ACH - An overview

ACH

The automated clearinghouse (ACH) is an electronic payments network that allows for the clearing and settlement of debit and credit transactions among financial
institutions. Only financial institutions may have direct links to the ACH, and, through
them, more than 3 million businesses and 100 million consumers originate and receive
ACH transactions.

The ACH was created in the mid-1970s as part of the government’s
efforts to begin dispersing electronically the burgeoning number of government payments
(such as Social Security). Since then the ACH has experienced continued growth. The
network is governed by the Operating Rules of the National Automated Clearinghouse
Association (NACHA – The Electronic Payments Association).

There are currently three ACH Operators –
the Federal Reserve,
Electronic Payments Network (EPN; formerly the New York Automated Clearinghouse, or
NYACH), and
Visa.

Though EPN and Visa are both nonbanks, they are bank-owned.

For transactions sent through the Federal Reserve, settlement may take place in the
Federal Reserve account of each financial institution, or in the Federal Reserve account
of designated correspondents. EPN and Visa both ultimately rely on the Federal Reserve
for settlement.

In 2001, nearly 8 billion transactions, with a corresponding dollar value of $14
trillion, were sent over the ACH network. Of those, traditional uses of the ACH, such as
for payroll direct deposit and automatic bill payment, accounted for over 6 billion
transactions.

The transaction begins with a party providing authorization to an originator. That originator passes entries along to the financial institution that will serve as the originating depository financial institution (ODFI). The ODFI, in turn, sends entries to the operator, which edits the entries and distributes them to the appropriate receiving depository financial institutions (RDFI), and effects settlement. The RDFI posts the item(s) to the receiver’s account.

As with other payments system applications, the ACH network allows for the
participation of third-party processors on behalf of financial institutions. There are four
situations in which third-party processors may be participants in the ACH. In the first
scenario, a financial institution allows a corporate customer to send files directly to the
ACH Operator.19 In the second, a financial institution allows a consumer bill payment
service to collect and then disburse funds by sending files directly to the ACH Operator,
using its account at the ODFI as a pass- through account.20 The third scenario is one in
which the ODFI uses a correspondent financial institution for processing and/or
settlement.21 Finally, in the fourth scenario, the ODFI uses a correspondent financial
institution for processing but not for settlement.

Though the bulk of ACH transactions are generated for traditional payments, the
ACH network is also being used for emerging payments. For example, in 1999 NACHA
implemented rules that allow for the conversion of paper checks to ACH items. Two
such conversion opportunities are paper checks written at the POS and paper checks
received at remittance lockboxes.