What does ACH mean? Why do we need it? And how does it work?
These are some of the questions we’ve tried to answer in this quick guide.
Starting with the definition: ACH is a payment processing network for financial transactions in the US.
Confused? Let us give you an example.
Imagine ACH as being a router in the middle of the office that connects hundreds of computers together for connectivity, data sharing and networking.
Yes. Networking. That’s the right word.
When banks need to send and receive payments to other banks, how are they supposed to do that with millions of transactions everyday (from utility bills, credit card payments, to B2B transactions)?
Well, they have to go through ACH; meaning, a central financial entity that connects financial organizations together and manages billions of electronic transactions every year.
What does ACH stand for?
ACH is an abbreviation that stands for Automated Clearing House. It is a payment processing network for financial transactions in the United States.
What does Automated Clearing House (ACH) do?
ACH is a clearing facility for electronic funds transfer (EFT) between financial institutions, business and the government. It is an integral part of the overall banking infrastructure.
One can think of ACH as a central link holding the financial network together. It processes transactions between organizations, individuals and other entities.
Why do we need ACH for banking?
The world is getting smaller as we’re moving towards a more multicultural age. The need fast payments has resulted in an electronic payments system worldwide.
In such a scenario, it is of utmost importance to have an efficient, safe and secure environment for payment processing.
That is what the Automated Clearing House (ACH) network provides.
The ACH money transfer moves about 22 billion electronic financial transactions every year worth $39 trillion in the US. It allows a specialized gateway to transfer funds between organizations.
How does an Automated Clearing House (ACH) transaction work?
To put it very simply, Automated Clearing House transfers happen between banks and other financial institutions. Following is a detailed process to illustrate what happens when you deposit a cheque in your bank account:
- ACH transactions are usually initiated by an individual or an organization, which we refer to as the Originator of the transaction. These transactions (debit or credit) are in the form of banking payments, bill payments, direct deposit, cheque clearance, and many others.
- The transaction is entered electronically by the Originating Depository Financial Institution (ODFI), or more simple, a bank, at the request of the Originator.
- After many transaction requests have been collected, the bank transmits all the transaction requests in batches and pre-decided times.
- As a result, the State Bank (Federal Reserve in this case) and the Clearing House get transaction requests raises by banks (ODFI).
- The payments are sorted and cleared before making the information and funds available to the receiving bank, or in banking terms Receiving Depository Financial Institution (RDFI).
- The receiving bank (RDFI) then credits or debits the receivers account
This is why it usually takes a couple of days for a cheque clearance between 2 different banks. The next time you hear bout an ACH transfer, you’ll know what they’re talking about.
Uses of ACH Payment Processor
ACH Payment processing system is a financial hub that connects all financial institutions in the United States. Following are some widespread uses of the Automated Clearing House payments system:
- Banking system financial clearing facility
- Business to business transactions
- E-commerce payment solutions
- Government transactions
- Social security payments
- Tax payments & refunds
- Consumers utility bills payments
What does ACH Credit & ACH Debit Mean?
Both ACH Credit and ACH Debit are methods of transferring money from one bank to the other.
Simply put, ACH Credit refers to depositing funds into an account, where as ACH Debit means withdrawing money from an account.