Automated Clearing House (ACH)

What is the Automated Clearing House (ACH)?

The Automated Clearing House (ACH) is a network that allows fund transfers to be done electronically. Through the ACH network, all U.S. financial institutions are connected which makes moving money electronically possible. 

Why is it important? 

The Automated Clearing House (ACH) has many benefits. Via this system, money can be moved electronically by individuals, businesses, and government organizations with ease and security. Payroll, consumer transactions, direct deposits, business to business, and government transactions are among the many uses of the ACH. With the ACH, transactions are fast and secure. Anyone with a U.S. bank account can use the ACH network so it is widely accessible.

Who runs the Automated Clearing House (ACH)?

The ACH is run by NACHA, previously known as the National Automated Clearing House Association. NACHA is a non-profit association supported by financial institutions in the U.S. It provides the ACH with the rules and guidelines for its management, development, and administration. 

How does the Automated Clearing House (ACH) work?

The ACH essentially acts as a system where bank accounts are connected and can interact in many directions. 

To understand how the ACH works, it’s important to know the following terms:

• Originator: the one who starts the ACH transaction
• This can be an individual, business, or government body
• Originating Depository Financial Institution (ODFI) is the bank of the originator
• The bank where the money will come from
• Receiving Depository Financial Institution (RDFI)
  • The bank of the recipient; 
  • The bank of the person/business where the money is intended to go to. 

Here is the flow of an ACH transaction:

1. An originator begins a direct deposit or a payment using the ACH network. This can be a one-time payment or a recurring payment. 
2. The amount is entered electronically into the ACH network.
3. The ACH network connects with the ODFI (the originator’s bank).
4. The ODFI (the originator’s bank) takes the transaction and puts it in batches with other ACH transactions. These batches are sent out at specific times throughout the day. 
5. These batches are received by an ACH operator (either the Federal Reserve or a clearinghouse). The ACH operator sorts out the transactions and organizes them according to which bank they are going to. 
6. The originator’s transaction is received by the RFDI (the bank of the recipient) and is put into the recipient’s bank account. 

How long does an ACH payment take to process?

Traditionally, ACH payments processing time was three to five days for the money to clear. Fortunately with technological advancements, NACHA began same-day settlements in 2016. This was a boost to businesses and organizations alike as they can now have the option to choose same-day, next-day, or two-day payment duration. Processing time does not include weekends and national holidays. 

What is the required employee information for employers to post an ACH payment to their accounts?

For employers who need to post an ACH to the account of their employees, they must obtain the following information: 

• Employee’s bank or credit union that will receive the funds
• ABA routing number of the employee’s bank
• The ABA routing number is a nine-digit code that identifies U.S. banks
• Employee’s type of account that will receive the deposit (savings or checking)
• Employee’s account number which is composed of eight to twelve digits unique to a person’s bank account.

Is it possible to stop an ACH payment? 

If you made a mistake in the ACH payment to an employee, do not panic. It is possible to stop an ACH payment.  If the payment has not yet been initiated, contact your company’s billing department or bank at least three business days before the scheduled payment date. Let them know about the ACH payment details. 

However, if the payment has already been posted, reversal is possible under the following circumstances: the amount paid or transferred was incorrect, the account number was incorrect, or the transaction was made more than once (duplicate transactions). Please note that reversals must be made within five business days of the transaction. 

While there are many benefits that an ACH payment system provides, businesses need to do their research to determine if it is right for them.