What Is An ACH?

Answer:
ACH stands for Automated Clearing House. It

is an electronic network for conducting financial transactions in the United States. Rules and regulations which govern the ACH network are put in place by NACHA-The Electronic Payments Association (formerly called the National Automated Clearing House Association) and the Federal Reserve.

As of 2002, this network processed 8.05 billion transactions with a total value of $27.1 trillion. Credit card payments are not handled by this network. Examples of an ACH credit transfer would include direct deposit payroll and vendor payments. Examples of ACH direct debit transfers include payments of insurance premiums, mortgage loans, as well as other bills. Businesses are also increasingly accepting ACH payments, rather than replying on credit and debit cards. Also included as a debit transfer are new applications such as the point of purchase check conversion program which is sponsored by NACHA. The Federal Reserve’s centralized application software which is used to process ACH transactions is called FedACH. Both private companies and the government now use ACH payments. The only private sector ACH Operator in the United States is the Electronic Payments Network (EPN).

Together, the Federal Reserve Banks are the largest automated clearing house operator in the United States. In 2005, they processed sixty percent of all commercial interbank ACH transactions. The remaining forty percent were processed by the EPN. The EPN and the Federal Reserve Banks work together and rely on each other when completing transactions in which either the Originating Depository Financial Institution (ODFI) or the Receiving Depository Financial Institution (RDFI) is not their customer. The Reserve Banks settle these interoperator transactions.

No financial institution is allowed to issue an ACH transaction toward an account without the prior authorization from the account holder (known as the Receiver). An ACH transaction will start with the Receiver authorizing an Originator (person or company) to issue an ACH debit to an account. Once the authorization is received, the Originator will create an ACH entry which is given to an ODFI, which is any company that does ACH origination. The ACH Entry is then sent to an ACH Operator and it is then sent to the RDFI.