The Basics of the ACH Network

The Basics of the ACH Network

Even if you are not familiar with what the ACH Network is, most people who transfer money in the United States have interacted with the ACH Network in some capacity. 

The ACH Network, which stands for the Automated Clearing House (ACH) Network, is a series of integrated financial institutions that are set up to approve and protect the process of transferring electronic payment in the U.S. through the automated clearing house. 

The ACH Network comprises the Federal Reserve, the Clearing House, the National  Automated Clearing House Association (NACHA), ACH Operators, Originating Depository Financial Institutions (ODFIs), and Receiving Depository Financial Institutions (RDFIs). 

We are providing you with an overview of some of the basic functions of the ACH Network so you can better understand its benefits, functions, and limitations. 

What are the different types of ACH transactions?

ACH transactions are transactions that are sent through the ACH Network. This is usually a bank-to-bank electronic transaction that is sent in U.S. currency and is not a wire transfer or eCheck. 

There are two ways to classify an ACH transaction: either as an ACH debit or an ACH credit. 

An ACH debit payment simply means to withdraw money from an account as part of an ACH transaction. Most people who use ACH transactions would use what is considered to be an ACH debit. 

An ACH credit is the opposite of an ACH debit. Simply put, an ACH credit is when money is deposited into a bank account. 

A good example scenario is in direct deposit. A direct deposit is an agreement set up between two people or a person/business and an organization where money is regularly deposited/credited into a bank account. Direct deposit is a common financial function between employers and employees. You might have your direct deposit set up to receive your income. 

In the direct deposit example, the ACH debit is pulled from your employer’s bank account and an ACH credit is deposited into your bank account. 

How ACH transactions work

An ACH transaction request must be set up by an Originator through a financial institution that is approved to send ACH transaction requests through an ODFI. 

Here’s a breakdown of what it looks like to submit an ACH transaction request:

  • The person who submits an ACH transaction request, known as the Originator, must provide their name, bank account number, routing number, and the payment details to the ACH Operator (third-party sender, bank, or ODFI). This usually means that this person has some type of agreement with the ACH Operator and the organization has enough of the person’s information to be approved under Know Your Customer (KYC) Rules. 
  • The authorized Originator will go into the payment process typically through an online banking portal and set up an ACH entry or ask for funds to be transferred.
  • The Originator provides the details of the recipient. If sending through a bank, the recipient will have to be a major organization, such as another financial institution IRA account. If sending through a payment processing app, the Originator would navigate the app accordingly.
  • Information like the amount of money, the date to be sent, and the frequency of sending is included in the ACH entry.
  • The Originator submits the request, verifies that the information provided is correct, and then ensures that the entry request has been made. 

For the most part, once this entry request has been made, the recipient will see the fruits of that labor in one to two business days. If they are receiving money from the Originator, they will see the funds deposited in their account in two business days, and made fully available in four business days. 

If there is a problem, the result looks a little different. Problems usually arise when there are insufficient funds in the bank account that was to be withdrawn from, or if a bank account is no longer active. 

If problems arise, then the financial institution used by the receiver (the Receiving Depository Financial Institution, or RDFI, which is essentially not the bank account used by the originator) will receive a return code from the Clearing House and will inform the ODFI. 

Depending on how the financial institution has it set up, the transfer might go through as same day ACH, which would mean that the payment would be processed within one to two business days as opposed to three to four business days.

The rules and processing procedures for ACH payments are provided by NACHA, and each ACH Operator must be regularly checked by the regulations. 

ACH for bill payments

ACH transactions are regularly used for paying bills online. Bill pay with ACH payments are commonly found in online banking when financial institutions have an agreement with other banking institutions and are approved through NACHA.

As a regular person (and not a business entity) you can be set up an ACH transfer under your bank’s “bill pay” or ask that the other part set up to send/receive an ACH transaction straight from their bank. 

When setting up bill payments, it is entirely in the control of the Originator as to when, how much, and how frequently the bill payment will be pulled. Bill payments allow Originators to set up an automated recurring payment monthly so that you do not miss a bill payment. Once set up, Originators must ensure that efficient funds are available in the designated bank account. 

ACH bill payments can be set up through a digital wallet, eCommerce site, or another financial system. It can also be processed using an ACH API

How ACH payments compare to other payment methods

ACH payments are secure, fast, and relatively inexpensive payment methods. So, in general, it is in the best interest of the parties involved to send money via ACH payment processing if the money is to be sent electronically. 

Understandably, though, it can be hard to see this benefit without a clear comparison against other payment methods. 

