Automated Clearing House -ACH
This network moves money between banks through electronic payments and automated transfers.
Automated Clearing House (ACH) Details
An Automated Clearing House (ACH) is a way to move money between banks. It is a network coordinating electronic payments and automated transfers in batches, meaning it processes millions of payments daily. ACH doesn't require wire transfers, credit cards, cash, or paper checks to move money automatically.
For someone to make direct transfers between banks, certain account information is required. This data includes the bank's name, type of account, routing numbers, and recipient's account number.
The ACH network runs transfer requests through the Federal Reserve or The Clearing House. The Clearing House is an association and payments business owned by the largest commercial banks. Having two locations allows the network to match and process between multiple financial institutions efficiently.
Examples Of Automated Clearing House
Everyday transactions involve the Automated Clearing House (ACH) network. The main one being direct deposits from your employer to your bank account is ACH. Additional examples of automatic payments and transfers using ACH include:
- Paying bills directly out of your checking account
- Providing a voided check
- Money transfers between brick-and-mortar banks and online banks
- Paying funds to the IRS online
ACH payments can be between businesses and their suppliers, consumers, and businesses, or between friends. The National Automated Clearing House Association (NACHA) runs the ACH network. In 2018, they reported that consumers and businesses made over 23 billion ACH payments.
An application currently used for person-to-person money transfers is called Zelle. Zelle transfers occur within minutes, and the bank finalizes it later using normal ACH processing. Many banks now have Zelle embedded into their system, and all a recipient needs to provide is their associated Zelle phone number or email. This difference eliminates the requirement of providing account number information.
Significance Of Automated Clearing House
There are multiple benefits to having the option to use ACH payments. For consumers, automated payments can prevent late fees on missed payments, minimize paper records, and provide faster direct deposit payments.
For businesses, ACH payments are less labor-intensive such as not requiring to print checks and place them in envelopes for employees. Customer payments can also be accepted faster and with lower fees compared to credit card payments. When businesses pay suppliers, they can also easily keep records of all transactions online.
Despite the benefits, ACH payments can pull funds from bank accounts whether you have the money to cover it or not. This process can lead to overdraft fees. Some people also don't like providing account information or letting employers have direct access to their accounts. However, most banks now have Zelle as an option for person-to-person transfers that eliminate sharing account details.
History Of Automated Clearing House
The United Kingdom had the first ACH in 1968. It was called the Bankers' Automated Clearing System (BACS) but is currently known as the Bacs Payment Schemes Limited.
The United States founded its first ACH in 1972 after a group of Californian banks solicited ways to replace check payments. The San Francisco Federal Reserve Bank operated this ACH. In 1974, after more regional ACH networks existed, NACHA was formed to administer the networks. In 1975, the Social Security Administration started using Direct Deposits.
ACH payments continued to improve and, in September 2016, NACHA launched the Same Day ACH for credits. By October 2016, businesses and consumers transferred a total of $4.98 billion from 3.8 million payments. In 2020, $460.1 billion was transferred through 347.2 million Same Day ACH payments.
Automated Clearing House (ACH) vs. Electronic Funds Transfer (EFT)
ACH and EFT are both electronic payments that refer to moving funds from one bank to another online. However, EFT is an umbrella term that includes ACH payments and other types of digital transfers such as wire transfers. EFT is also known as ePayment.
Automated Clearing House (ACH) vs. Wire Transfers
Both an ACH and wire transfer are electronic payments, but they have significant differences. ACH payments are processed automatically and tend to be more secure than wire transfers. Banks process a wire transfer, and only the sender can initiate the transfer. ACHs allow businesses and individuals to send or receive funds.
The two also differ in transfer speeds. Wire transfers are immediate, while ACH payments can take up to 3 days to process. With Zelle, ACH payments have become faster to receive money even though the processing time remains the same.
Automated Clearing House (ACH) vs. Real-Time Gross Settlement (RTGS)
ACH and RTGS are two different types of payment systems. Their main difference between them is how the transfers are processed. ACH processes payments in batches at the end of the day. On the other hand, an RTGS payment is processed individually in real-time. Real-time processing means there are no waiting periods, and RTGS is one of the fastest ways to transfer money.