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United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, the ACH Network is the national
automated clearing house An automated clearing house (ACH) is a computer-based electronic network for processing transactions, usually domestic low value payments, between participating financial institutions. It may support both credit transfers and direct debits. The ...
(ACH) for
electronic funds transfer Electronic funds transfer (EFT) is the electronic transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, via computer-based systems, without the direct intervention of b ...
s established in the 1960s and 1970s. It processes
financial transaction A financial transaction is an agreement, or communication, between a buyer and seller to exchange goods, services, or assets for payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals. A ...
s for consumers, businesses, and federal, state, and local governments. ACH processes large volumes of credit and debit transactions in batches. Short for "Automated Clearing House", ACH credit transfers include direct deposit for payroll, Social Security and other benefit payments, tax refunds, and vendor payments. ACH
direct debit A direct debit or direct withdrawal is a financial transaction in which one organisation withdraws funds from a payer's bank account., https://www.directdebit.co.uk/direct-debit-explained/what-is-direct-debit/ Formally, the organisation that calls f ...
transfers include consumer payments on
insurance premium Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
s,
mortgage loans A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any p ...
, and other kinds of bills. The rules and regulations that govern the ACH network are established by
National Automated Clearinghouse Association Nacha manages the development, administration, and governance of the ACH Network, the backbone for the electronic movement of money and data in the United States, and is an association for the payments industry. The ACH Network serves as a netwo ...
(Nacha). In 2018, the network processed 23billion transactions with a total value of $51.2trillion. Credit card payments are handled by separate networks. The Reserve Banks and the
Electronic Payments Network The Electronic Payments Network (EPN) is an electronic clearing house that provides functions similar to those provided by Federal Reserve banks. The Electronic Payments Network is the only private-sector operator in the ACH Network in the United S ...
(EPN) are the ACH operators.


History

The ideas leading to the ACH arose in the late 1960s. One early predecessor was a US federal initiative used to help United States Air Force personnel get their paychecks on time. The success of this initiative led to an expansion to other employees and the government adopted it as a major
payroll A payroll is the list of employees of some company that is entitled to receive payments as well as other work benefits and the amounts that each should receive. Along with the amounts that each employee should receive for time worked or tasks pe ...
standard. Separately in 1968 a group of check clearinghouse associations set up The Special Committee on Paperless Entries (SCOPE) to build an automated payment system after concerns for the number of
checks Check or cheque, may refer to: Places * Check, Virginia Arts, entertainment, and media * ''Check'' (film), a 2021 Indian Telugu-language film * ''The Checks'' (episode), a 1996 TV episode of ''Seinfeld'' Games and sports * Check (chess), a thr ...
being cleared for payrolls. This led to the first ACH association, formed in California in 1972. Other regional ACH associations followed. The difficulty in compliance between different organizations led them to join to form
National Automated Clearinghouse Association Nacha manages the development, administration, and governance of the ACH Network, the backbone for the electronic movement of money and data in the United States, and is an association for the payments industry. The ACH Network serves as a netwo ...
(Nacha) in 1974. Nacha consolidated and added new rules which led to ACH. As computer and telecommunication technology advanced over the next few years the system continued to develop. By 1978, electronic funds transfers were available. From the late 1980s through to the 2000s, the system continued to develop with a number of enhancements. In 2001, there was a major reorganization of Nacha which led to
financial institution Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial insti ...
s insured by the
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cred ...
becoming direct members making it much easier for the ACH network to be used by banks; that same year internet payments also went into effect which would go on to be a big part of ACH payments.


Uses of the ACH payment system

* Bank
treasury management Treasury management (or treasury operations) includes management of an enterprise's holdings, with the ultimate goal of managing the firm's liquidity and mitigating its operational, financial and reputational risk. Treasury Management includes a fi ...
departments sell this service to business and government customers *
Business-to-business Business-to-business (B2B or, in some countries, BtoB) is a situation where one business makes a commercial transaction with another. This typically occurs when: * A business is sourcing materials for their production process for output (e.g., a ...
payments *
Direct debit A direct debit or direct withdrawal is a financial transaction in which one organisation withdraws funds from a payer's bank account., https://www.directdebit.co.uk/direct-debit-explained/what-is-direct-debit/ Formally, the organisation that calls f ...
payment of consumer bills such as mortgages, loans, utilities, insurance premiums, rents, and any other regular payment *
Direct deposit A direct deposit (or direct credit), in banking, is a deposit of money by a payer directly into a payee's bank account. Direct deposits are most commonly made by businesses in the payment of salaries and wages and for the payment of suppliers' acco ...
of payroll,
Social Security Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
and other government payments, and tax refunds *
E-commerce E-commerce (electronic commerce) is the activity of electronically buying or selling of products on online services or over the Internet. E-commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain manageme ...
payments * Federal, state, and local tax payments * Non-immediate transfer of funds between accounts at different financial institutions (when a real-time transfer is required, a wire transfer using a system such as the Federal Reserve's
Fedwire Fedwire (formerly known as the Federal Reserve Wire Network) is a real-time gross settlement funds transfer system operated by the United States Federal Reserve Banks that allows financial institutions to electronically transfer funds between its ...
is employed instead)


Types of ACH transactions

For each ACH payment from a payor's bank account to a payee's bank account, there are effectively two ACH transactions created and transmitted, namely an ACH Debit transaction and an ACH Credit transaction. In the case of a payor and payee having an account at the same financial institution, there is only one ACH transaction, which is often called an "on-us" transaction.


