Within reACH: Understanding the Automated Clearing House Network
Hello, class! Welcome to ACH 101, I will be your instructor. Please take your seats. Hey—no paper airplanes, please.
Today we are going to talk all about the ACH Network. Can anyone tell me what that is?
Is that what The Walking Dead is on?
Close…You’re thinking of the AMC Network.
That’s what Duke and Clemson are in, right?
That’s the ACC Conference.
No, the ACH Network is an electronic network of financial institutions in the United States used for electronic payments and money transfers. The ACH Network moves trillions of dollars and processes billions of transactions every year. It provides a huge benefit to businesses that need to move money.
Don’t all businesses need to move money in one way or another?
Exactly, the ACH Network is incredibly important. Today we are going to learn what it is, how it works, why it benefits businesses and, most importantly, how businesses can leverage Dwolla to use the ACH Network.
I’m sorry, did you say Dwolla? What’s that?
Excellent question! Dwolla is an API specifically designed to connect businesses to the ACH Network. But we’re getting ahead of ourselves. We’ve got a lot to cover so let’s get right to it, shall we?
“...once you decide to go with ACH, Dwolla is the only game in town.”
So, let’s run over a few of the basics.
The Automated Clearing House Network is a network of banks and financial institutions that processes more than 25 billion transactions each year. This network is how banks and credit unions in the United States move funds between bank accounts. It’s an electronic system that has formed the foundation of the United States payments industry since its inception in 1972. ACH transactions are governed by both Federal Reserve Bank regulation and rules established by NACHA: The Electronic Payments Association, the nonprofit association that oversees the network.
The ACH Network moves an incredible amount of money—$43 trillion in 2017—from business accounts to personal accounts, from personal accounts to personal accounts, from business accounts to business accounts, and more.
And it’s growing.
According to a report by NACHA, the ACH Network handled nearly six billion transactions in the second quarter of 2018, a 6.2% increase from Q2 in 2017.
But how does it work?
An ACH credit or push transaction is initiated by the payer of funds and sends money to the receiving party. An ACH debit or pull transaction is initiated by the receiver of funds and pulls money from the paying party. In both cases, the ACH transaction is entered into the ACH payments system by an originator. The originator is responsible for obtaining the required authorization for the transaction.
The originator delivers the ACH transaction to its bank, called the ODFI or originating depository financial institution. The ODFI is liable for the action of its originator.
The ODFI forwards the transaction to its chosen ACH operator, either the Federal Reserve or the Electronic Payments Network. If the transaction is a “push”, the ODFI will also debit its customer’s account before forwarding the transaction onto the ACH operator. The ACH operator performs a switch role, passing the transactions on to the RDFI or receiving depository financial institution. If the transaction is a “pull”, the RDFI will debit its customer’s account upon receipt.
If the ODFI and RDFI use different ACH operators, the first operator switches the transaction to the second operator.
The ACH operators calculate net settlement totals for their banks on a daily basis. These totals are submitted to the Federal Reserve, which manages the actual settlement process using its National Settlement Service. After settlement, the ODFI or RDFI will credit its respective customer’s account based on the type of transaction—in a “push” transaction, the RDFI will credit its customer’s account, and in a “pull” transaction, the ODFI will credit its customer’s account.
No. Not at all.
Do you want me to go over it again?
Please don’t. Just give us a real world example in English, please.
Ok, let’s take Bill. Bill was just hired by an insurance company and on his first day he gave his employer his bank account information for the purpose of the direct deposit of his paycheck.
In this example, the insurance company is initiating a transfer to send money to Bill.
The insurance company sends the ACH entry to its bank which debits the insurance company’s bank account and forwards the entry to its ACH operator. The ACH operator passes the entry onto Bill’s bank which, after settlement by the Fed, credits Bill’s bank account.
This is an example of an ACH credit or “push” transaction.
Additionally, Bill has given his utility company his banking information and has authorized the company to pull funds directly from his bank account for his electric bill.
The utility company sends the ACH entry to its bank which forwards the entry to its ACH operator. The ACH operator passes the entry onto Bill’s bank which debits Bill’s bank account. After settlement by the Fed, the utility company’s bank credits its bank account.
