Automated Clearing House (ACH) is an electronic payment system used by financial institutions for financial transactions.
The ACH payment system is governed by The NACHA Operating Rules and the Federal Reserve Bank. The ACH system was created to reduce the use of paper checks by consumers and financial institutions and the automated system also allows for faster processing than paper processing. The ACH accomplishes this by forming a vast network that connects banks from all over the country. ACH processes large volumes of credit and debit transactions in batches. “ACH transactions are then accumulated and sorted by destination for transmission during a predetermined period”1.
How ACH Works
The ACH transaction begins when an entity called a Receiver, authorizes another entity referred to as the Originator to issue ACH debit or credit to an account. A Receiver is “an individual, corporation or other entity that has authorized an Originator to initiate a credit or debit entry to a transaction account held at an RDFI (Receiving Depository Financial Institution)”1. An Originator is “any individual, corporation or other entity that initiates entries into the Automated Clearing House Network”1.
The Uses of the ACH
The ACH network enables the following payments:
- Direct Deposit of payroll, Social Security and other government benefits, and tax refunds
- Direct Payment of such consumer bills as mortgages, loans, utility bills, and insurance premiums
- Business-to-business payments
- e-Commerce payments
- Federal, state, and local payments
This article covered the basics of this electronic payment system. ACH has changed how payments are received in a dynamic way. For more information about ACH or Automated Clearing House please refer to the links in the sources section below. These sites are excellent for learning more about ACH more in depth. More specifically, these links cover how ACH works for individual institutions in detail.
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