What Is ACH And Why Is It Important?
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The nationwide electronic network for banking and financial transactions in the United States is known as the Automated Clearing House or ACH. The ACH system is a batch driven system that processes both debit and credit transaction. Billions of transactions are completed through the ACH each year amounting to trillions of dollars. These transactions do not include credit card payments, which are handled through separate networks. The ACH is governed by rules and regulations established by the Electronic Payments Association.
ACH Credits
Direct deposit from your payroll account and payments from vendors to your account are among the ACH credit transfers that occur. Deposit of your Social Security benefits, tax refunds and other government benefits are normally handled through the ACH now.
ACH Debits
In addition to payments on mortgages, insurance payments and other regular payments, direct debit ACH payments are increasingly being used by merchants to collect funds from their customers online instead of accepting payments from credit or debit cards. Tax payments at federal, state and local level can be made through the ACH. In addition, business to business transfers are routinely made through the ACH. There are some new applications being tested such as Point-of-Purchase checks that work much like a debit card, in that the withdrawal from your account happens immediately. The merchant doesn’t have to wait for your check to clear and there is virtually no chance having to try to collect an NSF check.
Fed ACH
Approximately 60 percent of the ACH transactions in the United States are processed by the Federal Reserve application software. The government ACH program is called FedACH. The balance of the government and commercial sector transaction processing is done by the Electronic Payments Network (EPN).
Transaction
Debit card transactions, business to business transactions. E-business transactions and tax payments are all handled through ACH
How a transaction works
Each debit or credit transaction begins with authorization to the Originator (the utility company or the employer, for example) from the account holder (Receiver) to issue either a debit or credit to the account. The authorization must be in the form of written, verbal or electronic approval to state the amount, frequency and date of the activity. A recorded telephone conversation or an ‘I agree’ statement on the internet are both forms of authorization statements.
ODFI
Upon receipt of the authorization, the Originator prepares the ACH entry and sends it to the financial institution. The ACH origination organization is known as the Originating Depository Financial Institution. The ODFI sends the transaction to the ACH Operator who sends it on to the Receiving Depository Financial Institution (RDFI) for the completion of the transaction in the account of the Receiver.
RDFI
The Receiving Depository has the option of rejecting and returning the transaction when there is an adequate reason such as insufficient funds in the account. However, there is a time limit during which the rejection and return must occur. The ODFI can present the transaction up to three times in total. An ODFI receiving a return of an ACH entry may re-present the ACH entry two more times, or up to three total times, for settlement. Again, the RDFI may reject the transaction. After which, the ODFI may no longer represent the transaction via ACH.
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