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Straddle 101 - Internal
ACH Primer
Why do businesses choose ACH?
ACH vs wire transfers: what’s the difference?
What is Nacha and is your business compliant?
What is an ACH debit?
What is direct debit?
What is ACH credit and how does it work?
How does an ACH deposit work? A behind the scenes look
How an ACH transfer works: a complex process explained
ACH is the financial tool that many rely on and few understand. Despite supporting tens of billions of transactions within the US every year (
), many consumers know ACH by other names, and businesses may still be unclear on both how to drive consumer adoption and how to make sure all involved get the most from it.What is ACH?
ACH, or Automated Clearing House, is a digital, financial network that is used for electronic payments and money transfers between banks or financial institutions in the U.S. For example, if you’ve ever been paid via direct deposit, it was through an ACH transfer. ACH transfers are another way to transfer money that doesn’t involve paper checks, wire transfers, or cash. .You can send or receive money safely and securely from the comfort of your own home
What is the Automated Clearing House (ACH) network?
The Automated Clearing House is run by the National Automated Clearing House Association (). Formed in 1974, NACHA monitors the ACH network so it is safe, secure, and effective.
A brief history: As consumer mobility and payment preferences evolved in the early 1970s, with the volume and geographic spread of checks. So they turned to newly commercialized computer technology to establish an automated solution. This new system was named Automated Clearing House, or ACH, in honor of the “clearing house”, a central location () where banks went at set times to exchange checks and settle transactions.
The ACH network is run by two different operators:
As for the dynamic between these operators, imagine if UPS and FedEx each had their own zones and sometimes passed off mail to the other to delivery company on their route. Government financial institutions are serviced by FedACH and private banks by EPN.
NACHA works closely with various government agencies, sets the rules, and the two operators then work together to route and deliver all ACH transactions accordingly.
How do ACH payments work?
An ACH transaction instructs financial institutions to debit or credit accounts based on the account number and routing number. Employers often ask for a voided check to set up payroll because those numbers are on the bottom of your checks. When an employer pays you through an ACH transaction, your employer’s bank sends a request to your personal bank in order to transfer the money you’ve earned.
ACH transactions are also popularly referred to by various names such as “eChecks”, “direct deposit”, “direct debit”, “automatic withdrawal”, and so on. ACH transactions are often a means by which:
While ACH transactions aren’t the only way to move money, it has become a commonly used funds transfer method: .
The ACH network acts as a financial postal system. Individual transactions are like letters that ACH operators sort and deliver between various banks, where each bank acts as a post office on behalf of their respective account holders.
Member institutions and their processing partners regularly pass ACH messages to the network’s operators in the form of specially-formatted digital batches, which the operators re-bundle by recipient and pass on at regular intervals each business day. Each of these bundles contains a structured set of messages instructing the receiving party to make a credit or debit to an account they control.
Note that transactions aren’t settled directly- at no point do any two banks in the system exchange a stack of money or a pile of gold. The ACH network keeps a tally of net settled payments for each transaction window, and the banks involved jointly ask the Federal Reserve after each window to credit/debit their respective accounts accordingly.
What are the two types of ACH payments?
There are two types of ACH transactions: ACH debit (“pull”) or credit (“push”).
For example, in an ACH credit, an organization might "push" money to an employee’s account to pay wages.
In an ACH debit, an organization might "pull" money from a customer account for an automatic bill payment.
While one party’s credit is another party’s debit in a literal sense, the naming convention simply identifies which party originated the request. An employer generally asks the ACH network to push money from one of its accounts to an employee’s, making it a credit. If the employee had initiated the request, it would be an ACH debit transaction even though they received the funds.
How long does an ACH payment take to process?
A standard ACH payment typically takes one to three business days. However, ACH payment processing timelines can vary based on:
As of March 2021, ACH transactions are delivered . The ACH network can also accommodate same-day processing. That said, uptake of same-day ACH has been modest. In 2020, of ACH transactions were same-day or about 0.7% of all transactions. This lackluster adoption can be attributed in part to the added expense, and to the fact that faster processing doesn’t necessarily mean faster settlement.
Unlike a wire transfer, ACH transactions can be recalled. Timelines around recalls and returns . The system works on a “no news is good news basis” where the absence of a return code is the closest thing offered to a confirmation. Consumers have up to from when the statement containing the first unauthorized transaction was transmitted to the consumer to report an unauthorized ACH debit to their account. In practical terms, this can mean receiving binding reversal requests up to about the three-month mark, though most come through in the day or two following.
Depending on a given institution’s standard practices, as well as their assessment of the risk involved, the actual release of customer funds may be delayed until , even if the receiving institution already has the details in-hand. Though funds for credit transactions are occasionally released as a sort of low-risk loan.
For more on these timelines, see our companion article on .
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