Glossary

What is the Automated Clearing House (ACH)?

The Automated Clearing House (ACH) is a U.S. financial network that enables seamless electronic payments and bank-to-bank transfers. Governed by Nacha (formerly the National Automated Clearing House Association), the ACH network processes transactions in batches throughout the day, ensuring efficient and secure movement of funds without relying on paper checks or cash. With its wide application in consumer and business transactions, the ACH network powers payroll, bill payments, government benefits, and more, providing a reliable, cost-effective alternative to traditional payment methods.

How does the ACH process work?

1. Setup: The customer provides authorization for the transaction, allowing their bank account to be used.
2. Initiation: The originator (e.g., a business) submits payment details, including routing and account numbers, to their bank, known as the Originating Depository Financial Institution (ODFI).
3. Batching: The ODFI compiles transaction requests and sends them to an ACH operator, such as FedACH or the Electronic Payments Network (EPN).
4. Distribution: The ACH operator routes the transaction data to the Receiving Depository Financial Institution (RDFI), which holds the customer’s account.
5. Completion: The RDFI processes the request, either pulling funds for payment (ACH Debit) or depositing funds (ACH Credit), completing the transfer.

This process usually takes three to five business days, depending on the transaction type and bank processing times.

What are ACH payments?

ACH payments are a form of direct, electronic bank-to-bank transfer. They eliminate the need for paper checks, cash, or credit card networks, offering a flexible and secure solution for financial transactions. Businesses and individuals alike rely on ACH payments for a variety of uses, including payroll deposits, subscription payments, vendor invoices, and more.

Types of ACH Payments

1. ACH Debit:
   • Funds are pulled from a customer’s account based on prior authorization.
   • Commonly used for recurring payments like utility bills, subscription services, and loan repayments.
2. ACH Credit:
   • Funds are pushed into a recipient’s account by the payer.
   • Frequently used for payroll, vendor payments, and money transfers between individuals.

Benefits of ACH Payments

• Lower Costs: ACH fees are typically lower than credit card processing fees, reducing transaction costs.
• Improved Cash Flow Control: Businesses can schedule payment dates, amounts, and frequencies to better manage finances.
• Reliability: ACH payments have lower failure rates compared to credit or debit card payments, minimizing late payments or missed bills.
• Automation: Integrating ACH with accounting software streamlines financial processes and saves time.
• Flexibility: ACH payments support one-time or recurring transactions, making it easy to handle payroll, vendor payments, and more.

Direct Deposit vs. Direct Payment

1. Direct Deposit:
   • Used by businesses and governments to send money to individuals.
   • Examples: Payroll, tax refunds, and social security benefits.
2. Direct Payment:
   • Allows individuals or businesses to pay others electronically.
   • Examples: Paying utility bills or sending money to friends or family.

ACH simplifies financial transactions, reduces costs, and provides a secure platform for both businesses and consumers to move money efficiently. Whether managing payroll or handling recurring bills, the ACH network is the backbone of modern electronic payments in the U.S.