitted from the "ODFI". to the Payor's bank i.e. RDFI (Receiving Financial Depository Institution ). It instructs the RDFI to credit the funds to the Payee's bank account. The RDFI has 2 working days (i.e. full working day when it received the transaction as well as up until the end of the next working day) to send the return to the "ODFI". incase it is unable to credit the funds to the Payee's account. There could be multiple reasons for not being able to credit the funds e.g. account not found, account closed, account frozen etc.
Types of ACH Settlements
There are two types of ACH Settlements:
Next day ACH
ACH debits and credits are transactions that are created, batched and transmitted to an ACH operator typically via a Financial Institution's connection to the ACH Network. Each ACH transaction is cleared overnight i.e. the sending institution (sending institution is called "ODFI". ) sends the transaction to the receiving institution (receiving institution is called RDFI = Receiving Depository Financial Institution ). Once the RDFI receives the transaction it has the current working day as well as until the end of the next working day to send a rejection to the "ODFI".. If the "ODFI". does not receive a return by the morning of the third business day from the RDFI then the transaction is deemed to be successful. This feature i.e. waiting for a timeout for 2 days is an antiquated feature of ACH that lingers on from the days when ACH was designed and implemented i.e. in the sixties/seventies. In today's day and age it does not keep up with the other faster and real-time payment networks. Because of this feature an ACH debit or credit transaction can take 4 working days to complete.
Same day ACH
Same Day ACH is different from Next Day ACH in that the settlement can happen the same day as opposed to the next day. Hence instead of waiting till end of the day to transmit ACH files the "ODFI". (originating institution ) can transmit files the same day. So the RDFI (receiving institution ) can receive the files the same day. This expedites the processing of ACH transactions. However it is important to note that the RDFI still has 2 working days to send a return. So while it can accept the files earlier there will still be a 2 working day delay in Same Day ACH Debit transactions. ACH Credit transactions can be credited the same day though as along as the RDFI receives the ACH transaction in the correct window.
Same Day ACH was rolled out in 3 phases by NACHA:
On September 15, 2017, banks additionally needed to accept debit requests in the same three settlement windows.
Starting September 23, 2016, financial institutions were required to be able to process ACH credit requests in all three settlement windows. (That means simply being able to process requests to add funds to an account.)
On March 16, 2018, banks were required to make funds available by 5:00PM local time for ACH credit transactions processed in the day’s first two settlement windows. (That means not just appearing as “Pending” on your bank ledger, but being fully settled as a completed transaction.)
Some common Standard Entry Class (SEC) codes:
|ARC||Accounts receivable conversion||A consumer check converted to a one-time ACH debit. The difference between ARC and POP is that ARC can result from a check mailed in whereas POP is in-person.|
|BOC||Back office conversion||A single entry debit initiated at the point of purchase or at a manned bill payment location to transfer funds through conversion to an ACH debit entry during back office processing. Unlike ARC entries, BOC conversions require that the customer be present, and that the vendor post a notice that checks may be converted to BOC ACH entries.|
|CCD||Corporate Credit or Debit Entry||Used to consolidate and sweep cash funds within an entity's controlled accounts, or make/collect payments to/from other corporate entities.|
|CIE||Customer Initiated Entries||Use limited to credit applications where the consumer initiates the transfer of funds to a company for payment of funds owed to that company, typically through some type of home banking product or bill payment service provider.|
|CTX||Corporate trade exchange||Transactions that include ASC X12 or EDIFACT information.|
|DNE||Death notification entry||Issued by the federal government.|
|IAT||International ACH transaction||This is a SEC code for cross-border payment traffic to replace the PBR and CBR codes. The code has been implemented since September 18, 2009.|
|POP||Point-of-purchase||A check presented in-person to a merchant for purchase is presented as an ACH entry instead of a physical check.|
|POS||Point-of-sale||A debit at an electronic terminal initiated by use of a plastic card. An example is using your debit card to purchase gas.|
|PPD||Prearranged payment and deposits||Used to credit or debit a consumer account. Popularly used for payroll direct deposits and preauthorized bill payments.|
|RCK||Represented check entries||A physical check that was presented but returned because of insufficient funds may be represented as an ACH entry.|
|TEL||Telephone-initiated entry||Oral authorization by telephone to issue an ACH entry such as checks by phone. (TEL code allowed for inbound telephone orders only. NACHA disallows the use of this code for outbound telephone solicitations unless a prior business arrangement with the customer has been established.)|
|WEB||Web-initiated entry||Electronic authorization through the Internet to create an ACH entry.|
|XCK||Destroyed check entry||A physical check that was destroyed because of a disaster can be presented as an ACH entry.|
- Clearing (finance)
- Clearing house (finance)
- Clearing House Association
- Directo a México
- Electronic funds transfer
- Originating Depository Financial Institution
- Pan-European automated clearing house
- Universal Payment Identification Code
- Wire transfer
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- "Federal Reserve Board – Automated Clearinghouse Services". Board of Governors of the Federal Reserve System. Retrieved 2019-11-12.
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- "NACHA Moves Back IAT Deadline to Allow More Time for Testing". Retrieved 2014-07-22.