ACH | Automated Clearing House

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The Automated Clearing House (ACH) System

The Automated Clearing House system is the net settlement system used for electronic payments in the United States, and is used by most banks in the country. The ACH system is used for large-volume, low-value payments, such as payroll direct deposits, business-to-business payments, dividends, tax payments, and social security payments. The transfer of funds from the payer to the beneficiary can take several days, depending on the payer’s payment instructions. This system comprises a network of bank associations and privately-owned processing entities. The cost of an ACH payment is quite low, usually just a few cents per transaction.

The Automated Clearing House process flow is for a company to submit an electronic file to its bank (also known as the originating depository financial institution), containing payment information; the bank lets these submissions accumulate until the end of the day. At that time, it directly pays any of the authorized items with a book transfer if the recipient has an account with the bank. If not, the bank batches and forwards the remaining payment authorizations to its designated ACH operator (usually a regional branch of the Federal Reserve, or the Electronic Payments Network).

The ACH operator collects the ACH submissions from all of the banks in its region, and calculates the net settlement amounts that they must pay to each other. The ACH operator then aggregates the remaining transactions involving banks outside of its region, subdivides them by ACH region, and transmits them to the ACH operators responsible for conducting similar processing for their regions. Payments are made to the beneficiary’s banks (also known as Receiving Depository Financial Institutions), who in turn pay the beneficiaries. Payments between banks associated with different ACH operators are settled on a gross basis.

Automated Clearing House settlement timing is based on the payment date specified by the payer in the ACH file submitted to its bank. A company can deliver ACH debit instructions that are no earlier than one banking day prior to the settlement date, while ACH credits can be delivered no earlier than two banking days prior to the settlement date. If the ACH file is delivered too late to settle on the specified date, then the ACH operator will use the next business day as the settlement date.