The ACH Network is the United States national automated clearing house (ACH) for electronic funds transfers. It was launched during the 1960s and 1970s and processes financial operations from businesses, consumers, and federal, state, and local governments. ACH processes vast quantities of credit and debit transactions in batches. Its credit transfers include Social Security, direct payroll deposits, other benefit payments, vendor payments, and tax refunds. On the other hand, debit transactions include customer payments on mortgage loans, bills, and insurance premiums. The National Automated Clearinghouse Association (Nacha) is the organisation that establishes the rules and regulations which govern the ACH network. The Reserve Banks and Electronic Payments Network (EPN) are ACH operators. However, credit card payments are handled separately by other systems.

History

The concept leading to the ACH network dates back to the 1960s. Its predecessor was a U.S. federal scheme designed to help United States Airforce personnel get their paychecks on time. The initiative’s success led to its expansion to other employees, forcing the government to adopt it as a major payroll standard. Separately in 1968, after concerns about the number of checks being cleared for payrolls, a group of clearinghouse associations founded The Special Committee on Paperless Entries (SCOPE) to create an automated payment system. This resulted in the first ACH association, created in California in 1972. Soon after, other regional ACH associations followed. The difficulty in compliance between different institutions led them to become a single entity (The National Automated Clearinghouse Association) in 1974. Nacha consolidated existing requirements and added new rules. The network continued to develop as computer and telecommunication technology evolved over the following years. By 1978, electronic financial transactions had become a reality. The system continued to develop from the late 1980s to the 2000s via several enhancements. 2001 saw a significant reorganisation in Nacha’s structure. It made financial institutions insured by the Federal Deposit Insurance Corporation direct members of the network, making it easier for banks to use ACH. Internet payments were made possible the same year, becoming a massive part of ACH transactions.

Uses of the ACH Network

Business-to-business payments; E-commerce payments; Federal, state, and local tax payments; Direct deposit of payroll, social security, tax refunds, and other government payments; Direct debit of consumer bills (loans, mortgages, insurance premiums, rents, utilities, etc.); Non-immediate transfer of funds between accounts at different financial organisations; Bank treasury management departments sell the service to business and government customers;

Types of ACH Transactions

Two ACH transactions are created and transmitted for each payment – ACH Debit Transaction and ACH Credit Transaction. However, if the payor and payee hold accounts in the same financial institution, only one ACH transaction, known as “on-us,” is created and submitted.

ACH Debit Transaction

The ACH Debit Transaction dictates receiving institutions to withdraw and transfer funds from a payor’s bank account. This happens when the payee’s sending institution creates, batches, and transmits an ACH Debit Transaction. On the other hand, receiving institutions must send the return to sending institutions by the end of the next business day if they cannot debit the funds from the payor’s account. This can happen because the account is closed or frozen or isn’t found. For an ACH Debit Transaction, sending institutions can be third-party banks rather than the payee’s financial institution.

ACH Credit Transaction

The ACH Credit Transaction instructs receiving institutions to credit funds to the payee’s bank account. This happens when the payor’s sending institution creates, batches, and transmits an ACH Credit Transaction. Receiving institutions are obligated to send the return to the sending institutions by the end of the following business day if they are unable to execute the operation. This can happen because the account isn’t found, closed, or frozen. For an ACH Credit Transaction, sending institutions cannot be third-party banks rather than the payor’s financial institution.

Types of ACH Settlements

There are two types of ACH settlements: Next-Day ACH – With this type of settlement, ACH transactions are cleared overnight. The sending institution sends the transaction to the receiving institution, meaning that the latter has until the end of the following business day to send a rejection to the former. If a rejection isn’t sent, then the operation is deemed successful. This type of settlement is regarded as antiquated as it can be time-consuming. Same-Day ACH – This type of settlement allows credit transactions to happen on the same day. Debit operations, however, still have a waiting period for a rejection to be sent. Transfers exceeding $100,000 and international transactions are not eligible for this settlement.

SEC Codes

Check out the common Standard Entry Class codes used in the ACH network.