Automated Clearing House (ACH) & Other ACH Services

The ACH Network is a highly reliable and efficient nationwide batch-oriented electronic funds transfer system governed by the NACHA OPERATING RULES which provide for the interbank clearing of electronic payments for participating depository financial institutions. The American Clearing House Association, Federal Reserve (“FED ACH”), Electronic Payments Network, and Visa act as ACH Operators, central clearing facilities through which financial institutions transmit or receive ACH entries. The ACHA (American Clearing House Association) is one of the three private sector ACH operators in the United States. The FED ACH is the only public sector processor and currently handles approximately 85 percent of ACH transactions between financial institutions.

The FED ACH is an electronic payment delivery system owned by the Federal Reserve Bank. It is most often used to process low-dollar repetitive retail payments. Financial Institutions that are members of the FED ACH System send batches of credits and/or debits into the system The system then sorts the items from all batches submitted and routes them to the appropriate receiving financial institution. The system is used primarily for pre-authorized recurring payments such as payroll, corporate payments to vendors, Social Security payments, insurance premium payments and utility payments.

The Presentment and Return Cycle:

The process of banks and/or ACH Processors submitting transactions into the ACH System is called “Presentment”. The initial time that a check is submitted into the ACH System (aka ACH Network) it is called a 1st Presentment. When the same item is returned, it is called a 1st Presentment Returned. If the returned item is Re-Presentable, this is followed by a 2nd Presentment, which if returned is called a 2nd Presentment Returned. If the 2nd Presentment Return is Re-Presentable, this is followed by yet a 3rd Presentment. If returned, this is called a 3rd Presentment Returned. Banks and ACH Processors are paid immediately on all items submitted, and are also charged immediately for all returns that come back to them.

Paper Checks versus ACH Transactions:

paper-checksA check is a paper demand draft on a bank account that a check writer can use to pay someone. A check that has been converted into an ACH transaction becomes a “truncated check”, or “electronic draft”. These electronic drafts are commonly called “items”, “transactions”, “debits”, “ach’s”, and “checks”. Technically, a check that has been converted into an electronic draft is no longer a check; however, colloquially language often still uses the term “check” to describe these transactions.

Paper Check Processing versus ACH Transactions Processing:

Paper checks and electronic truncated checks are processed through different clearing intermediaries. Paper checks are processed through the Federal Reserve Bank’s “Check Collection Services”; this system involves the merchant’s “collecting bank” sending all of their deposited checks to the local Federal Reserve Bank, which, in turn, sends the checks to the check writer’s “paying bank”. This is all done using actual paper items. The ACH Network consists of the FED ACH network and four private ACH Networks; these networks serve as intermediaries between the merchant’s bank and the check writer’s bank for the processing of “electronic items”, also known as “truncated checks”.

ACH versus EFT:

Debit and ATM transactions are processed through an “EFT” (electronic funds transfer) network that is set up to verify and debit funds in real time using an encrypted personal identification number for authorization purposes; these networks are connected to ATM Machines and Point of Sale terminals running debit-card and credit-card transactions. Some privately owned EFT Networks are PLUS, Star, Cirrus, and Interlink. Electronic checks are processed through the shared ACH Network that banks use for moving money between institutions; this system does not check funds availability in real time, and authorization is based on a signature or other authenticating means, just like paper checks. Electronic checks can be returned for insufficient funds.

The Other Players in ACH

Originator

Any individual, corporation or other entity (merchant) that initiates entries into the Automated Clearing House Network.

Originating Depository Financial Institution (ODFI)

A participating financial institution (merchant processing bank) that originates ACH entries at the request of and by (ODFI) agreement with its customers. ODFI’s must abide by the provisions of the NACHA Operating Rules and Guidelines.

Receiving Depository Financial Institution

Any financial institution qualified to receive ACH entries (check writer’s bank) that agree to abide by the NACHA Operating Rules and Guidelines.

Receiver

An individual, corporation or other entity (Check writer) who has authorized an Originator to initiate a credit or debit entry to a transaction account held at an RDFI.

History of ACH

First introduced in the early 1970s as a more efficient alternative to checks, ACH has evolved into a nationwide mechanism that processes electronically originated credit and debit transfers for any participating institutions nationwide. The ACH is a rapidly growing alternative to paper checks and handles billions of payments annually. Fed ACH is the Federal Reserve’s centralized application software used to process ACH payments.

The Automated Clearinghouse (ACH) Network is used by more than 20,000 participating financial institutions, over 725,000 corporations, and millions of consumers. In the twenty-five years since its inception, the ACH Network has grown to a national payments system processing over four billion payments annually. In 1998, nearly 5.3 billion ACH transactions were processed with a total value of more than $16 trillion. In 1999, more than 6.2 billion ACH transactions, valued at over $19.4 trillion, were transmitted through the network.

The Operating Rules of the National Automated Clearing House Association (NACHA) specify the formats for ACH transactions and define the rights, obligations and warranties of parties involved in ACH transactions.

Resources:

The Clearing House

FederalReserve.gov

NACHA – The Electronic Payments Association

Electronic Funds Transfer

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