Automated Clearing House (ACH)
ACH, the beginnings. In the early ’70s, a group of California bankers wrestled with an ever-expanding line item on the expense side of their respective P&L’s: the cost of processing physical checks. In addition to the cost, there were inherent inefficiencies in the process with intense human handling opening itself to simple but costly errors and possible fraud.
They organized as a group, at that time known as SCOPE, to develop an automated payment processing system. This evolved into what is now known as ACH and governed by sets of rules and regulations governed by NACHA. Their vision has had a tremendous impact on the payment processing industry both then and now.
As a noun ACH is a clearinghouse, as a verb, it is an electronic network designed to process the exchange of electronic transactions between financial institutions.
Simply put ACH transfers are like paying by check, just without the paper. ACH transfers are therefore also known as eChecks. This article will get into a high-level view of the what ACH means to you, how it works and why you would want to utilize it.
What is ACH used for?
There are myriad of ways to utilize ACH transactions, notwithstanding the first and probably most widely used: Payroll Direct Deposit. The IRS has embraced ACH with 80% of filers receiving refunds in this manner. State revenue departments are on the ACH rail as well. The advent of Etail and other e-commerce transactions have helped surge the ACH network volume to over 25 billion transactions moving $51 trillion in 2018 (Source)
While these would be the most voluminous categories of transactions, ACH is employed across many more business and consumer based sectors, here are a few:
Tax remittance/refund – IRS, state, local
Pension Plan disbursements – private, public, union
Loan payments – Car, home
B2B – suppliers, contractors, lease payments,
Utility payments – Electric, gas, cell phone, garbage
Social Security disbursements
How does ACH work?
There are five participants in each ACH payment transaction: the Originator, the Originating Depository Finacial Institution (ODFI), the ACH Operator, the Receiving Depository Finacial Institution (RDFI) and the Receiver.
The process is so simple yet so complex. We will leave the complexity which would include verification, returns, settlement, encryption and regulatory compliance for a future conversation.
Simply put, the Originator initiates either a direct deposit or direct payment using the ACH network to the ODFI. The ODFI enters the ACH entry and accumulates these into batches and transmits them at predetermined times to the ACH Operator. The transactions are then sorted and routed to the appropriate RDFIs. Upon verification, the RDFI then credits or debits the target receivers account. It is that simple!
More information on the distinction of credit processing versus debit processing is in the section ACH credit versus ACH debit below.
Benefits of ACH
The ever-increasing comfortability of consumers with ACH transaction processing is a WIN-WIN for both consumer and business. There are benefits shared by both entities and ones specific to each. At the top of the shared list are security, reliability, and speed.
From a customer perspective, security is paramount when dealing with their personal account information. First of all, unlike checks ACH payments are electronic and cannot be misplaced or forged. In addition to the encrypted network, the payment traveling on most payment processors utilize micro-deposits to authenticate both parties involved in the transaction. By depositing micro deposits into the business’s and customer’s accounts, the accounts are then verified by the respective entities. Finally, NACHA has a comprehensive Risk Management Strategy in place to ensure the safety and security of ACH payments.
The initiation of payments from where ever you are by simply getting on the internet makes paying via ACH quite convenient. You need not worry about having your checkbook, envelopes, and stamps to send a conventional check, simply login into the businesses WEB page and make a payment. Additionally, setting up recurring payments such as car loans, mortgage or insurance premiums adds to this convenience. You can “set it and forget it”.
Financially, ACH transactions have the lowest fees of any payment method (except cash). On a $200 transaction, the business can typically save up to $4.87 based on a typical percentage of purchase and transaction fee. The fact that most banks process electronic payments before checks make it more likely for a business to get paid. On the consumer side, many businesses offer discounts if payments are made electronically as opposed to checks. Combine this with the savings of stamps, envelopes the cost of the checks themselves and you reap a small but recurring savings
A collateral benefit of utilizing an ACH payment versus a check is a reduction on the environmental footprint. Unlike checks and envelopes, electronic payments don’t use paper.
With electronic payments you eliminate the worry of lost checks, writing invalid amounts or forgetting to sign the check. Additionally, if you look at your checks the information printed on them contains everything a thief would need to fraudulently obtains funds from your account. It has your name, address, RTN, account number and maybe even your phone number. NACHA’s advice for the most effective way to safeguard your account is “stop using paper checks”.
ACH credit versus ACH debit
Think push versus pull or rear wheel drive versus front wheel drive. With credit transactions, the ODFI pushes authorized funds to the appropriate RDFI. DIrect deposits and online bill pay are processed using credit transactions.
