What is the Automated Clearing House (ACH)?
The Automated Clearing House network, also known as ACH, is a channel run by the National Automated Clearing House Association (NACHA), which transfers funds electronically from one place to another. The NACHA operates to facilitate the growth of electronic payments throughout the US for payroll, direct deposit, consumer bills, tax payments, and more.
ACH transactions share similarities with paper-based checks; however, the primary difference is that the payment is completed digitally. Therefore, they are often referred to as:
- Electronic funds transfers (EFTs)
How the ACH Network Operates
The ACH Network serves an array of financial institutions with a total value of more than $40 trillion per year through electronic transactions. The ACH Network acts as a channel that helps individuals and institutions transfer money from one bank account to another; the form of payment can include direct payments or deposits for government, consumer, or business-to-business purposes.
For a transaction to occur, an entity must first make a direct deposit or payment using the ACH Network. The entity can be an institution, individual, or government. The bank that completes the transaction takes the money, along with transactions made by others, packages them, and sends the funds at scheduled times throughout the day to the Federal Reserve or a clearinghouse.
The Federal Reserve or clearinghouse sorts through the batch and ensures the banks are authorized and can complete the transaction made by the intended recipient. Then, the recipient’s bank account receives the funds made by the sender.
For example, with ACH payments, entities can complete the following online:
- Customers pay a service provider
- The employer deposits money to employee’s checking account
- Businesses pay reoccurring funds to suppliers for materials
- Transferring funds from one bank account to another
How to Complete ACH Payments
To transfer money from one party to another using the ACH method, the sender needs the bank account information of the receiver. Thus, they need the following details to set up a direct deposit:
- Name of the bank that the receiver uses
- Type of bank account (checking or savings)
- Bank’s ABA routing number
- Recipient’s account number
Pros of the ACH Network
Since the ACH Network processes transactions by sending them in batches, online transactions become an easy process and are generally more convenient, as there is no need for parties to be physically present to collect, carry, or process paper-based checks.
Furthermore, ACH transfers serve as a cheaper option for individuals to move money from one place to another through direct deposit or e-transfer. Also, ACH payments result in a lower carbon footprint. As no material resources are being utilized, such as envelopes, ink, stamps, printers, etc., there is a reduced amount of paper and pulp used since the entire transaction is online.
Thus, to summarize, the pros of the ACH Network include:
- Easy process/convenience
- Cheaper option of transferring money
- Lower carbon footprint
Cons of the ACH Network
As the ACH Network processes transactions in batches, there will be times when transfers will not take place until thresholds are reached or completed during a certain period of the day; thus, ACH payments tend to be unsuitable for time-sensitive transactions.
So, in the scenario where a sender lacks funds to pay to the receiver, due to batch processing delays, the receiver may not realize the declined transaction until after the product or service has been distributed or completed. Thus, the process is also a bottleneck.
When to Use ACH Payments
If the individual or business currently uses paper checks, ACH transfers may be recommended, as it is convenient, easier to process, and environmentally friendly because the payment is completed online. With low cost and high security, ACH payments work excellently with recurring payments for personal expenses towards landlords, utilities, and monthly credit card payments.
For businesses with a relatively larger number of employees, ACH payment methods would be recommended, as it allows for direct deposit and reduces the hassle of distributing physical checks to each employee within the company.
On the opposing end, if the entity is concerned about payments that may be inaccurate or “bounced” and unrealized until the product or service is delivered, ACH would not be the suggested option.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: