Automated Clearing House

Banking in the United States
Monetary policy
Federal Reserve System
Regulation
Lending
Credit card
Deposit accounts
Savings account Checking account Money market deposit account Certificate of deposit
Deposit account insurance
Federal Deposit Insurance Corporation (FDIC) National Credit Union Share Insurance Fund (NCUA)
Electronic funds transfer (EFT)
ATM card Debit card Automated Clearing House (ACH) Bill payment Electronic Benefit Transfer (EBT) Wire transfer
Check clearing system
Checks Substitute checks Check 21 Act
Types of bank charter
Credit union Federal savings bank Federal savings association National bank State bank

Automated Clearing House (ACH) is an electronic network for financial transactions in the United States. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit payroll and vendor payments. ACH direct debit transfers include consumer payments on insurance premiums, mortgage loans, and other kinds of bills. Debit transfers also include new applications such as the point-of-purchase (POP) check conversion pilot program sponsored by NACHA – The Electronic Payments Association. Both the government and the commercial sectors use ACH payments. Businesses increasingly use ACH online to have customers pay, rather than via credit or debit cards.^{[citation needed]}

Rules and regulations that govern the ACH network are established by NACHA (formerly the National Automated Clearing House Association) and the Federal Reserve. In 2012, this network processed an estimated 21 billion ACH transactions with a total value of $36.9 trillion. Credit card payments are handled by separate networks.

The Federal Reserve Banks are collectively the nation's largest automated clearing house operator, and in 2005 processed 60% of commercial interbank ACH transactions. The Electronic Payments Network (EPN), the only private-sector ACH operator in the U.S., processed the remaining 40%. FedACH is the Federal Reserve's centralized application software used to process ACH transactions. EPN and the Reserve Banks rely on each other for the processing of some transactions when either party to the transaction is not their customer. These interoperator transactions are settled by the Reserve Banks.

Uses of the ACH payment system

• Bank treasury management departments sell this service to business and government customers
• Business-to-business payments
• Direct debit payment of consumer bills such as mortgages, loans, utilities, insurance premiums, rents, and any other regular payment
• Direct deposit of payroll, Social Security and other government payments, and tax refunds
• E-commerce payments
• Federal, state, and local tax payments

ACH process

An ACH transaction starts with a receiver authorizing an originator to issue ACH debit or credit to an account. A receiver is the account holder that grants the authorization. An originator can be a person or a company (such as the gas company, a local cable company, or one's employer). Accounts are identified by the bank's routing number and the account number within that bank.

NACHA Operating Rules require that ACH credits settle in one to two business days and ACH debits settle on the next business day. Thus, funds will typically show as "pending" in receiver's account on the next business day and cleared after the second business day.

Example 1: Alice buys a tee shirt at Jamie's Gift Shop with a check for $15. Alice is the receiver; her bank account will eventually receive the order to take $15 out of her account. Jamie's Gift Shop is the originator. The check, signed by Alice, authorizes Jamie's Gift Shop, Inc. to originate the ACH transaction, code POP. The check has Alice's routing number and account number.

Example 2: Candice has her paycheck at Delirium Designs deposited directly to her checking account. Delirium Designs is the originator, but cannot begin until Candice, the receiver, fills out a form for direct deposits, including her bank routing number and account number.

In accordance with the rules and regulations of ACH, no financial institution may issue an ACH transaction (whether it be debit or credit) towards an account without prior authorization from the Receiver. Depending on the ACH transaction, the originator must receive written (SEC codes: ARC, POP, PPD), oral (TEL), or electronic (WEB) authorization from the receiver. Written authorization constitutes a signed form giving consent on the amount, date, and frequency (if applicable) of the transaction. If oral authorization is not audio-recorded, the originator must send a receipt of the transaction details before or on the transaction date. An electronic authorization must include a customer being presented the terms of the agreement and typing or selecting some form of an "I agree" statement.

Once authorization is acquired, the Originator then creates an ACH entry to be given to an Originating Depository Financial Institution (ODFI), which can be any financial institution that does ACH origination. This ACH entry is then sent to an ACH Operator that passes it on to the Receiving Depository Financial Institution (RDFI), where the Receiver's account is issued either a debit or credit.

Example 1: Bob's Gift Shop, in its central office, turns the check into an ACH transaction that it submits to its bank, in this case the ODFI. This transaction reaches Alice's bank, in this case the RDFI, who debits (takes the money out of) Alice's account.

Example 2: Delirium Designs submits an ACH transaction to its bank, acting as ODFI. It traverses through the system to Candice's bank, who credits (deposits the money into) Candice's bank account.