A debit, on the other hand, the RDFI pulls authorized funds from the ODFI. When you make a payment on a web site to pay your electric bill, for example, an ACH debit is created.
An ACH credit is inherently more secure as you do not enter your RTN and account information because the banks already have that information and when the transaction is processed the receiver does not receive your account information.. On a debit transaction that you have initiated online, you enter this information, opening for a greater chance of stolen identity. Knowing the party you are dealing with is key to minimizing fraud.
Payroll Direct deposit example.
Online utility payment example
NACHA published 2018 year-end statistics revealed the following: (Source)
⇒ 2018 ACH Network volume and value 23 Billion transactions totaling $51.2 trillion
⇒ Volume has increased at least 1 billion every year for the last 4 years
⇒ Value has increased by at least $1 trillion every year for the last 6 years
⇒ 2017-2018 increases by type
→ B2B – 9.4%, $3.6 billion
→ Direct deposit – 4.4%, $6.8 billion
→ Internet – 14.2%, %5.9 billion
→ P2P – 32.2%, $128,7 million
Following are a few of the findings from a Payments Trend Survey conducted and published through a collaborate effort of Credit ResearchFoundation and NACHA. Specifically developed to provide insight into the changing dynamics of today’s payment receivable operations and provide relative metrics. The audience surveyed consisted of CRF members who are senior leaders at Fortune 500 companies responsible for trade credit, AR and customer financial services.
⇒ 96% of respondents accept ACH as a form of payment
⇒ By 2020 they anticipate 45% of their payments will be received via ACH and only 34% by check
⇒ 70% prefer to be paid by ACH credit
⇒ Key factors shifting the landscape
→ Internal factors – contractual, marketing efforts
→ Customers are requesting it
→ Technology enhancements – ERP systems, WEB portal
Not necessarily referenced in this article following are terms you will encounter while engaging in ACH conversations.
ACH Operator – An ACH operator processes all ACH transactions that flow between different depository financial institutions. It serves as the central clearing facility that receives entries from the ODFIs and distributes the entries to the proper RDFIs. The two ACH operators are the Federal Reserve and The Clearing House (EPN).
Clearing – The exchange of financial detail facilitating the posting of transactions to originator’s account and reconciliation with issuing bank’s settlement. But not the exchange of funds.
Clearing House – Thre are many definitions and uses of ‘Clearing House’ for the purpose of this discussion a clearinghouse is an electronic fund transfer system facilitating payments.
Gateway – Software platform providing the interface between participating institutions.
Merchant – The business that accepts ACH payments.
ODFI – Originating Depository Financial Institution. The institution authorized to receive an ACH transaction.
Originator – Entity, individual or institution, originating an ACH transaction.
Receiver – Person or institution that has authorized the originator to initiate an ACH transaction to either debit or credit their account.
RDFI – Receiving Depository Finacial Institution. The interface between the originator of transactions and ACH network.
RTN – Routing Transit number. Identifies the bank that the account resides.
Settlement – The actual transfer of funds between financial institutions involved in the ACH transaction.
What is an ACH Payment?
Simply put it is an electronic transfer of funds from one bank account to another.
Is ACH the same as a direct deposit?
Direct deposit is a type of ACH transaction, most commonly used for payroll, social security and pensions. further, it is also used for tax refund/payments and investment dividends.
What is needed for a consumer to utilize ACH payments?
Utilizing ACH you are authorizing your bank to withdraw funds from our account, thus you will need to provide the routing transit number (RTN) of your bank and your account number.
What costs are associated with an ACH transaction?
Industrywide merchants will pay fees can ranging from $.15 to $.95 per transactions based on varying criteria. For more information on pricing email email@example.com
Where do I find my routing transit number and account number?
Can ACH payments be returned as NSF?
Yes, even if the transaction goes through initially.
Do ACH payments post immediately?
No, they are not immediate. The ACH network is a batch process where transactions are accumulated throughout the day for later batch processing. However, in September 2016, NACHA implemented rules and processes for Same Day ACH come back for a future blog on this site.
Can I put a stop-pay on an ACH payment?
Yes, you will need to notify your bank typically 3 days before the transaction is scheduled and a fee usually applies.
Are ACH transactions safe?
While there is an opportunity in fraud, NACHA data demonstrates that fewer than 3 out of 10,000 transactions are rejected as unauthorized by the consumer. As described above, the two basic types of basic transactions carry different levels of risk. Credits run a lower level of risk than credits. That being said, you run a much lower chance of fraud when dealing with known entities that you currently have a relationship with, such as your electric company. Secondly, rather than pay your bills via the biller’s website which initiates a debit, pay through the online bill-pay option from your bank’s site which initiates a credit, lowering the risk