The Automated Clearing House (ACH) is the secure network used to connect all US banks and financial institutions to each other. It makes the electronic funds transfer (EFT) for direct deposits and debit and credit card payments possible. It was established originally as a means for California banks to work with the Federal Reserve to enable paperless transactions.
This process increased the speed with which transactions were completed. As time passed and the number of transactions increased, more financial institutions joined the network and regional associations were formed. The National Automated Clearing House Association (NACHA) was established to coordinate regional efforts and link them into a nationwide network.
How It Works
The ACH has proven that electronic funds transfer is faster and more economical than using paper check processing. All financial institutions that participate in this network must adhere to the NACHA Operating Rules. The network functions on a batch processing, store-and-forward system. This means that instead of transactions being sent and processed individually, transactions are collected for a specified amount of time and sorted based on destination.
Once the predetermined time has passed, transmission of the sorted transactions is made to the appropriate location. This is faster than handling paper checks as the data is entered into the system and sent electronically.
A transaction that used to take up to two weeks from start to finish can now be completed in a matter of hours. There are many types of ACH payments. Direct deposit of payroll, Social Security and tax refund checks can all be made through this network.
ACH for Recurring Payments
Direct payment for recurring bills such as utilities, mortgages and insurance premiums also utilize this system. Electronic checks as well as e-commerce payments take advantage of the speed and ease of use of the Automated Clearing House. Many organizations were hesitant to use the electronic transfer system for their own business at first, but adoption rates continue to increase each year.
That has dissipated and the number of business-to-business transactions that are processed electronically through ACH has increased in the last few years. As the Internet has become accepted as a mainstream resource, online payment processing has become increasingly popular.
Consumers can use it to set up recurring payments directly from their bank accounts. The speed with which transactions can be processed helps improve cash flow to vendors and results in fewer late fees that must be paid. Due to the electronic nature of the transactions, personnel requirements have decreased and the amount spent on consumables such as envelopes and stamps have been greatly reduced.
Read more about how ACH compares to other electronic transactions here.
