Hi David!
What a great question!
Let's start with defining ACH and a brief summary of the ACH's
history.
WhatIs defines the Automated Clearing House thusly:
"Automated Clearing House (ACH) is a secure payment transfer system
that connects all U.S. financial institutions. The ACH network acts as
the central clearing facility for all Electronic Fund Transfer (EFT)
transactions that occur nationwide, representing a crucial link in the
national banking system. It is here that payments linger in something
akin to a holding pattern while awaiting clearance for their final
banking destination."
Automated Clearing House
http://whatis.techtarget.com/definition/0,289893,sid9_gci214632,00.html
Here's a short and sweet summary from HowStuffWorks.com:
""ACH" is short for "automated clearing house." This bank terminology
means that a person or business is authorizing another person or
business to draft on an account. It is common for fitness centers and
other businesses to ACH a monthly membership fee from member accounts,
and many small businesses use ACH for direct deposit of paychecks."
How ATMs Work
http://money.howstuffworks.com/atm4.htm
There's actually a teensy bit more to it than that, but it's a very
good, bare bones explanation.
The Automated Clearing House (commonly, but incorrectly referred to as
"Automatic Check Handling") was first established in California in
1972, by a joint effort between banks and the regional Federal Reserve
to facilitate paperless check transactions. As news of the success of
this first association spread, more ACH associations were established,
with agreements made between the associations and their corresponding
regional Federal Reserve Banks to operate regional ACH networks.
The National Automated Clearing House Association was established in
1974 to coordinate efforts to develop a nationwide ACH network,
ultimately succeeding in 1978, when all ACH networks nationwide were
electronically linked.
In 1980, the ACH Network was changed slightly by the passage of the
Monetary Control Act, which allowed for private sector ACH Operators
to compete with the Federal Reserve Bank. There are now three
recognized private sector ACH Operators: American Clearing House
Association, the New York Automated Clearing House, and VisaNet ACH
Services. It's expected that more private sector clearing houses will
emerge in the near future. Currently, the FED ACH Operator (Federal
Reserve) handles more than 85% of ACH transactions.
The ACH Network is what is responsible for allowing such services as
online bill pay, direct deposit, and direct debiting, and has proven
to be a viable, faster and more cost effective alternative to paper
check processing. It consists of more than 12,000 financial
institutions, 650 industry councils, and a network of regional ACH
associations, and is governed by NACHA - The Electronic Payments
Association in Herndon, Virginia.
ACH History
http://web.archive.org/web/20020107225724/http://www.paymentsystems.org/achhist.htm
Perhaps the easiest way to explain how the ACH system works is to
start with a couple diagrams:
How does the ACH network work?
http://www.gsb.com/images/business/ach.gif
ACH Network
http://www.openecho.com/ach.ht1.gif
Those probably aren't terribly helpful in and of themselves, but I
asked the nice ladies at National City Bank (Lewis Ave. Branch,
Toledo) to explain an ACH transaction in layman's terms. They were
happy to oblige!
Let's say for a moment that you have your car payment deducted from
your checking account each month, because you hate writing checks and
want to make sure every payment is on time. You authorize your lender
to deduct the amount on a specific day of the month...say, the tenth
of each month. Let's call that amount $500 (wow, nice Jeep!).
On the tenth of the month, your lender (the Receiver) tells his biller
(the Originator) to send a request to your bank to transfer $500 from
your bank account to the lender's account, per your written payment
agreement.
The Originator sends this information to your bank (Originating
Depository Financial Institution), which deducts the amount from your
account and sends the information on to the ACH Operator (typically a
Federal Reserve Bank, but not always). The amount is still in your
account, but no longer available to you, and is typically flagged as a
"pending ACH debit". Essentially, it's a hold on those funds.
The ACH Operator notes that the ODFI is sending $500, the lender is
receiving $500, and makes the proper transaction notations (much like
ledger entries). The ACH then sends the information to the lender's
bank (Receiving Depository Financial Institution).
At this point, no money has actually changed accounts. It's all still
hypothetical. Remember those ledger entries? It's all digital right
now, until accounts are settled up and the payment is "cleared".
The lender's bank transfers the amount to the lender's account, but
doesn't make it available yet. It will be listed as a "pending ACH
transfer". Once the RDFI receives the information, the accounts are
reconciled, verified to have sufficient funds to complete the
transaction ("cleared"), and the money is officially deducted from
your account and deposited in your lender's account ("settled"). (In
other words, the "pending" flags are removed, thus moving the
transaction from the hypothetical to the complete.)
Further explanation of "settling", including a change in when the
transaction is considered final, is reviewed in these documents from
the Federal Reserve Bank:
A Letter on SDF
http://www.frbservices.org/Retail/pdf/ACHfinalityLetter.pdf
Settlement Day Finality
http://www.frbservices.org/Retail/pdf/finality_pressjun25.pdf
Obviously, the specific details of how transactions are recorded and
finalized are not going to be available to the general public, in
order to secure the integrity of the system, prevent hacking, and
safeguard the account information that passes through the system every
day.
