Automated Clearing House, usually noted as ACH, is nothing more than an electronic network that processes batches of debit and credit transactions. Credit transfers, defined as Direct Payment via ACH, include payments made by vendors and payroll direct deposits. Debit transfers, called Direct Deposit via ACH, are frequently insurance, mortgage or other types of consumer payments. Government benefits, tax refunds and interest are also processed through the system. Credit card processing is done through a separate system.
The ACH is governed by the NACHA (originally known as the National Automated Clearing House Association) and the Federal Reserve. Use of the system is growing rapidly and NACHA recently announced that the volume in 2012 had exceeded 21 billion; this included 9.79 billion debit and 6.96 billion credit transactions. Merchant accounts make up a portion of the total number, although the Federal Reserve Banks are the largest user. The total dollar value of the transactions in 2012 was close to $37 trillion.
The ACH Network functions by collecting ACH transactions throughout a day and batch processing them later. As the transactions are accumulated they are sorted by destination to be later transferred during a preset period. Later transactions are processed during the following period. Batch transfers by destination provide savings of time and money by taking advantage of economies of scale.
The electronic nature of the system negates the use of paper leading to a faster and more cost effective system. All transactions are through secure data transmission. Transfer of funds from one financial institution to another can normally be accomplished in one business day. NACHA Operating Rules require ACH debits to be completed on the next business day and credits be completed in one to two business days. It is possible to set up merchant accounts or ACH accounts for individuals to provide a less expense option to credit card processing.
Within the ACH system, the Originator initiates the transaction, and the Receiver authorizes an entry of a debit or credit to a transaction account. A merchant account, for example, would be a Receiver authorizing a buyer to deposit a payment into the account. The determination of whether the transaction is credit or debit is made by seeing what happens to the Receivers account. If the Receiver’s account shows a debit, the transaction was a debit. An equal amount will be credited to the Originators account. The events are reversed in a credit transaction. It is important to note that the transaction is unidirectional, from Originator to Receiver regardless of the nature of the transaction.