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National Cash Management Systems, Payment Processing Service, McKinney, TX

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 institutions.

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 benefits.

"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 information.

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?

  1. 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.
  2. Once authorization is received, the Originator creates an ACH entry to be given to a Payment Processor like NCMS.
  3. The Payment Processor then submits the data to an Originating Depository Financial Institution (ODFI), who can be any financial institution that does ACH origination.
  4. This ACH entry is then sent to an ACH Operator (usually the FED).
  5. 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.