The RDFI may, however, reject the ACH transaction and return it to the ODFI if, for example, the account had insufficient funds or the account holder indicated that the transaction was unauthorized. An RDFI has a prescribed amount of time to perform returns, ranging from 2 to 60 days from the receipt of the ACH transaction. However, the majority of returned transactions are completed within 24 hours from midnight of the day the RDFI receives the transaction.

Example 1: Unfortunately, Alice has been living beyond her means, and her checking account is down to $3.44, causing the ACH transaction for $15 to bounce. The original transaction has been completed, so Alice's bank (the RDFI) now prepares a new ACH transaction, code RCK, to grab the $15 back through the ACH system. For this transaction, however, Alice's bank is the ODFI and the Gift Shop's bank is the RDFI.

An ODFI receiving a returned ACH entry may re-present the ACH entry two more times for settlement. Again, the RDFI may reject the transaction. After which, the ODFI may no longer represent the transaction via ACH.

Example 1: Bob's Gift Shop still needs their $15. The easiest way is to just submit the original transaction again, hoping that enough money shows up in Alice's bank account so that it clears. After two tries, they have to contact Alice themselves to get their money.

Time frame differences can cause loss towards an 'Receiving Depository Financial Institution' when returned ACH entries are subject to the Regulation E. An example is for the ARC and POP SEC Codes, where an RDFI has only 60 days from the date of settlement to return an unauthorized debit, and the consumer has 60 days upon notification to dispute a transaction in his statement under Regulation E. The consumer can receive notification via a statement 30 days after settlement. With these time frames, it is possible that the 60-day period allowed for ACH return would expire even before the consumer's 60-day protection (under Regulation E) would expire, leaving the RDFI open to loss.

An ACH settlement on day 1 allows the RDFI to return the entry until day 60. However when a consumer receives a statement on day 30, under Regulation E, the consumer can dispute the transaction until day 90. The RDFI is at risk from day 60 to 90 due to the different timelines.

Another problem deals with compliance where the merchant presented with a check issues an ACH entry with SEC Codes ARC or POP. However, the merchant then fails to comply with the handling of the physical check and presents the physical check for payment as well. This causes a double-debit against a consumer account.

SEC codes

Some common Standard Entry Class (SEC) codes:

ARC

Accounts receivable conversion. A consumer check converted to a one-time ACH debit. The difference between ARC and POP is that ARC can result from a check mailed in whereas POP is in-person.

BOC

Back office conversion. A single entry debit initiated 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 ARC entries, BOC conversions require that the customer be present, and that the vendor post a notice that checks may be converted to BOC ACH entries.

CBR

Corporate cross-border payment. Used for international business transactions, replaced by SEC Code IAT.

CCD

Corporate credit or debit. Primarily used for business-to-business transactions.

CTX

Corporate trade exchange. Transactions that include ASC X12 or EDIFACT information.

DNE

Death notification entry. Issued by the federal government.

IAT

International ACH transaction. This is a new SEC code for cross-border payment traffic. The code will replace the PBR and CBR codes. The new code has been implemented since September 18, 2009.

PBR

Consumer cross-border payment. Used for international household transactions, replaced by SEC Code IAT.

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.

POS

Point-of-sale. A debit at an electronic terminal initiated by use of a plastic card. An example is using your debit card to purchase gas.

PPD

Prearranged payment and deposits. Used to credit or debit a consumer account. Popularly used for payroll direct deposits and preauthorized bill payments.

RCK

Represented check entries. A physical check that was presented but returned because of insufficient funds may be represented as an ACH entry.

TEL

Telephone-initiated entry. Oral authorization by telephone to issue an ACH entry such as checks by phone. (TEL code allowed for inbound telephone orders only. NACHA disallows the use of this code for outbound telephone solicitations unless a prior business arrangement with the customer has been established.)

WEB

Web-initiated entry. Electronic authorization through the Internet to create an ACH entry.

XCK

Destroyed check entry. A physical check that was destroyed because of a disaster can be presented as an ACH entry.

See also

• Clearing House Association, LLC
• Directo a México
• Electronic funds transfer
• Pan-European Automated Clearing House
• Universal Payment Identification Code
• Wire transfer

External links

• NACHA, The Electronic Payments Association
• ACH Rules Online
• Electronic Payments
• Federal Reserve Payment Systems
• Intro to the ACH Network?
• Federal Reserve's ACH Number Lookup
• Regulation E
• ACH Return Codes
• ACH Return Codes & Explanations
• ACH Terms and Definitions
• ACH vs Credit Cards