ACH Debit transaction

The payee's sending institution creates, batches, and transmits an ACH Debit transaction to the payor's receiving institution. The ACH Debit transaction instructs the receiving institution to withdraw and transmit the funds from the payor's bank account to the sending institution. The receiving institution must send the return to the sending institution by the end of the following business day if it is unable to debit the funds from the payor's account, such if the account was not found, the account was closed, or the account was frozen. For an ACH Debit transaction, the sending institution may be a third-party bank, rather than the payee's bank.


ACH Credit transaction

The payor's sending institution creates, batches, and transmits an ACH credit to the payee's receiving institution. The ACH Credit transaction instructs the receiving institution to credit the funds to the payee's bank account. The receiving institution must send the return to the sending institution by the end of the following business day if it is unable to credit the funds to the payee's account, such if the account was not found, the account was closed, or the account was frozen. For an ACH Credit, the sending institution may not be a third-party bank, rather than the payor's bank.


Types of ACH Settlements

There are two types of ACH settlements.


Next-day ACH

ACH debits and credits are transactions that are created, batched, and transmitted to an ACH operator, typically by way of a financial institution's connection to the ACH Network. With next-day ACH, each ACH transaction is cleared overnight. The sending institution (called the Originating Depository Financial Institution) sends the transaction to the receiving institution (called the Receiving Depository Financial Institution). When the receiving institution receives the transaction, it has until the end of the next working day to send a rejection to the sending institution. If the sending institution does not receive a return from the receiving institution by the morning of the third business day, then the transaction is deemed to be successful. Waiting for a timeout for two business days is an antiquated feature of ACH that lingers on from the 1960s when the ACH system was designed and implemented. It is not as quick as real-time payment networks. Consequently, ACH debit or credit transaction can take four working days to complete.


Same-day ACH

With same-day ACH, settlement can happen the same day. The sending institution can transmit files to the receiving institution the same day, expediting the processing of ACH transactions. The receiving institution still has two business days in which to send a return, so there will still be a delay of two business days in same-day ACH debit transactions. On the other hand, ACH credit transactions can be credited on the same business day as along as the receiving institution receives the ACH transaction within the correct window. Transactions exceeding $100,000 and international transactions are not eligible for same-day ACH.
Nacha Nacha manages the development, administration, and governance of the ACH Network, the backbone for the electronic movement of money and data in the United States, and is an association for the payments industry. The ACH Network serves as a netwo ...
instituted same-day ACH in four phases. As of September 15, 2017, banks were required to accept debit requests in the same three settlement windows. As of September 23, 2016, financial institutions were required to be able to process ACH credit requests to add funds to an account in all three settlement windows. As of March 16, 2018, banks were required to make funds available as fully settled completed transactions by 5:00p.m. local time for ACH credit transactions processed in the day's first two settlement windows. As of March 20, 2020, the per-transaction limit was raised from $25,000 to $100,000.


SEC codes

Common Standard Entry Class (SEC) codes are as follows.


See also

*
Clearing (finance) In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. This process turns the promise of payment (for example, in the form of a cheque or electronic payment request) into ...
*
Clearing house (finance) A clearing house is a financial institution formed to facilitate the exchange (i.e., '' clearance'') of payments, securities, or derivatives transactions. The clearing house stands between two clearing firms (also known as member firms or partici ...
*
Clearing House Association The Clearing House is a banking association and payments company owned by the largest commercial banks in the United States. The Clearing House is the parent organization of The Clearing House Payments Company L.L.C., which owns and operates core ...
* Directo a México *
Electronic funds transfer Electronic funds transfer (EFT) is the electronic transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, via computer-based systems, without the direct intervention of b ...
*
Originating Depository Financial Institution Originating Depository Financial Institution or ODFI is a banking term in the United States used in connection with ACH Network (ACH). In the ACH flow, the ODFI acts as the interface between the Federal Reserve or ACH network and the originator of t ...
*
Pan-European automated clearing house A pan-European automated clearing house (PE-ACH) is a clearing house that is able to settle SEPA compliant credit transfers and direct debits across the Eurozone. At present there is only one PE-ACH in operation – STEP2 – which was establish ...
*
Universal Payment Identification Code A Universal Payment Identification Code (UPIC) is an identifier (or banking address) for a Bank account statement, bank account in the United States used to receive electronic credit payments. A UPIC acts exactly like a US bank account number and p ...
*
Wire transfer Wire transfer, bank transfer, or credit transfer, is a method of electronic funds transfer from one person or entity to another. A wire transfer can be made from one bank account to another bank account, or through a transfer of cash at a cash ...


References

{{Reflist


External links


Nacha, The Electronic Payments Association


Banking in the United States Banking technology Banking terms E-commerce in the United States Federal Reserve System Payment clearing systems Payment networks