This example is an ACH debit or “pull” transaction.
Direct deposits, automatic bill pays—those are all ACH transactions?
Exactly! Most electronic payments that are initiated by providing your bank account information—as opposed to a credit card—are ACH transactions.
So where does Dwolla come in?
Great question and we’ll get to it very soon, but there are still a few details to understand.
Is the ACH Network fast?
That’s a complicated question.
Many ACH transfers can be completed in one or two business days but that timeline is variable depending on transaction types, errors and the ACH’s batching process.
Batching process? You mentioned batches earlier. Can you explain those, please?
ACH transactions don’t happen in real time and are not instant. Banks send their files to the ACH Network in batches. If you put a letter in a mailbox, it doesn’t immediately begins its journey to the receiver, it waits in the mailbox until the mail person comes by.
The ACH Network is the same way.
If a bank sends its files at 11:00 a.m., 3:00 p.m. and 6:00 p.m., for example, an entry originated at 11:02 a.m. has to wait until 3:00 p.m. to be sent to the ACH Operator. An entry originated at 6:05 p.m. will wait till the next business day at 11:00 a.m. to be sent to the ACH Operator.
And there are other factors involved. Let’s go back to Bill and the utility company for a moment.
Let’s say the utility company needs to collect Bill’s heating payment of $100.
On Friday at 6:30 p.m., the company originates the transaction by sending the ACH file to their bank. However, the company’s bank sends their last batch at 6 p.m. so the file has to wait till Monday to be processed.
And this particular Monday is a bank holiday, and the file won’t actually be processed until Tuesday.
So now on Tuesday, the bank sends the company’s file to the ACH Operator.
If Bill’s payment information was entered incorrectly, if his funds were insufficient, if he hadn’t authorized the transaction in the first place or if there is another issue, a bank will issue one of more than 80 ACH Return Codes.
As you can see, there are a number of factors that can affect the ACH transaction—these were just a few of them.
Wait—if ACH transactions take time and may ultimately be reversed, why use the ACH Network instead of credit cards or checks?
I’m so glad you asked. That brings us to the very next topic.
There are many reasons why a business would want to use the ACH Network to move money. The main ones are time and cost.
Wait—how is time a benefit to ACH transactions? The process you just laid out seemed kind of slow.
You’re right, the example I made was a bit exaggerated but helpful for illustrative purposes. However, ACH transfer times are speeding up; NACHA recently allowed same-day processing, a feature that a third-party ACH API—like Dwolla—can leverage. But to address your question, time is relative.
I thought this was ACH 101, not Physics 101.
Right. Einstein wasn’t thinking of the ACH Network when he said that but it definitely applies here.
True, ACH transfers are not as fast or real-time as wire transfers but they can be AUTOMATED.
ACH transfers can be initiated manually for one-time payments, like a card or a check but in Bill’s example, he could pay his bill—and the company could get paid—with no one lifting a finger. Once Bill authorized the utility company to pull funds from his account, the payment happened on its own—and could continue happening monthly—automatically.
Automated processes reduce the number of staff needed for handling payments and allow employees to focus on more important work. Many companies send and receive hundreds of payments a month (or day); automating that process leads to more accurate record-keeping and more time spent on building or growing the business.
Who cares about a couple of processing days when the alternative is to spend that time processing checks?
Think about the time it takes to send out a paper bill or invoice, hoping it isn’t lost in the mail, hoping the receiver opens and pays it immediately and then waiting for that payment to come in.
Now Bill’s example doesn’t seem so slow, does it?
It still seems like credit card transactions would be faster.
And they are. But that speed comes at a price. Cards come with processing fees which ding a business every time they swipe a card. For businesses that process lots of payments, those fees add up quickly.
When you take into account the time and material of paper checks (which need to be reordered, by the way) ACH transactions cost about 10 times less.
Other transfers, depending on the type or whether or not they are expedited might come with fees but they are on average less than credit card fees. Wire transfers also occur immediately but cost even more than credit cards.
