Automated Clearing System
The Automated Clearing House (ACH) Network is an electronic funds-transfer system run by NACHA, formerly the National Automated Clearing House Association, since 1974. This payment system provides ACH transactions for use with payroll, direct deposit, tax refunds, consumer bills, tax payments, and many more payment services in the United States.
NACHA is a self-regulating institution, and it gives the ACH network its management, development, administration, and rules. The organization’s operating rules are designed to facilitate growth in the size and scope of electronic payments within the network.
How the ACH Network Works
The ACH Network is an electronic system serving financial institutions to facilitate financial transactions in the United States. It represents more than 10,000 financial institutions and ACH transactions total more than $43 trillion each year by enabling more than 25 billion electronic financial transactions, according to NACHA.
The ACH Network essentially acts as a financial hub and helps people and organizations move money from one bank account to another. ACH transactions consist of direct deposits and direct payments, including B2B transactions, government transactions, and consumer transactions.
An originator starts a direct deposit or direct payment transaction using the ACH Network. Originators can be individuals, organizations, or government bodies, and ACH transactions can be either debit or credit. The originator’s bank, also known as the originating depository financial institution (ODFI), takes the ACH transaction and batches it together with other ACH transactions to be sent out at regular times throughout the day.
An ACH operator, either the Federal Reserve or a clearinghouse, receives the batch of ACH transactions from the ODFI with the originator’s transaction included. The ACH operator sorts the batch and makes transactions available to the bank or financial institution of the intended recipient, also known as the receiving depository financial institution (RDFI). The recipient’s bank account receives the transaction, thus reconciling both accounts and ending the process.