Automated Clearing House, otherwise known as (ACH), is an electronic network for financial transactions in the United States. The ACH system processes large volumes of credit and debit transactions in batches. Automated Clearing House credit transfers include direct deposit, payroll, and vendor payments. Its debit transfers, on the other hand, include consumer payments on insurance premiums, mortgage loans, and other kinds of bills.
Types of ACH Operators
There are two types of ACH operators. They include public FedACH and the privately-run Electronic Payments Network. In a situation where an ODFI and RDFI operate use different operators, the first operator will switch the transaction to the second operator. Now, both ACH operators are to calculate net settlement totals and submit the same to the Federal Reserve Bank. The Federal Reserve Bank in turn, manages the settlement process and regulates the ACH. However, this is not to be confused with the National Automated Clearing House Association (NACHA), a non-profit membership association that manages it’s administration.
How ACH Payments Work
As earlier stated, there are two types of ACH payments: ACH debit payments and ACH credit payments. While the ACH credit payment are initiated by a payer of funds, the ACH debit payments are initiated by the recipient. Payers and recipients on the other hand, are to authorize these transactions before they can be completed.
Now, whoever initiates the transaction is known as the originator. They are to send a request to a bank or financial institution, called the originating depository financial institution or ODFI. The ODFI at its end, forwards the transaction to an ACH operator, which routes the request to the Receiving Depository Financial Institution or RDFI. The RDFI thereafter, deposits funds to the receiver’s account, reconciling both accounts and bringing the process to an end.
Benefits of ACH Network
There are so many benefits that consumers who pay through the Automated Clearing House (ACH), can enjoy. Here they come:
- Electronic transactions, made through the Automated Clearing House (ACH), are fast, efficient, and reliable.
- Consumers do not have to pay any processing fees before using ACH. This makes it even more attractive than other transaction options.
- Consumers can easily keep records with electronic payments.
- With ACH, financial institutions create a trail without necessitating papers floating around with your bank information.
- No physical document to lose or damage.
- With ACH payments, fraud is very rare.
- Consumers, can automate transactions using the ACH network. What this implies is that, your payments always arrive on time, and you never forget to pay a bill.
The business also can benefit from the ACH network. Let’s see how:
- Digital transactions are easy to manage and consumers typically pay faster and regularly, if there is an automated option.
- It also eliminates the need for ordering, writing, and sending checks, the need for an extensive record-keeping system as well as the need to pay for postage.
- ACH speeds up the process along at a lower price point than its alternatives.
- For recurring payments, these savings really add up over time.
- It is more challenging to reverse an ACH payment, thus, you are more likely to keep funds in your account.
Disadvantages of ACH Network
Just like every other system, the ACH system also comes with advantages as well as disadvantages. Here, we will be looking at some of the drawbacks of the ACH network.
- One of the main drawback of the ACH network for consumers is the authorization requirement. This is because, any time you want to make or receive payments, you are to offer your account information.
- ACH payments are automated, thus, you may end up overdrawing your account when you are short on funds.
For Businesses, there are some similar challenges, and they include:
- Any error or unexpected withdrawal is more likely when others have a direct link to your bank account.
- Companies and corporations are expected to be more careful about fraud than consumers.
- They do not have the same level of protection.
- Companies and corporations, have to invest in time and software to enable ACH transfers.
- Participating banks and financial institutions are also required to pay annual and small transaction fees to cover administration costs.
- Larger businesses that have higher volumes, tend to pay less per transaction.
How Long Does an ACH Payment Take to Process?
ACH payments may take more than 3 working days to pop up in your bank account. Note however, that the time of day that you submit the ACH file to your bank is important. Note also, that the process may also fail for various reasons, this may result in potentially longer processing times.
Cost of ACH Payments
The ACH payment’s median internal cost for processing is $0.29. Notwithstanding, the total cost associated with accepting ACH payments differs, depending on a number of factors.
Examples of ACH Transactions
Here, we bring you the different ACH transactions that you can make. They include:
- Direct deposits from your employer or social security.
- Electronic payments to your credit card bill.
- Direct payments, like bill payments to utility companies, merchant transactions, consumer transactions, and government transactions.
- Bank account transfers between your own accounts as well as other banks or financial institutions.