How ACH Transfers Work

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• How Businesses and Other Government Agencies Utilize ACH Transfers
• How to Move Cash Among Various Accounts Using ACH Transfers
• A Brief History of ACH Transactions

You want to make sure that your mortgage and utility bills are paid on time every month, but you hate writing checks, and paying postage to mail those bills is getting to be a hassle. Therefore, you sign up for automatic payment with each of these companies. In doing so, you notify your mortgage and utility companies that you would like the respective set amounts to be taken from your account on certain days each month. When those days arrive, the receivers (the companies that receive the payments) contact the originators (the billers) and tell them to send requests to your bank to transfer the money amounts from your account to the lenders’ accounts per your written permission that you gave when you signed up for automatic bill pay.

The originators send the information to the ODFI (your bank) which then deducts those amounts from your account. At this point, the money is still in your account, but it’s not available to you because holds have been placed on those funds. The lender's bank transfers the amounts to the lenders’ accounts, but the bank doesn't make the money available yet. These transactions will be listed as a "pending ACH transfers". Once the RDFI (usually the Federal Reserve) receives the information, the accounts are reconciled (“balanced”), proven to have sufficient funds to complete the transaction ("cleared"), and the money is officially deducted from your account and deposited in your lenders’ accounts ("settled"). Now, the transactions are officially complete. Your bills are paid for another month. If you don’t yet use direct deposit or automatic bill pay personally, signing up is simple. Just notify your employer and/or the billers for which you have services or products that you wish to participate in Automatic Billing. Some billers may require you to fill out minimal paperwork, but most companies offer the opportunity to sign up online by visiting their websites.

While the concrete details as to how transactions are recorded and finalized aren’t available to the general public to prevent hacking, safeguard account information and maintain the integrity of the system, you might be surprised to learn that clearing transactions is a relatively simple, comparatively quick procedure. A typical transaction takes anywhere from a few hours to a few days to clear depending on how much traffic passes through the regional clearing houses. Interestingly, these transactions do not happen in “real time” as some might think. Instead, participating institutions receive output files (transaction updates and notations) just four times a day. Therefore, the transaction might not appear immediately in your record.

How Businesses and Other Government Agencies Utilize ACH Transfers

Many businesses use direct deposit to pay their employees. When you get your check direct-deposited, your employer uses the ACH to place the funds from your paycheck into the account(s) that you designate on your employment paperwork. The vast majority of Americans who have the option to do so use direct deposit to ensure their checks are placed into their accounts without them having to worry about losing the check or waiting to use the money. The money is available immediately, and people can plan their monthly budgets according to when they get paid. Similarly, if you use Automatic Bill Pay to pay mortgage, utility, or credit card bills, the companies that provide those services to you receive their payments through the ACH network. In using the ACH network, you control the amount of your payment, and you decide when the payment goes out to the lender. There’s no more stress about whether these bills will get paid on time. Just keep in mind that you are obligated to have the money in your account at the time that the payments go out. If there isn’t enough money in your account at the time that the payments are delivered, you might face penalties that range from late fees to suspension or discontinuation of services. These companies might also notify the credit bureaus that you didn’t pay the bill on time which could cause your credit rating to plummet.

Businesses can also use ACH transactions in a similar manner to fulfill other financial obligations. For example, if a school system has contracts with specific food vendors to supply products to the schools within that system, ACH transfers are used to deliver money from the school system accounts to the accounts of the vendors. Many government agencies use ACH transfers on a wide scale. The IRS uses ACH transactions to receive payments and issue refunds. Various agencies (the DMV, child support enforcement agencies and the Social Security Administration) utilize ACH transactions routinely to collect and issue payments in a timely, efficient manner. In fact, the use of ACH transactions has become so widespread that more and more companies are now insisting that their customers pay them electronically. This reduces the use of paper, cuts costs and eliminates unnecessary and time-consuming record keeping since the information is all electronic. In short, the biggest advantage in using ACH transactions is that doing so simplifies the process of getting and giving money.

How to Move Cash Among Various Accounts Using ACH Transfers

If you have funds that are spread across several accounts—whether you are establishing accounts for different family members or pursuing higher interest rates—transferring and keeping up with money from various accounts can be quite challenging. Fortunately, customers do have options at their disposal so that they may track and manage their money as effectively as possible. Consider these helpful tips when deciding where you want to keep your cash stashed:

• 1) Find a bank that requires a very low minimum balance and no monthly fees. Since it’s unlikely that you’ll be keeping the bulk of your funds here, you don’t necessarily have to worry about interest rates. However, it’s probably a good idea to keep at least some money here in case you need to transfer funds quickly, or you want to prevent your bank from closing an empty account.
• 2) Make sure that your hub account has the ability to” push” (deposit) or “pull” (withdraw) money from multiple external accounts with no transfer fees. Some banks allow you to link just one or two accounts. Others will charge you when you initiate individual transfers.
• 3) Look for banks with quick transfer times. Ideally, transactions should take no longer than one business day, but some financial institutions may take as long as three days to transfer money. In some cases, however, if you schedule a funds transfer before the end of a business day, they may credit your account even before you are able to withdraw the money so that you can start earning interest that day (even though, to prevent fraud, you can only withdraw the money officially after three days).
• 4) Make sure that the bank or credit union allows the transfer. Some institutions may not permit one party to initiate transactions. Most banks will not charge customers who put money in their accounts, but some charge fees when money is withdrawn from their accounts.

Here’s a sample timeline of one such transaction:

Friday: You schedule a $500 transfer from one bank (Point A) to your hub account (Point B). You begin earning interest in your hub account on Friday, but nothing has happened at the bank yet.

Monday: $500 is withdrawn from one bank (Point A).

Thursday: $500 is available to pull from your hub account (Point B). Now, you schedule a transfer from a second bank (Point C), and $500 is debited from your hub account.

Friday: $500 is available at the second bank (Point C).

A Brief History of ACH Transactions

The Automated Clearing House (ACH) was established initially in 1972 as a collaborative effort between California banks and the regional Federal Reserve to simplify the processing of paperless check transactions. Word of its success spread so quickly that many other ACH associations were founded, and agreements were made between the associations and their respective regional banks to operate regional ACH networks. Two years later, in 1974, the National Automated Clearing House Association (NACHA) was founded to develop a national ACH network. By 1978, this had been achieved, and all ACH networks throughout the United States were linked electronically. In 1980, the Monetary Control Act was passed that gave private sector ACH operators the right to compete with the Federal Reserve Bank because the Federal Reserve could no longer offer free services since its operating costs had to be recovered. As a result, there are three private sector ACH operators: American Clearing House Association, The New York Automated Clearing House, and VisaNet ACH Services. Currently, the Fed ACH Operator, otherwise known as the Federal Reserve, handles more than 85 percent of ACH transactions. The ACH Network allows such streamlined services as online bill pay, direct deposit, and direct debiting, and it’s a faster, more secure alternative to paper check clearance. Today, the ACH Network consists of more than 12,000 financial institutions, 650 industry councils, and a network of regional ACH associations that are governed by NACHA from its headquarters in Herndon, VA.