An automated clearing house (ACH) is a computer-based electronic network for processing transactions, usually domestic low value payments, between participating

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 inst ...

s. It may support both credit transfers and

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 ...

s. The ACH system is designed to process batches of payments containing numerous transactions, and it charges fees low enough to encourage its use for low value payments.

History

The first automated clearing house was BACS in the United Kingdom, which started processing payments in April 1968. In the U.S. in the late 1960s, a group of banks in California sought a replacement for

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payments. This led to the first automated clearing house in the US in 1972, operated by the

Federal Reserve Bank of San Francisco The Federal Reserve Bank of San Francisco (informally referred to as the San Francisco Fed) is the federal bank for the twelfth district in the United States. The twelfth district is made up of nine western states—Alaska, Arizona, California, ...

. BACS operated from the beginning on a

net settlement A net settlement is a payment system used for inter-bank transactions. It is the process by which banks calculate the collective total of all transactions through designated times each day. In an inter-bank payment system using net settlement, deb ...

basis. Netting ACH transactions reduces the amount of deposits a bank must hold.

Operation

ACHs process large volumes of credit and debit transactions in batches. ACH credit transfers are initiated by the payer and include payments such as: direct deposits, payrolls, retail payments and vendor payments. ACH

collections are initiated by the payee with pre-authorization from the payer; ACH direct debits include consumer payments such as utility bills,

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 ...

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, and other types of bills. Transactions received by the bank during the day are stored and transmitted in batches to the ACH. ACHs are net settlement systems, so settlement may be delayed for days, and there is some settlement risk. ACHs may allow for the transfer of a limited amount of additional information along with payment instructions. ACH payments contrast with

real-time gross settlement Real-time gross settlement (RTGS) systems are specialist Electronic funds transfer, funds transfer systems where the transfer of money or securities takes place from one bank to any other bank on a "real-time" and on a "gross (economics), gross" ba ...

(RTGS) payments which are processed immediately by the central RTGS system and not subject to any waiting period on a one-to-one basis. ACH systems are typically used for low-value, non-urgent transactions while RTGS systems are typically used for high-value, urgent transactions.

Operations

This section describes in a generic way the typical operation of an ACH system. Each ACH system has its own specifics; see, for example, quick facts for the

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 ...

ACH Network in the

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and its terminology. # The ordering customer makes a transaction initiation, which can be either manually or by sending a file of initiation requests to a bank. # The bank gathers all transaction initiations for an ACH that arrive from different customers (combining manual and file-based). # On a periodic basis, the bank creates a file that it dispatches to the ACH either at the end of day or in cycles throughout the day. # The ACH operator combines the information submitted by the banks within each cycle (generally ACHs have several cycles throughout the day). # The ACH operator informs each bank of the net settlement amount for which they are responsible for the cycle. # The ACH operator ensures that the settlement amounts are received from all participants for the cycle, so that the cycle can be executed. # The ACH operator informs the destinator's bank of the transaction details. # When transaction arrives in the destination bank, the bank executes the transaction: such as crediting the payment to the beneficiary, while the ordering customer's bank debits the ordering customer's account.

Existing systems

There are various ACH systems around the world. The World Bank identified 87 systems in their 2010 Survey and 98 systems in their 2012 survey, while other sources have made qualitative analysis of a smaller number of ACH systems. }; National System of Electronic Payments) , - , ,

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Czech Express Real Time Interbank Gross Settlement System Czech may refer to: * Anything from or related to the Czech Republic, a country in Europe ** Czech language ** Czechs, the people of the area ** Czech culture ** Czech cuisine * One of three mythical brothers, Lech, Czech, and Rus' Places * Czec ...

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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 ...

for the

Single Euro Payments Area The Single Euro Payments Area (SEPA) is a payment-integration initiative of the European Union for simplification of bank transfers denominated in euro. , there were 36 members in SEPA, consisting of the 27 member states of the European Union ...

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Interbank Clearing Limited Interbank is a Peruvian provider of financial services. History In 1897, Elias Mujica opened an agency at Jiron de la Union in Lima's historical center under the name of ''Banco Internacional''. In 1934, branches were opened in Chiclayo and Ar ...

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National Automated Clearing House National Automated Clearing House regional ECS into one National Payment System, is claimed to be better than its predecessor, Electronic Clearing Service. According to the service's website, transactions towards distribution of subsidies, divide ...

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National Electronic Funds Transfer National Electronic Funds Transfer (NEFT) is an electronic funds transfer system maintained by the Reserve Bank of India (RBI). Started in November 2005, the setup was established and maintained by Institute for Development and Research in Bankin ...

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, - , , Zengin (banking) , - , , Latvijas Banka , - , , SICAM (Sistema de Camaras) , - , , GSIMT (The Moroccan Interbank Remote Clearing System) , - , ,

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Norwegian Interbank Clearing System Norwegian, Norwayan, or Norsk may refer to: *Something of, from, or related to Norway, a country in northwestern Europe *Norwegians, both a nation and an ethnic group native to Norway *Demographics of Norway *The Norwegian language, including the ...

(NICS) , - , , National Institutional Facilitation Technologies (NIFT) ACH , - , , PesoNet , - , , (KIR) , - , , Sociedade Interbancária de Serviços (SIBS) , - , , Camara de Compensacion Electronica (CCE) , - , , Clearing House KIBS AD Skopje (KIBS) , - , , TransFonD SENT ACH , - , ,

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with both RTGS and ACH , - , , eGIRO which is part of Singapore Automated Clearing House , - , , Bankart , - , ,

BankservAfrica BankservAfrica is an automated clearing house located in Johannesburg, South Africa and operates both nationally and within Africa. Annually processing billions of transactions valued at trillions of South African rand; BankservAfrica's clients i ...

, - , , HOFINET , - , , Iberpay , - , , Bankgirocentralen BGC AB , - , ,

Swiss Interbank Clearing The Swiss Interbank Clearing (SIC) system is a mechanism for the clearing of domestic and international payments. History The development of the SIC started in 1980. Since 1987, the SIC system has been operated by SIX Interbank Clearing (100% o ...

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's System of Electronic Payments , - , , Bacs Payment Schemes Limited , - , ,

Federal Reserve Bank A Federal Reserve Bank is a regional bank of the Federal Reserve System, the central banking system of the United States. There are twelve in total, one for each of the twelve Federal Reserve Districts that were created by the Federal Reserve A ...

FedACH FedACH is the Federal Reserve Banks' automated clearing house (ACH) service. In 2007, FedACH processed about 37 million transactions per day with an average aggregate value of about $58 billion. For comparison, Fedwire processed about 537,000 trans ...

and
The Clearing House's Electronic Payments Network, underpinned by

's ACH Network , - , , Cámera de Compensación Electrónica (CCE) , - , , NAPAS 247, run by

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(NAPAS) In addition, there are various ACH associations such as the European Automated Clearing House Association.

Uses of the ACH payment system

There are various usages of ACH systems; the terminology related to different types of transactions varying in different countries. Most ACH payment systems support the following types: * Credit Transfer: non-immediate transfer of funds between accounts at different financial institutions for payments by retail customers and non-urgent

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 or membership style payment. These type of payments are usually used by businesses that collect ongoing payments from the same customer.

References