The Automated Clearing House (ACH) system

The Automated Clearing House System is much better known as ACH. The system is designed for high-volume, low-value payments, and charges fees low enough to encourage the transfer of low-value payments. The system is designed to accept payment batches, so that large numbers of scheduled payments can be made at once. Given its convenience and reliability, the ACH system has replaced check payments to a considerable extent.

The ACH system is designed for the domestic transfer of payments. It does not operate in other countries than the United States, though variations on the system have been installed in many countries. Some major banks operate portals that link a number of these ACH-like systems, so that a “global” system with ACH characteristics is currently operational.

ACH is a net settlement system, so settlement is delayed for up to two days, and there is some settlement risk. The system allows for the transfer of a limited amount of additional information along with payment instructions, though this information may be stripped away if a transaction is being transferred into a different national ACH system that does not allow for additional payment information.

A rare clearing and settlement feature is the ability of the ACH system to process debit transactions, so that a payee can initiate a payment by having cash extracted from the account of the payer. This is a particularly useful feature for recurring payments. Debit transactions can be refused, and many companies have instituted ACH debit blocks on their bank accounts to restrict the use of this feature.

ACH is primarily used to process payments from businesses to individuals. For example, ACH is used for payroll direct deposit payments, as well as for pension and annuity payments. In the reverse direction, businesses use ACH debits to extract a variety of payments from the bank accounts of individuals. There is also increasing usage of ACH for accounts payable payments from one business to another.

The basic process flow for the ACH system is as follows:

  1. The payer submits a file to its bank, containing a batch of payment information.
  2. The bank immediately pays any amounts directed to payee accounts within the bank, using an internal book transfer.
  3. The bank assembles all remaining payments into a batch and sends it to the regional ACH operator to which it has been assigned.
  4. The ACH operator nets the payment information submitted by the banks in its region and notifies them of the settlement amounts for which they are responsible.
  5. The ACH operator summarizes the remaining transactions involving payments to banks located outside of its processing region, and sends the summaries to the other regional ACH operators for further settlement, which are completed on a gross basis.
  6. When payments arrive in the accounts of payee banks, those banks forward the payments to payees, while the payers’ banks debit the payers’ accounts for the related and offsetting payment amounts.