What is the ACH and when do I use it?

The automated clearing house is a widely used electronic payment processing network.

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If you’ve ever looked at your bank statement, you may have seen a transaction denoted with the label ACH credit or ACH debit. That means your payment was processed electronically by the automated clearing house, one of the largest payment processing systems in the U.S.

You’ve probably used the ACH network without knowing it. Here are some examples of the ACH at work:

  • Direct deposit from employers

  • Recurring bill payments

  • Bank-to-bank transfers

  • Vendor payments made by businesses

Using the automated clearing house saves people and businesses time and money. it was first conceived of in the 1960s as an alternative to paper checks, a common payment method at the time. A group of bankers in California anticipated that the technology to process the growing volume of checks might fall behind, and thought up a way to better conveniently move funds and accommodate the transferring of money.

How the ACH works

The automated clearing house uses a batch system to transfer money. When you initiate a transaction — either to transfer money to someone or send a bill payment — your bank or credit union will take the payment request and groups it with all the other requested ACH transactions from its customers.

Then it sends them all at once, in batches, to the ACH network. This might happen a few times during the day. The ACH operator sorts through the transaction requests and the bank moves your money to your payee. If you have insufficient funds , your payment may be declined and you may be charged a fee depending on your bank.

To complete an ACH transfer you will need the following information.

The ACH facilitates easy and convenient transactions. There’s no hassle of carrying or losing paper checks, and you’ll never miss a payment if you set up a recurring one through online bill pay. Businesses might also opt for payments through the clearing house, since the processing fees might be less than those incurred to process a credit card payment.

The ACH network is administered by the nonprofit Nacha.

Wire transfers vs ACH transfers

An ACH transfer is a common way to transfer money between banks. In fact, it’s how many bank-to-bank transfers are conducted. Wire transfers are not the same as ACH transfers. ACH transfers between banks are usually aren’t completed within the same day, but usually the following business day. Wire transfers often happen within hours, though they may take up to a full business day, too. (However, recent updates to Nacha operating rules will allow faster payments in the future.)

The speedy delivery of a wire transfer comes with a price — often a $30 to $40 fee. This is because each wire transfer is conducted individually, while an ACH transfer only happens in batches throughout the day as previously mentioned. (Read more about transferring funds between banks.)

An ACH funds transfer doesn’t usually have transaction fees, but this depends entirely on financial institution, so you’ll want to confirm with them. In addition, you can request a stop to an ACH payment, but wire transfers are irrevocable.

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Types of ACH transactions

The ACH Network isn’t only limited to bank-to-bank transfers; it processes other payments as well. There are two types of ACH transactions: direct deposit and direct payments, which can be further broken down into ACH debit and credits. We’ll list a few of the most popular examples of each.

Direct deposits

  • Payroll wages

  • Tax refunds

  • Pension and retirement distributions, as from a 401(k)

  • Dividend and interest payments

Direct payments

  • Funding a retirement investment account like a IRA

  • Recurring payments such as utilities

  • Mortgage payments

  • Tax payments

  • Insurance premiums

  • Subscriptions and membership fees, like a streaming service or the gym

  • Student loan or tuition payments

Direct payments can further be broken down into ACH debit and ACH credit.

ACH debit transactions authorize funds to be taken from your account, such as when you allow the recipient or payee, like your utility company, to transfer money out of your bank account. Typically this involves providing the payee with your routing number and bank account information.

With ACH credit transaction happens when money is deposited into an account — like receiving a payment from a vendor. You will be credited the money in your bank account.

Credits and debits are complementary to one another; if person transferring funds will see a debit, while the recipient will see a credit. Debits have faster processing time than credit; on the next business day, as per Nacha operating rules.

Is using the ACH safe?

All ACH transactions are generally safe. Federal consumer laws protect you from unauthorized debits from your bank account. Nacha operating rules also offer guidelines on risk management and fraud protection for businesses and financial institutions that utilize the clearing house network. If you think there’s been an authorized payment made with your account, contact your financial institution.

Federal Reserve regulation

ACH payment processing is regulated by the Federal Reserve. In fact the Federal Reserve regulates all electronic payments like wire transfers, as well.

Treasury law also regulates the ACH network, including how ACH payments are used by the federal government to buy government securities like Treasury bonds, pay taxes, and send tax refunds.