The ACH (Automated Clearing House) network is the system used to complete the majority of American electronic money transfers. This network is made up of all its affiliated banks, ACH operators and the Federal Reserve. The network manages both credit and debit transactions and transfers funds between members of the network. Those funds may ultimately go to a personal account, merchant account or government account.
ACH entries are entirely electronic, meaning there are no paper money or even paper checks involved. Some examples of common ACH transactions include Direct Deposit, automatic mortgage and bill payments, online banking payments and credit card processing. Even the government uses the ACH network to administer Social Security and other monetary benefits. With the continuing increase in electronic payments, the ACH network handles nearly all American money transfers.
All transfers within the ACH network are done through a system called batch processing. Financial institutions collect all the payment requests from their customers and send them together in a batch to the ACH operators at regular intervals. Following is an example of how the ACH network operates for credit card processing. A customer swipes their credit card in the store. The customer is now an Originator and the merchant is the Receiver. The payment request is automatically sent to the Originator’s credit card company, referred to as the Originating Depository Financial Institution (ODFI). The ODFI collects all their customer requests until the end of the day, when they are forwarded to an ACH Operator. The Operator then sorts the requests and allots the proper funds from the Federal Reserve Banks. These funds are made available to the Receiving Depository Financial Institution (RDFI), which is the merchant’s bank. The RDFI then credits the merchant account. This is the process for all ACH entries, whether credit or debit. The only differences are the specific entities. According to the ACH network rules, debit transactions are completed within one business day and credit transactions take one to two business days.
The ACH network safely and efficiently moves trillions of dollars each year. They are able to do this because of their clearly outlined system and the group of rules that govern them. NACHA is the trustee of the ACH network that keeps the network running smoothly. They institute the rules governing the network, however they do regularly invite the members of the network to provide their input.