FedACH

How does FedACH work?

The Federal Reserve System (the “Fed”), composed of 12 banks and 24 branches, is the central banking system of the US government. FedACH acts as its ACH payment operator, handling millions of transactions each day.

FedACH is involved in a few steps of the transaction process. The bank that initiates the transaction, known as the Originating Depository Financial Institution (ODFI), sends an ACH payment to FedACH. Following a fast but thorough sorting process, FedACH delivers the payment to the bank on the receiving end of the transaction, or the Receiving Depository Financial Institution (RDFI). Finally, FedACH settles the payment by debiting and crediting the ODFI’s and RDFI’s settlement accounts.

Unlike real-time processing systems, FedACH doesn’t settle payments directly. Instead, FedACH tracks all transactions that occur within a specific transaction window, debiting and crediting accounts in batches after that window closes.

What are the origins of FedACH?

With support from the Federal Reserve, ACH emerged in the early 1970s. By the end of the decade, the Federal Reserve introduced a standardized national network of local ACH operators.

How did the Fed help grow this nascent industry? One key factor: technology. Though early ACH was partially driven by a handful of private operators, the Fed’s computing technology enabled unprecedented processing volume. In time, two parties came to dominate ACH: the Fed and The Clearing House, a private payment infrastructure corporation. They remain the nation’s only ACH operators.