Though it sounds complex, it's actually a simple and relatively quick
process, requiring anywhere from a few hours to complete the entire
transaction to just two or three days in the event of a large amount
of traffic (backlog) through the regional clearing house. It's also
important to note that the transactions do not happen in real time -
participating institutions receive "output files" (basically updates
and transaction notations) just four times a day:
Four FedACH SM Distributions Per Day Beginning September 19, 2003
http://www.frbservices.org/Retail/pdf/FourDistributionLetter.pdf
Reminder
http://www.frbservices.org/Retail/pdf/FourFileDeliveryReminder.pdf
So who uses the ACH network? Well, you do if you have direct deposit,
use online bill pay, have automatic billing with your utility
provider, or avail yourself of services like BillPoint or PayPal. In
fact, according to Business Cashflow Solutions, 43% of Americans use
ACH payments for at least one recurring payment!
The variety of institutions and individuals who use the ACH Network
might surprise you:
-- Mortgage Lenders
-- Insurance Companies (Home, Life, Auto)
-- Auto Lenders
-- Mutual Funds and Investment Companies
-- Newspapers/Magazines (for subscriptions)
-- Utilities
-- Long Distance Providers
-- Cellular Service Providers
-- Internet Service Providers
-- Cable/Satellite TV Providers
-- Health Clubs
-- Credit Card Companies
-- Non-Profits and Fundraisers
-- Zoos and Museums (membership fees)
-- Online Payment Services (BillPoint, PayPal)
-- Employers (for Direct Deposit)
-- The IRS (for Direct Deposit of refunds or automatic payment of
taxes owed)
-- State Departments of Taxation
-- State Bureaus of Motor Vehicles
-- State Attornies General (for payment of liens owed the state)
-- State Highway Patrols (speeding on the Turnpike is hazardous to
your bank account!)
-- County Courts (for payments of fines, liens, fees)
-- Child Support Enforcement Agencies
-- The US Social Security Administration
-- Consumer Collection Agencies (so you may pay your obligation
quickly)
It might surprise you to know that many websites which require
membership for viewing also use the ACH system, as do "check by phone"
companies, and some landlords will accept rent payments via ACH.
ACH is perhaps best known for Direct Deposit. According to the
Mid-America Payment Exchange, ACH is used for Direct Deposit by 70% of
all Social Security benefit recipients, 46% of the U.S. workforce, and
96% of all Federal Government employees. Direct Deposit saves time
and money for both employers and employees, making it one of the
fastest increasing services of the ACH Network. Some financial
institutions will also waive your account fees if you use Direct
Deposit!
I used quite a few sources while preparing your answer, many of which
will provide further details about the workings of the ACH Network,
such as the addresses of regional associations, Federal Reserve
branches, and regulations associated with electronic transactions.
Sources:
Misconceptions about Automated ACH/EFT Payments
http://www.bizcashflow.com/consumercenter/apmisconceptions.htm
FAQs- ACH/EFT Payment
http://www.bizcashflow.com/consumercenter/apfaqs.htm
Office Banker FAQs
http://www.gsb.com/business/OB/obFaq.html
What is ACH? The Automated Clearing House (ACH) Network
http://www.openecho.com/ach.html
ACH/EFT
http://www.absinow.com/faq.htm
A Consumer's Guide to Direct Deposit
http://www.bos.frb.org/finsvcs/html/services/ach/pdf/ddguide.pdf
A Consumer's Guide to Direct Payment
http://www.bos.frb.org/finsvcs/html/services/ach/pdf/dpguide.pdf
International ACH Service Manual
http://www.frbservices.org/Retail/pdf/IACH-ServiceManual.pdf
A Consumer's Guide to Electronic Bill Payment
http://www.bos.frb.org/finsvcs/html/services/ach/pdf/ebill.pdf
Commercebank Online Business
http://www.ozcommonline.com/projects/ach_qaweb/ach_geninfo.html
National EFT
http://www.nationaleft.com/faqarct.html
Payment Systems Resources
http://www.ny.frb.org/bankinfo/payments/master2.htm#ach
Regional ACH Associations
http://www.paymentsystems.org/content/payment_associations.htm#
ach history
http://web.archive.org/web/20020107225724/http://www.paymentsystems.org/achhist.htm
Automated Clearing House (ACH) and Other ACH Services
http://www.merchantseek.com/ach.htm
ACH - a whatis definition
http://whatis.techtarget.com/definition/0,289893,sid9_gci214632,00.html
Automated Clearing House - Fed Points - General Publications -
Publications - Federal Reserve Bank of New York
http://www.ny.frb.org/pihome/fedpoint/fed31.html
NACHA Rules
http://www.nacha.org/ACH_Rules/ach_rules.htm
Direct Deposit and Direct Payment Information, Second Edition
http://www.nacha.org/OtherResources/Direct_Deposit_and_Direct_Payment_General_Information_-_2nd_Edition.pdf
Direct Deposit.org
http://www.directdeposit.org/
Electronic Funds Transfer Act
Act No. 322 of the Public Acts of 1978
http://web.archive.org/web/19990209181948/www.commerce.state.mi.us/fib/pca/eftact/eftfull.htm
MPX - Direct Deposit
http://www.mpx.org/Information/02conddp.htm
MPX - Direct Payment
http://www.mpx.org/Information/02conabp.htm
I hope this answer meets your needs. If you need further assistance
or feel you need a bit more information, please don’t hesitate to ask
for a clarification. I’ll be happy to help.
--Missy
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