Have you ever heard the term ACH transfer?
Wondering what it stands for? ACH refers to the automated clearing house. If you live in the United States there’s a pretty good chance that you’ve used ach transfers in some form or fashion. They are quick, convenient, and cheap, making them a favorite among people looking to transfer money.
ACH transfers are responsible for huge amounts of cash transfers from one party to another. Increasingly, ACH payment is being used in lieu credit and debit card payments. The payment system offers many benefits, such as being secure, cheap, and easy-to-use once set up.
Historically, ACH payments were very popular for mortgage payments, direct deposits from employers, paying insurance premiums, and many other things. Lately, this payment has become increasingly popular for point-of-purchase payments and other consumer activities.
The ACH system is an electronic system that allows entities, organizations, and even individuals to quickly and easily send payments to one another. The system was set up to reduce the need and reliance on paper checks, which can take days to transport and process.
The “Originating Depository Financial institution” or ODFI, which can be a bank or another organization, initiates the payments. The money is then sent to another institution and placed in the appropriate bank accounts. For example, Acme Business might send a direct deposit payment to Jon Doe and then have the money deposited into his account. This is much quicker and easier for both parties than issuing a check.
Who Operates The ACH System?
There are two primary payment processing organizations. First, there is the Federal Reserve, and second there is “The Clearing House” (clever name, right?). These two organizations handle the ground work of maintaining and facilitating the ACH system.
ACH payments are processed in batches, so this payment system might not be as quick as direct payments, but in most cases the delay is very minor.
These two organizations are responsible for facilitating the transfer of nearly $40 trillion (yes trillion, not billion) dollars worth of payments per year (yes, per year). To put that into context, the United States’ entire gross domestic product is worth less than $20 trillion dollars. Together, the two organizations process about 22 billion transfers per year.
Given this huge volume of transfers it’s pretty amazing that the ACH system works at all. It’s even more amazing that the system is so secure, effective, cheap, and quick.
Who Is In Charge Of The ACH System?
The Federal Reserve Banking system is the largest single ach servicer, processing some 60 percent of all payments. The Federal Reserve uses the FedACH system in order to process these payments. Together with the National Automated Clearing House Association, the Fed oversees most of the regulations of the ACH system.
Then there is the NACHA, or National Automated Clearing House Association, which counts more than 11,000 members in its ranks. Many of these members being banks and other financial institutions. It is a not-for-profit organization and it is not directly responsible for facilitating transfers and direct activities. Instead, it works with the government to set the rules to govern the system.
Of course, most consumers and even business mangers or investors don’t really need to know the details of the ACH system. It’s good enough to know that the ACH system is one of the fastest, cheapest, and most secure systems of payment in the world. So if you need to make a payment or figure out a way to accept payments make sure you consider this system!
We hope this answered any questions you might have about “what is ach?” The system might sound a bit complicated and in truth it is pretty complicated. But for most of us it’s good enough just to know that the automated clearing house works, and it works well!