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The Beginners Guide to ACH Payments


Written by Aja McClanahan

ACH payments are a fast, convenient and affordable way to send payments among banks and individuals. ACH stands for Automated Clearing House, the network used to route credit and debit transactions to and from various financial institutions.

Though regional ACH bank associations existed in the early 1970s, it wasn’t until 1978 that all banks in the U.S. could send and receive ACH payments among themselves. Since the widespread implementation and use of ACH payments, the technology has expanded into other practical uses.

For example, when you make an electronic payment (like paying your student loans), your lender and your bank use the ACH system to complete the transaction. The ACH network also allows institutions to update account statements once transactions are settled. Though ACH was originally used mostly for recurring payments, the network is now also used to process one-time debit transfers like payments made online and by telephone.

How are ACH payments used?

Though you may not know all the technical aspects of how the ACH payment process works, you are probably already using it anyway. Each time you pay a bill online or authorize a deduction from your bank account, you are using ACH payments. In fact, a survey by the National Automated Clearing House Association (NACHA) reported that nearly 50 percent of all consumer bill payments are made via ACH.

ACH is also involved when you receive direct deposits from sources like your paycheck or income tax refund. Then, there are intermediaries like PayPal, Venmo, Zelle and other peer-to-peer payment services that allow you to use the ACH network for sending and receiving payments.

If you still write checks, ACH powers the clearing process as well. The process of “back office conversion” allows originators (the party that initiates a credit or debit) to convert paper checks into an ACH debit. This allows for faster clearing times for checks for both the check writer and check recipient.

How ACH payments work

Here’s how the ACH payments process generally works:

  1. The originator initiates a transaction. Common types of transactions include payroll deposits, government and Social Security benefits, bill payments, online banking payments, person-to-person (P2P) and business-to-business (B2B) payments.
  2. The Originating Depository Financial institution (ODFI) enters the ACH entry.
  3. The ODFI transmits the payments to an ACH Operator (the clearing house that settles ACH transactions).
  4. The ACH operator receives the payment entry from the ODFI.
  5. The receiver’s account is credited.
  6. The ACH credit transaction settles in one to two business days(from the time the originator initiates the transaction), while debit transactions settle in one business day.

ACH timelines

Though ACH transactions can settle in one to two business days, the timeline can be shorter or longer. Why? ACH transactions are batched and transmitted to clearing houses at predetermined intervals throughout the day, so any transactions submitted after those cutoff times could have to wait for the next transmittal period. If there are errors or issues, this could delay transaction settlement further. Errors could included improperly coding transactions, duplicate entries or incorrect references to account numbers.

There are two main ACH processors that handle all the debit and credit files for banks here in the United States: The Federal Reserve or The Clearing House. If you take a look at the Federal Reserve transmission and settlement schedule along with explanations of how banks should schedule their credit and debit transmissions, you’ll see that there are plenty of variables that could cause this process to become delayed. Mainly, it comes down to the banks submitting their transaction files in sync with the Fed’s schedule.

Same Day ACH

NACHA began planning for same-day ACH settlement capability around 2014. The phased approach to implementing faster ACH processing was rolled out in three phases that occurred in 2016, 2017 and 2018.

The latest stage was complete as of March 16, 2018, and allowed banks to designate a number of transactions for the same-day processing window. Now, banks and credit unions that receive Same Day ACH credit payments can make funds available to their depositors by 5 p.m. local time. This means many ACH transactions now have the potential to be initiated and settled on the very same day.

Use cases for same-day payment settlement include:

  • Payroll
  • Urgent claims payments and refunds
  • Invoice and tax payments
  • Person-to-person payments
  • Account-to-account payments
  • Bill payment
  • Online payments
  • Point of sale check conversions
  • Collections payments
  • Merchant debit payments (e.g. returns)

What information is needed for an ACH payment?

Whether your are receiving or sending funds via ACH, you’ll need to have or supply the following information:

  • First and last name on the account
  • Name of the financial institution that holds the account
  • Routing numbers (also known as the American Bankers Association or ABA number) Account number
  • Type of account (savings versus checking)

ACH limitations

Though ACH payments are probably the quickest, most common and convenient ways to send payments, you should be aware of some limitations that might be imposed by your bank, federal regulations or by the ACH payments process itself.

  • Cut-off times: If you initiate transactions after certain times, this could delay settlement of the transaction.
  • Savings account limits: You are limited to 6 outbound transactions (debits) each month for savings accounts, per Regulation D.
  • International ACH: Some institutions prohibit the use of ACH payments internationally.
  • Transaction limitations: Some institutions have a limitation on the amount of money per transaction and number of transactions (daily or monthly) allowed using ACH payments. Check your account terms and disclosures for details.
  • Fees: Some entities will charge a fee for outbound ACH transfers.

ACH compared to other transfer methods

ACH works well for people who need to move money back and forth without hassle, but don’t mind waiting for payments to clear (though processing times are getting much faster.)

Wire transfers can be used to transfer money between both companies and individuals. This type of transaction doesn’t require a clearinghouse to process money transfers. Money is transferred directly between banks, so transfers can happen within minutes — though some banks warn that these transfer can take up to two to three days. Wire transfers are also more costly, starting around $15.

Writing a check is another way to transfer money and could take a few days to clear the accounts on either end of the transaction. Writing a check is free (aside from the cost of the checks,) but can be even slower than ACH debit or credit.

Peer-to-peer apps are another viable, free option to move money around, but they also use ACH transfer protocols. In some cases, like in in-network bank transfers or instant transfers that require a fee, money movement can appear to be immediate. In other cases, the processing time can be one two three days.

Comments
payitforward
payitforward   |     |   Comment #1
According to NACHA, amounts up $25,000 are required to be processed the same day (morning submission deadline: 10:30 am ET; afternoon submission deadline: 2:45 pm ET).

When I spoke with a CSR at Cit bank yesterday, he indicated that ACH can take 2 o 3 days. Perhaps he hasn't been advised of the new regulations. In regards to amounts over $25,000, I believe they must be processed the next day based on the following info. on the NACHA web site, :
(NACHA) National Automated Clearing House Association

Why are large dollar transactions (above $25,000) ineligible? Faster velocity of payments is expected to introduce risks that must be managed and mitigated. A per transaction dollar limit is one way to mitigate risk. Financial institutions and businesses will also have to adjust their end-of-day balance forecasting and funding, and the dollar limit is a way to limit the impact. Currently, more than 99% of ACH transactions are under $25,000, so the overall impact of the same-day limit is expected to be modest. Will Same Day ACH be available for all account types? Any account that is able to receive ACH entries today could receive Same Day ACH entries. The ACH OPERATORS WILL EDIT FOR THE $25,000 LIMIT FOR SAME DAY ACH TRANSACTION, AND WILL ASSIGN NEXT DAY SETTLEMENT TO ANY TRANSACTIONS ABOVE THE LIMIT.

Comments?
payitforward
payitforward   |     |   Comment #2
I just inquired with a CSR at Ally Bank and he quoted the bank's policy on regular and expedited ACH processing, which may take up to 5 days. When I mentioned the NACHA regulation, his response was that he is certain that the bank follows federal regulations. When I asked to escalate the call to a supervisor or manager, he placed me on hold; after a few minutes, the call was disconnected.

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