National Cash Management Systems
Automated Clearing House ( ACH ) Industry
The Automated Clearing House (ACH) is a nationwide electronic
funds transfer (EFT) system that facilitates the inter-bank clearing of credit
and debit transactions and information exchanges among participating financial
ACH is one of the groups of processing institutions that have
networked to exchange (clear and settle) electronic transactions. According to
Computer World magazine, "The Automated Clearing House is a secure, private
electronic payment transfer system that connects all U.S. financial
institutions. Direct paycheck deposits and debit card purchases are two examples
of electronic fund transfers that go through this network." Other typical ACH
payments include salaries, recurring bill payments, and Social Security
"Executing ACH payments is cheaper and faster than processing
paper checks. Both business-to-business and business-to-consumer e-commerce
activities are becoming ever more dependent on the ACH system, thus forcing it
to evolve," notes Computer World.
According to the Federal Reserve Bank of New York, “In 2000,
over 4.8 billion payments with a total value of more than $12 trillion were
processed by ACHs through the Federal Reserve System.” See http://www.ny.frb.org/aboutthefed/fedpoint/fed31.html for more
How did ACH begin?
The ACH was conceived in the early 1970s, when it seemed that
the increasing volume of paper checks used by businesses and consumers to pay
their bills would eventually exceed the ability of the existing computer systems
to process and sort the checks efficiently. The Federal Reserve participated in
the early discussions and offered to provide the computer systems necessary to
process and settle the ACH items between the depository institutions.
In 1974, the regional ACH associations formed the National
Automated Clearing House Association (NACHA) to develop standards governing ACH
transactions. See http://www.nacha.org/default.htm for more information.
How does the ACH process work?
- An ACH entry starts with a Receiver
authorizing an Originator to issue an ACH debit or credit to an account. An
Originator can be a person, the gas company, your local cable
company, or your employer. Depending on the ACH transaction, the Originator must
receive written (ARC, POP, PPD), verbal (TEL), or electronic (WEB) authorization
from the Receiver.
- Once authorization is received, the Originator creates an
ACH entry to be given to a Payment Processor like NCMS.
- The Payment Processor then submits the data to an
Originating Depository Financial Institution (ODFI), who can be
any financial institution that does ACH origination.
- This ACH entry is then sent to an ACH
Operator (usually the FED).
- Then it is passed on to the Receiving Depository
Financial Institution (RDFI), where the Receiver's account is issued
either a credit or debit depending on the ACH transaction.