Automated Clearing House

The ACH is a secure computer network that efficiently connects individuals, businesses and banks together through the Federal Reserve System enabling electronic payments to flow safely from start to finish.

In today’s computer-connected global economy, money of all amounts and currencies moves from location to location, from sender to receiver in nano-seconds. The Automated Clearing House (ACH) functions as the traffic coordinator for all these transactions in much the same way that traffic lights and other devices control the flow of automobiles in major cities.  

Without an ACH system there would be no way to secure, trace or verify direct payroll deposits, social security payments, tax refunds, confirm consumer payments such as mortgages and credit cards, or distribute insurance premiums, business to business payments, e-checks or government tax payments. Imagine any large city during rush hour without traffic lights or police officers and you’d have just an inkling of what e-commerce would look like without the ACH. 

The ACH is probably the most important component in a world that is rapidly moving towards paperless financial transactions. Simpler, cheaper and cost efficient, electronic money transfers have increased more than 1000% from a mere 1.33 billion transactions in 1989 to an astounding 6.5 billion in 2006 worth over 35 trillion dollars. Even multi-national conglomerates have jumped on the bandwagon, sending out payrolls and other employee benefits around the world in different currencies and to multiple banks with the click of a mouse.  

To better keep track of this huge financial marketplace, the federal government created NACHA, the National Automated Clearing House Association in Herndon, VA which created a set of rules, standards and guidelines to properly identify, track and report on all ACH transactions for the benefit of all participants in the system. Most recently NACHA instituted a set of rules and standards to help regulate Internet transactions for websites that accept ACH payments as part of their normal operating procedures. These rules have laid the groundwork for a system not only equipped to meet the needs of current users but equally equipped to utilize new technologies to enhance the system in the future.

In addition to the advantages of the ACH system such as speed, efficiency and cost savings, the main factor driving the explosive growth of the system is its affordability. The ACH system, especially on the internet, is much less expensive than any other system currently in use. The cost of processing and receiving a credit card payment over the internet without the ACH network averages 2.5% or more of the total plus a flat handling fee ranging from 15 cents to 40 cents per transaction. Compare that to the ACH rates that range from just 2.5 cents to 25 cents per transaction, and you begin to see why businesses on the internet have taken to the ACH in ever growing numbers. As the internet grows so grows the ACH. 

The ACH system began with the advent of the bank wire transfer which still exists today and is similar in many ways to the ACH system. Both are electronic transfers of funds from one account to another and both go through the Federal Reserve System. It’s the differences between the two forms of transferring funds that separate them.

Wire transfers are initiated by individual senders, go to individual receivers, and are instantaneous. ACH transactions are handled as batches and thus can wait for hours or even a day or more before they are finally released into the system.  

ACH payments can be questioned; this means there is a window of time when the sender or the receiver can change any or all of the details of the transfer, from the bank, to the amount, to the names on the transaction. Once a wire transfer is initiated nothing about it can be altered in any manner.  

Wire transfers are fully guaranteed and will not be sent unless the funds are removed from the sender’s account.  ACH payments can bounce if there isn’t enough money in the account to cover the payment. While there are firms that track companies who have violated this rule there is no guarantee that any ACH transfer is backed by adequate funds to facilitate its payment.  However, ACH transfers are tremendously less expensive than wire transfers. ACH payments typically cost less than 25 cents per item while wire transfers can cost upwards of $50 or more if the transmission is complicated. This single reason accounts for the fact that firms such as PayPal use the ACH system to keep their costs down on the millions of small, individual to individual payments they facilitate.

As the industry has adjusted to the growing demand of its clients, ACH banks have also begun offering customers more services without increasing their charges. Attempting to close the gap between an ACH transfer and a wire transfer, customers are now able to transmit additional information along with the funds. In this manner business are able to ascertain what invoice the payment is being to applied to, whether or not the invoice is being paid in full, or whether a discount, interest, penalty or late fees are included. 

As more and more banks offer consumer based payment services, more banks will be attached to the ACH system, more options will be made readily available to users, and the ACH system and its clients will be more in charge of the financial future of the world. 

 

 

 

Some problems with ACH

 

 

ACH payments have been around for some time now, but people are just getting used to them, especially with the ARC, POP, and RCK, where the original instrument was a physical cheque. One problem occurs when the account holder issues a stop payment on a physical cheque not knowing that the check was presented as an ACH entry.

A time frame problem can cause potential loss towards an RDFI due to irregular time frames provided for the return of ACH entries that are subject to Electronic Funds Transfer Act (Regulation E). An example is a POP and ARC entry, where an RDFI has only 60 days from the date of settlement to return an unauthorized debit, and the consumer has 60 days upon notification to dispute a transaction in his statement under Regulation E. With these time frames, it is possible that the 60-day period allowed for ACH return would expire even before the consumer’s 60-day protection (under Regulation E) would expire.

Another problem deals with compliance where the merchant causes an ODFI to issue an ARC or POP entry (for cheque presentment) and then fails to comply with the handling of the physical cheque and presents the physical cheque for payment as well. This causes a double-debit against a consumer account.

It is possible to initiate ACH transfers without authorization.

Uses of the ACH Payment System

  • Debit card transactions
  • Direct deposit of payroll, Social Security and other government benefits, and tax refunds
  • Direct debit payment of consumer bills such as mortgages, loans, utility bills, and insurance premiums, rents, and any other regular payment.
  • Business-to-business (B2B) payments
  • E-commerce payments
  • Federal, state, and local tax payments
  • Bank Treasury management departments sell this service to business and government customers