In the United States, the ACH Network is the national automated clearing house (ACH) for electronic funds transfers established in the 1960s and 1970s. It processes financial transactions for consumers, businesses, and federal, state, and local governments. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit for payroll, Social Security, and other benefit payments, tax refunds, and vendor payments. ACH direct debit transfers include consumer payments on insurance premiums, mortgage loans, and other kinds of bills.[1]
The rules and regulations that govern the ACH network are established by National Automated Clearinghouse Association (Nacha). In 2018, the network processed 23billion transactions with a total value of $51.2trillion.[2] Credit card payments are handled by separate networks.
The Federal Reserve's FedACH and The Clearing House Payments Company's Electronic Payments Network (EPN) are the two ACH operators in the United States.[3]
The ideas leading to the ACH arose in the late 1960s. One early predecessor was a US federal initiative used to help United States Air Force personnel get their paychecks on time.[4] The success of this initiative led to an expansion to other employees and the government adopted it as a major payroll standard.
Separately in 1968 a group of check clearinghouse associations set up The Special Committee on Paperless Entries (SCOPE) to build an automated payment system after concerns for the number of checks being cleared for payrolls.[5]
This led to the first ACH association, formed in California in 1972. Other regional ACH associations followed. The difficulty in compliance between different organizations led them to join to form National Automated Clearinghouse Association (Nacha) in 1974.
Nacha consolidated and added new rules which led to ACH. As computer and telecommunication technology advanced over the next few years, the system continued to develop. By 1978, electronic funds transfers were available.[6]
From the late 1980s through to the 2000s, the system continued to develop with a number of enhancements. In 2001, there was a major reorganization of Nacha which led to financial institutions insured by the Federal Deposit Insurance Corporation becoming direct members making it much easier for the ACH network to be used by banks; that same year internet payments also went into effect which would go on to be a big part of ACH payments.
For each ACH payment from a payor's bank account to a payee's bank account, there are effectively two ACH transactions created and transmitted, namely an ACH Debit transaction and an ACH Credit transaction. In the case of a payor and payee having an account at the same financial institution, there is only one ACH transaction, which is often called an "on-us" transaction.
The payee's sending institution creates, batches, and transmits an ACH debit transaction to the payor's receiving institution. The ACH debit transaction instructs the receiving institution to withdraw and transmit the funds from the payor's bank account to the sending institution. The receiving institution must send the return to the sending institution by the end of the following business day if it is unable to debit the funds from the payor's account, such if the account was not found, the account was closed, or the account was frozen. For an ACH debit transaction, the sending institution may be a third-party bank, rather than the payee's bank.
The payor's sending institution creates, batches, and transmits an ACH credit to the payee's receiving institution. The ACH credit transaction instructs the receiving institution to credit the funds to the payee's bank account. The receiving institution must send the return to the sending institution by the end of the following business day if it is unable to credit the funds to the payee's account, such if the account was not found, the account was closed, or the account was frozen.
For an ACH credit, the sending institution may not be a third-party bank, rather than the payor's bank.
There are two types of ACH settlements.
ACH debits and credits are transactions that are created, batched, and transmitted to an ACH operator, typically by way of a financial institution's connection to the ACH Network.
With next-day ACH, each ACH transaction is cleared overnight. The sending institution (called the Originating Depository Financial Institution) sends the transaction to the receiving institution (called the Receiving Depository Financial Institution). When the receiving institution receives the transaction, it has until the end of the next working day to send a rejection to the sending institution. If the sending institution does not receive a return from the receiving institution by the morning of the third business day, then the transaction is deemed to be successful.
Waiting for a timeout for two business days is an antiquated feature of ACH that lingers on from the 1960s when the ACH system was designed and implemented. It is not as quick as real-time payment networks. Consequently, ACH debit or credit transactions can take four working days to complete.
With same-day ACH, settlement can happen the same day.[7] The sending institution can transmit files to the receiving institution the same day, expediting the processing of ACH transactions. The receiving institution still has two business days in which to send a return, so there will still be a delay of two business days in same-day ACH debit transactions. On the other hand, ACH credit transactions can be credited on the same business day as long as the receiving institution receives the ACH transaction within the correct window.
Transactions exceeding $1,000,000 and international transactions are not eligible for same-day ACH.[8]
Nacha instituted same-day ACH in four phases. As of September 15, 2017, banks were required to accept debit requests in the same three settlement windows. As of September 23, 2016, financial institutions were required to be able to process ACH credit requests to add funds to an account in all three settlement windows. As of March 16, 2018, banks were required to make funds available as fully settled completed transactions by 5:00p.m. local time for ACH credit transactions processed in the day's first two settlement windows. As of March 20, 2020, the per-transaction limit was raised from $25,000 to $100,000. It was again raised to $1,000,000 as of March 18, 2022. [9]
Common Standard Entry Class (SEC) codes are as follows.
| Code | Name | Description | ||
|---|---|---|---|---|
| align=center | ARC | Accounts Receivable Conversion | A consumer check converted to a one-time ACH debit. The difference between an Accounts Receivable Conversion and Point of Purchase is that an Accounts Receivable Conversion may result from a check received by mail, whereas Point of Purchase must have been received in-person.[10] | |
| align=center | BOC | Back Office Conversion | A single-entry debit, initiated either at the point-of-purchase or at a manned bill-payment location, to transfer funds through conversion to an ACH debit entry during back-office processing. Unlike Accounts Receivable Conversion entries, a Back Office Conversion requires that the customer be present and that the vendor post a notice that checks may be converted to Back Office Conversion ACH entries.[11] | |
| align=center | CCD | Corporate Credit or Debit Entry | Used to consolidate and sweep cash funds within an entity's controlled accounts, or make/collect payments to/from other corporate entities. | |
| align=center | CIE | Customer Initiated Entries | Use is limited to credit applications where the consumer initiates the transfer of funds to a company for payment of funds owed to that company, typically through some type of home-banking product or bill payment service provider.[12] | |
| align=center | CTX | Corporate Trade Exchange | Transactions that include ASC X12 or EDIFACT information. | |
| align=center | DNE | Death Notification Entry | Issued by the federal government. | |
| align=center | IAT | International ACH Transaction | This is a SEC code for cross-border payment traffic to replace the PBR and CBR codes. The code has been implemented since September 18, 2009.[13] | |
| align=center | POP | Point of Purchase | A check presented in-person to a merchant for purchase is presented as an ACH entry instead of a physical check. | |
| align=center | POS | Point of Sale | A debit at an electronic terminal initiated by use of a plastic card. An example is using a debit card to purchase gas. | |
| align=center | PPD | Prearranged Payment and Deposits | Used to credit or debit a consumer account. Popularly used for payroll direct deposits and preauthorized bill payments. | |
| align=center | RCK | Represented Check Entries | When a physical check was presented and then returned because of insufficient funds, it may be represented as an ACH entry. | |
| align=center | TEL | Telephone-Initiated Entry | Oral authorization by telephone to issue an ACH entry, such as checks by phone. While a Telephone-Initiated Entry is allowed for all inbound telephone orders, it is allowed outbound telephone solicitations only if a prior business arrangement with the customer has already been established. | |
| align=center | WEB | Web-Initiated Entry | Electronic authorization through the Internet in order to create an ACH entry. | |
| align=center | XCK | Destroyed Check Entry | If a physical check was destroyed because of a disaster, it can be presented as an ACH entry. |