When your employer deposits your paycheck directly in your bank account or you authorize a creditor to debit a payment, these take place as electronic transactions via the Automated Clearing House network. ACH transfers are executed according to rules established by the National Automated Clearing House Association. Transactions involving the U.S. Treasury also are governed by Federal Reserve System regulations.
The Scope of ACH Transactions
The ACH network was started in 1974 by financial institutions like banks and credit unions to reduce a growing volume of paper checks straining existing computer processing capabilities. By 2014, 10,000 participating financial institutions processed 23 billion electronic transactions, with a total value of more than $40 trillion. Businesses use ACH transfers to pay employees, pay their bills and collect from customers. The Treasury Department disburses Social Security benefits and other entitlements via electronic transfer. ACH transfers also are used to make interest and dividend payments.
Types of ACH Transfers
There are two basic types of ACH transfers.
- Direct Deposit. In a direct deposit transaction, the originator sends money to the payee's bank account. For example, many employers uses direct deposit to pay workers.
- Direct Payment. With direct payment, a payer authorizes the originating individual or organization to take money out of an account. For example, you might give the electric company permission to debit your checking account each month to pay your bill.
The ACH Transfer Process
ACH transfers are handled using a system of batch processing. This means that the transactions individuals and organizations enter accumulate throughout the business day. At predetermined times, batches of transactions are sent to an Automated Clearing House facility. The ACH transfers then are sorted and made available to the receiving financial institutions.
For instance, if you originate a payment to a merchant, your bank batches it with other transactions and sends it to the clearing house, where it is made available to the merchant's bank. The receiving financial institution credits or debits each transfer to the proper destination account. NACHA rules say credit transactions must be settled in one or two business days, and debits in one business day.