The ACH Network allows banks to work with one another in debiting, crediting, and transferring money without having to build and manage a network of connections themselves. Instead NACHA (National Automated Clearing House Association) governs the rules and regulations of ACH to provide clarity and cohesion amongst the various institutions using ACH.
ACH is a critical ingredient in many people’s financial lives although they might not know it. When you receive your paycheck from your employer directly in your bank account, pay your utility bill, or receive a tax refund from the United States government, that’s ACH at work.
History of ACH
In its infancy in the early 1970s, ACH was primarily used as a more scalable, secure way to manage payment and payroll. Paper checks were too cumbersome and difficult to track. A number of check clearing houses banded together with the federal government to try and build more automated forms of payment that could be used nationwide. With a regulated, national network of automated clearing houses, U.S. citizens and businesses could buy goods, get paid, and send payments much easier and much faster. In 1974, NACHA was founded to regulate ACH as it still does all these years later.
How do ACH payments work?
So, how do ACH transactions actually work? There are two types of transactions: debits and credits. ACH debits let you pull money from another account and ACH credits let you push money. The ACH network processes both types similarly.
Let’s say you just bought insurance for your car and need to make monthly premium payments. You provide your bank account information to the insurance company so that they can debit the premium payment amount from your account automatically. On the day your premium payment is due each month, the insurance company’s bank will automatically create an ACH entry, requesting to withdraw the funds they’re owed from your bank account. That request is forwarded to an ACH operator, the third party managing requests and settlement of ACH credits and debits between banks. There are two ACH operators in the US - the Fed and the EPN.
The ACH operator sends a request to your bank from the insurance company's bank to collect money for the premium payment from your account. Those ACH requests are batched and processed in bulk. Your account is then debited. Once that debit is cleared by the operator, the payment is settled and the money arrives in the insurance company’s bank account. A typical ACH transactions takes 2 - 3 days to clear. However if you use same-day ACH or RTP, transactions can get cleared on the same day. Dive deeper into how ACH works with this guide.
How does ACH compare to other payment methods?
When comparing payment methods, you need to consider their speed, cost and coverage. Speed is typically measured by settlement time, or how long it takes for funds to move from the originating account to the receiving account. Cost is measured per payment and coverage refers to how many banks and financial institutions in the US support the payment method. The direction supported by the method is also important. Some methods like ACH support both pulling (debiting) from and pushing (crediting) funds to a counterparty's bank account, while others like Wires only support pushing.
Here's how ACH and same-day ACH compare to Wire Transfer and RTP, two other prominent electronic payment methods in the United States.
Note that the costs per payment for each method are in approximate ranges. In practice, they vary significantly depending on your bank, transaction volume, average transaction size and other factors.
To learn more about costs, coverage and speed, take a look at these articles:
- Which banks have Real-Time Payments?
- Why Are Wire Transfers Expensive?
- The Fastest Ways to Send a Payment