10/3/2022
The North American economic system is made up of a wide variety of institutions that safeguard financial operations. Among his many tasks is to ensure that transfers and payments are made quickly, safely and without complications.
For this purpose, there is the Automated Clearing House (ACH). If you still do not know what it is or what it does, here we explain in more detail how it works.
What is the Automated Clearing House?
The Automated Clearing House represents a computer network that supports one of the largest payment systems in the world.
Founded in 1974, it is under the command of NACHA, which stands for the National Automated Clearing House Association, an autonomous institution that sets the standards, administration, management and development of the ACH network.
ACH is an electronic funds transfer system that handles various options, such as payroll, tax returns, consumer bills, direct deposits, tax payments, and more.
NACHA's role is to see the electronic payment system expand and grow to create a larger, more diversified, and more secure network within the United States.
How does the ACH network work?
The Automated Clearing House network is a financial system that helps streamline transactions for some 10,000 institutions within the United States.
For this reason, it handles approximately $43 trillion dollars a year, enabling more than 25 trillion electronic operations between banks, consumers, businessmen, suppliers and more.
Due to its nature, ACH network functions as a hub that makes it easy for people and organizations to move money from one bank account to another. The most common operations within the system are direct deposits or payments, which can be B2B, government and private.
We can describe the process as follows:
- The originator (individual, business, or federal entity) initiates a direct deposit or payment request through the system.
- The originator's bank, also known as ODFI (Originator Depository Financial Institution), takes the transaction and bundles it with other ACHs for processing at a certain time of day. Usually after 5 pm.
- An operator, either the Federal Reserve or a clearinghouse, then receives the ODFI batch that includes the transaction from the originator.
- Subsequently, the ACH operator classifies the grouped operations and makes them available to the entity that must receive the funds, called RDFI (Receiving Depository Financial Institution).
- The process ends when the receptor bank receives the transaction and both accounts are reconciled.
Due to how this network works, it must be understood that the operations are not effective almost immediately. NACHA operating rules state that deposits must be processed in a maximum of 1-2 business days, and debits the next business day.
However, updates to the system now allow almost all transactions to be processed in 24 hours or less.
On the other hand, it is important to know the dynamics of direct payment via ACH, which is divided into 2 basic categories:
- ACH credit. This modality represents the funds that are deposited in an account. For example, when you use your credit union or bank to pay the bill or when your employer pays your salary.
- ACH debit. In this case, the money is withdrawn from the account to cancel a service, a fee or a monthly payment. It happens when you establish an automatic charge to the account due to a mortgage, a basic service, a credit card, etc.
Benefits of the Automated Clearing House network
The ACH network is a system that has been growing and evolving to better manage the trend of electronic media over manuals. Reducing the use of paper and issuing checks represents greater savings for the planet. On the other hand, this system stands out for:
- Streamline government and business transactions, contributing to a more efficient management model.
- Make it easier to send money between individuals through e-check or direct deposit, which is also cheaper.
- Promote a financial exchange through a digital platform that continues to grow every year, adjusting to the needs of people and organizations.
- Adapt to the financial challenges represented by the increase in direct payment operations, B2B, international collections and information related to the support of a secure, fast and reliable platform.
In the Busconómico comparators we support any initiative that serves to speed up payment processes and contributes to boosting your personal finances. For this reason, we believe that the work of the Automated Clearing House (ACH) is fundamental to having a modern, customer-focused and efficient bank.
Español: Qué es la Cámara de Compensación Automatizada (ACH)