Here’s a clear breakdown of the differences between ACH payments and other payment methods:

Wire transfer

A wire transfer is an electronic money transfer sent from one bank to another. They are typically expensive, ranging from $15 to $45 depending on if the person sending the money must pay the wire transfer fees of the recipient and depending on if wire transfer costs are covered in any bank fees. 

A wire transfer typically takes 24 hours in order to process but it is a direct payment and can be sent over an international border and transferred into a currency other than the U.S. dollar.

To compare, an ACH transaction is an electronic money transfer sent from one bank to another but instead of going directly to the other bank, the money transfer is filtered through an Automated Clearing House and approved by the Federal Reserve. 

Costs for sending an ACH transaction are very minimal; they are estimated to cost about $0.29 per transaction, and users are charged on average $1.50 (if anything) and return fees. They take anywhere from one business day to four business days, depending on the process used, and they cannot be transferred across the U.S. border or into another currency.

Credit card transaction

A credit card transaction is a direct payment made with a credit card approved within one of three major credit card networks: the Visa Network, the Mastercard Network, and the American Express Network. A credit card (and number) must be used during this transaction; this means that the user will be approved with the credit card company based on their credit history. 

Each transaction made with a credit card is a form of credit payment. So the user is not expected to have cash funds; instead, the transaction is processed for the receiver and then the user will pay the credit card company at their own time. Daily compounding interest is charged on the credit based on an Annual Percentage Rate (APR). Credit card transactions are instantaneous for the receiver and usually take 3-5 business days to appear on the credit card account for the user.

To compare, an ACH transfer is different from a credit card transaction in that the transaction is made with cash. Therefore, in order for the transaction to be approved and secured, it is sent through the ACH Network to be checked. 

ACH transactions are coming from a bank account so there is no daily compounding interest being charged to the user or Originator. Payments appear within one to four business days.

Debit card transaction

A debit card transaction is a process of sending money electronically from a checking account that is connected to a debit card. Debit card transactions are a direct payment that typically occurs at the Point of Sale (POS) when purchasing something in-store so the money is going from the bank account to the merchant directly, but there are also electronic debit card numbers available that will connect users to the same account and allow for online banking transactions.

A debit card transaction is usually free or cheaper for customers and will be pulled out of their account instantaneously. There is usually no fee associated with the transaction unless the merchant needs to charge for processing the payment. No interest is charged for a debit card transaction. Sometimes a pin is needed, and sometimes individuals can tap or use contactless smart cards.

To compare, an ACH transfer is very similar to the debit card because it might use the same bank account that the debit card is connected to. The main difference is that an ACH transfer is not given a card. As well, it cannot be used with any merchant like a debit card can. While ACH transactions are typically used for bill pay or sending payment to friends through a third-party payment processor, a debit card transaction will be used to pay for something in store. 

ACH transactions cost the same as debit card transactions but they take a little longer to be processed. They also cannot be used for in-store purchases. 

Check or eCheck

A check or eCheck is a bank approved form that designates that one individual has authorized the withdrawal of funds from their bank account to be deposited into the bank account who is designated on the receiving line. A check will display the receiver’s name, the amount being sent numerically and written out, the date the check was written, notes, and the signature of the sender. 

Checks are verified with printed bank account information and allow a bank to send money between individuals and businesses. They typically take 2-3 business days to be processed. There is usually a fee associated with obtaining checks and processing them, but often banks subsume these fees into account fees. Checks are somewhat reliable, but check fraud is common. 

To compare, an ACH transfer is similar to checks except in that the actual check form is never used. It differs from a check because you can provide a check to anyone in the world and the check can be cashed (even if it is cashed at a check-cashing business) as long as it is originally deposited in U.S. dollars. 

An ACH transfer is typically done online, which is different from the check process. However, even if the check is digital (eCheck), then the process still differs because the check goes directly from one bank (account) to another as opposed to going through the ACH Network. Minimal fees are associated with each transaction, and both transactions can take from one business day to four business days to completely process.

Unlike a check, an ACH transaction can be processed in an ACH API, which provides users with a lot of functionality in terms of how money is being sent.

The Basics of the ACH Network

The ACH Network allows secure payments to be sent between banks and individuals in the United States. However, because of the restrictions placed on the ACH network in the form of protection, sending an ACH payment is not always accessible.

ACH payments are a secure payment method used regularly for things like direct deposit or paying a bill, but you would not use it to pay for goods or services at the POS. 

If you’d like to learn more about the ACH Network, then visit Sila’s Guide to the ACH Network.