how the automated clearing house ach works
the ach network is an electronic system that serves financial institutions to facilitate financial transactions in the u s it represents more than 10 000 financial institutions ach transactions totaled more than 80 1 trillion in 2023 by enabling over 31 billion electronic financial transactions 2the network essentially acts as a financial hub and helps people and organizations move money from one bank account to another ach transactions consist of deposits and payments including here s how the system works an originator starts a direct deposit or direct payment transaction using the ach network via debit and credit the originator s bank also known as the originating depository financial institution takes the ach transaction and batches it together with other ach transactions to be sent out at regular times throughout the day an ach operator either the federal reserve or a clearinghouse receives the batch of ach transactions from the originating institution with the originator s transaction the ach operator sorts the batch and makes transactions available to the bank or financial institution of the intended recipient also known as the receiving depository financial institution the recipient s bank account receives the transaction thus reconciling both accounts and ending the process changes to nacha s operating rules in march 2021 expanded access to same day ach transactions which allows for same day settlement of most if not all ach transactions 3special considerationsthe ach payment system is offered by nacha formerly known as the national automated clearing house association it s a self regulating institution the ach network s history dates back to 1968 but wasn t officially established until 1974 4this network manages develops and administers the rules surrounding electronic payments the organization s operating rules are designed to facilitate growth in the size and scope of electronic payments within the network types of ach transactions include payroll and other direct deposits tax refunds consumer bills tax payments and many more payment services in the u s and internationally advantages and disadvantages of the achbecause the ach network batches financial transactions together and processes them at specific intervals throughout the day it makes online transactions extremely fast and easy nacha rules state that the average ach debit transaction settles within one business day and the average ach credit transaction settles within one to two business days the use of the ach network to facilitate electronic transfers of money has also increased the efficiency and timeliness of government and business transactions more recently ach transfers have made it easier and cheaper for individuals to send money to each other directly from their bank accounts by direct deposit transfer or e check ach for individual banking services typically took two or three business days for monies to clear starting in 2016 nacha rolled out in three phases for same day ach settlement phase 3 launched in march 2018 requires receiving depository financial institutions rdfis to make same day ach credit and debit transactions available to the receiver for withdrawal no later than 5 p m they must be in the rdfi s local time on the settlement date of the transaction and are subject to the right of return under nacha rules 5originally the ach network only worked between u s accounts this meant you couldn t conduct any transactions meant for international transfers using this payment system however nacha eventually introduced international ach transactions iat which allow banks to transact internationally 6certain financial institutions may restrict the amount of money you can transfer if you want to do a large transfer you may have to do this in multiple steps for instance if you re transferring money to your child who s away in college you may be limited to transfers of 1 000 if they need more for books and rent you will be required to send more than one transfer some banks charge fees for ach transactions and this can be a per transaction fee if you re used to doing multiple transactions this can add up and put a big dent in your bottom line makes online transactions quick and easyincreases efficiency and timelinessprovides same day banking transactionsinternationally availablebanks may limit transaction amountsfees