Automated Clearing House (ACH) - Explained
What is the Automated Clearing House?
Written by Jason Gordon
Updated at March 11th, 2022
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What is the Automated Clearing House (ACH)?
The Automated Clearing House (ACH) Network refers to an electronic funds-transfer system operated by NACHA since 1974, previously the National Automated Clearing House Association. This method of payment deals with direct deposit, consumer bills, tax refunds, tax payments, payroll, and more payment services in the U.S. NACHA is a self-regulating institution, and it prescribes management, administration, rules, and development to the ACH network. The operating rules of the organization are designed to increase growth in the scope and size of electronic payments within the network.
Back To: COMMERCIAL LAW: CONTRACTS, PAYMENTS, SECURITY INTERESTS, & BANKRUPTCY
How the ACH Network Works
The ACH Network refers to an electronic system used by financial institutions in facilitating financial transactions in the United States. According to NACHA, it represents above 10,000 financial institutions and also moves more than $43 trillion per announcement by enabling over 25 billion electronic financial transactions. The ACH Network basically functions as a financial hub and assists organizations and individuals transfer money from one bank account to another. ACH transactions comprise direct deposits, as well as, direct payments, including government transactions, B2B transactions, and consumer transactions. An originator begins a direct payment transaction or direct deposit using the ACH Network. Originators can be organizations, government bodies, individuals, and ACH transactions can be either credit or debit. The bank of the originator also referred to as the originating depository financial institution (ODFI), takes the automated clearing house transaction and batches alongside other ACH transactions to be sent out regularly throughout the day. An ACH operator, be it a clearinghouse or the Federal Reserve, gets the batch of ACH transactions from the ODFI along with the originator's transaction. The ACH operator classifies the batch and makes transactions available to the intended recipient's financial institution or bank, also referred to as the receiving depository financial institution (RDFI). The bank of the recipient gets the transaction, thereby reconciling the two accounts and ending the process.
