Automated Clearing House (ACH) – Definition

Cite this article as:"Automated Clearing House (ACH) – Definition," in The Business Professor, updated December 16, 2019, last accessed August 15, 2020, https://thebusinessprofessor.com/lesson/automated-clearing-house-ach-definition/.

Back To: COMMERCIAL LAW: CONTRACTS, PAYMENTS, SECURITY INTERESTS, & BANKRUPTCY

Automated Clearing House (ACH) Definition

The Automated Clearing House (ACH) Network refers to an electronic funds-transfer system operated by NACHA, previously the National Automated Clearing House Association, since 1974. 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 gives its 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.

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.

Benefits of the ACH Network

Since the ACH Network batches financial transactions together and then processes them at regular intervals throughout the day, it results in super fast and easy online transactions. According to NACHA rules, average ACH debit transactions clear in just one business day while one or two business days are required for average ACH transactions.

[Important: Changes to the operating rules of NACHA would widen access to ACH transactions executed the same day, thereby allowing for the same-day settlement of majority, if not all, automated clearing house transactions as of September 2020.]

Using the ACH Network to improve electronic money transfers has also increased the effectiveness, as well as, timeliness of business and government transactions. Recently, ACH transfers have made it more affordable and stress-free for people to transfer money to one another directly from their bank accounts via e-check or direct deposit transfer.

ACH for individual banking services initially took between two to three business days for funds to clear, until 2016 when NACHA rolled out in 3 stages for same-day ACH settlement. Stage 3 launched in March 2018, requiring RDFIs to make available same-day ACH debit and credit transactions to the receiver for withdrawal latest by 5 p.m. This is expected to be in the RDFI’s local time on the transaction’s settlement date, subject to the right of return under NACHA rules.

Key Takeaways:

ACH is an electronic method of transferring money which facilitates payments in the United States.

The National Automated Clearing House Association (NACHA) runs the ACH.

Recent changes to the rules are enabling most debit and credit transactions carried out via the ACH to clear on the same business day.

Reference for “Automated Clearing House (ACH)”

https://en.wikipedia.org/wiki/Automated_clearing_house

https://www.investopedia.com › Investing › Financial Analysis

https://www.nacha.org/…/what-ach-quick-facts-about-automated-clearing-house-ach-n…

https://www.fhb.com › … › Customer Service › General

https://fiscal.treasury.gov/ach/

Academics research on “Automated Clearing House (ACH)”

Automated Clearing House Growth in an International Marketplace: The Increased Flexibility of Electronic Funds Transfer and its Impact on the Minimum Contacts Test, O’Keefe, B. (1994). Automated Clearing House Growth in an International Marketplace: The Increased Flexibility of Electronic Funds Transfer and its Impact on the Minimum Contacts Test. U. Pa. J. Int’l Bus. L.15, 105.

Post Consolidation Estimates of ACH Scale Economies, Technical Change and Cost Efficiency, Bauer, P. W. (2002). Post Consolidation Estimates of ACH Scale Economies, Technical Change and Cost Efficiency. Federal Reserve banks have been processing Automated Clearing House (ACH) payments, a consumer oriented product intended to be an electronic substitute for paper checks, since the mid-1970s. Previous studies by Humphrey (1982, 1984, 1985), Bauer and Hancock (1995), and Bauer and Ferrier (1996) have found strong evidence for increasing returns to scale (falling unit costs as volume transacted increases). Employing data from the early 1990s, the latter two studies also found evidence of rapid technical change (falling unit costs as better technology is implemented over time). Using data through 2000, we find that the ACH cost function still exhibits both of these properties, yet there are some signs that the technology may be maturing. The rate of technical change, while still rapid, appears to have slowed. Scale economies, at least as estimated by the GLS technique, still appears to exist far beyond the current range of output. Both of these findings have important implications for Reserve Banks that are facing increasing Federal Reserve banks have been processing Automated Clearing House (ACH) payments, a consumer oriented product intended to be an electronic substitute for paper checks,

Automated Clearing Houses: The Case for Barring Thrift Institutions, Karr, F. H. (1978). Automated Clearing Houses: The Case for Barring Thrift Institutions. Banking LJ95, 823.

The effect of pricing on demand and revenue in Federal Reserve ACH payment processing, Stavins, J., & Bauer, P. W. (1999). The effect of pricing on demand and revenue in Federal Reserve ACH payment processing. Journal of Financial Services Research16(1), 27-45. Because the automated clearinghouse (ACH) has been found to have lower social costs than paper checks, the Federal Reserve has been promoting more widespread use of ACH by lowering ACH processing fees. In this paper, we have obtained the first numerical estimates of ACH demand elasticities, a measure of the responsiveness of ACH demand to price changes. Various methods are employed to estimate the demand elasticities to determine how robust the estimates are. During the period 1985–1996, the Federal Reserve lowered the per-item price of interregional ACH, while the per-item price of intraregional ACH stayed constant. We take advantage of this unique pattern of historical price changes implemented by the Federal Reserve to estimate the effect of price changes on demand for ACH.

Electronic check clearing alternatives take shape, Murphy, P. A. (1993). Electronic check clearing alternatives take shape. American Bankers Association. ABA Banking Journal85(5), 62.

Was this article helpful?