ACH transfers cost less but are they secure?
According to the 2016 AFP Payments Fraud and Control Survey, ACH debits and credits were the least-defrauded payment type in 2014. Unlike checks, ACH transfers can’t get lost or intercepted in the mail.
Integrate with confidence
I’ll sum up, and add a few more good reasons for the ACH Network. ACH transactions:
- Are more cost effective than credit cards or wire transfers
- Cost less and save time compared to using paper checks
- Generate no material like paper, ink or shipping energy
- Are easy to track through electronic record-keeping
Dwolla is a Des Moines, Iowa-based financial technology company that built the ideal payment platform for businesses to move money.
Dwolla offers an API—an application programming interface—for connecting to the ACH Network. An API allows two electronic entities to interact with each other.
Only banks or financial institutions can access the ACH Network directly. So for businesses needing to move money, they either need to build their own payment platform or integrate with a third-party API like Dwolla, which acts as an on-ramp to the ACH Network.
Dwolla isn’t a bank?
No, Dwolla is not a bank. Dwolla is a software platform that connects a business to the ACH Network so it can use it to initiate payments.
Why don’t businesses simply create their own connection to the ACH Network?
Payment platforms are complicated and extremely difficult to build, so Dwolla does the heavy lifting.
You could also build your own car to take advantage of the highway system but it’s easier and ultimately more cost-effective to let Ford or Chevy do that for you. Between finding the correct parts and spending the time putting the parts together, making sure your car is in compliance with regulations and is street legal—all while assuming that you know how to build a car in the first place—it’s better to just go to the dealership.
Dwolla has a payments platform that is reliable and ready to use. So, businesses that integrate with Dwolla gain a partner that connects them to the reliability and efficiency of the ACH Network without having to build it themselves.
Through Dwolla’s white-labeled API, business owners can connect to the ACH Network while customizing to keep their brand at the forefront.
Hold up, hold up—what’s a white label?
If you go to a coffee shop and get a to-go cup, it’s likely that the coffee shop bought the cups from a different company and put their own branding on it.
That’s a traditional example of what a white label product is. Dwolla, as a software, operates slightly differently while keeping its customers’ branding at the forefront.
Going back to Bill and the utility company—the utility company has thousands of customers and therefore needs to process a large volume of payments with regularity. To save money on fees and to save time by automating, the company needs to connect to the ACH Network and uses Dwolla to do so.
When Bill pays the utility company, checks his records online or otherwise interacts with the company electronically, he primarily sees the utility company’s branding. He doesn’t go to a third-party site, he mostly interacts with the utility company even though part of their interaction is powered on the back-end by Dwolla.
An insurance company relies on computers to get their work done but they don’t build the computers because their expertise is insurance, not motherboards and circuits. Most businesses aren’t experts in the ins and outs of the complicated ACH Network process so they work with Dwolla for Dwolla’s expertise and efficiency in connecting to the ACH Network.
So Dwolla doesn’t just connect businesses to the ACH Network?
There’s more to it. Dwolla offers a number of products for businesses with differing needs. Along with access to the ACH Network, the Dwolla Platform comes with a number of benefits.
With Dwolla’s Scale and Enterprise tiers, you will have direct access to Dwolla’s engineers who know the API inside and out, plus a dedicated account manager to ensure your integration meets all of our integration requirements
Dwolla’s security team uses iterative security, meaning we evolve with technology and risks by focusing on the platform, our people and our culture of security
Dwolla offers predictable pricing so you can plan for the future
Dwolla’s API keeps your trusted user experience at the forefront
Stop sending paper checks and use Dwolla’s dashboard to send funds
Use Dwolla to connect your business with the U.S. banking system
Dwolla really allows us to scale and not worry about that part of our business. If you have a lot of customers that you need to pay, I don't know if there's a better solution than Dwolla. Having our payments done programmatically has worked really well for us.
This all sounds good but is there any practical way to see how Dwolla works?
Absolutely. Dwolla offers a sandbox environment as a replica of Dwolla’s production environment. The sandbox is flexible to the point where it’s possible to test out a single endpoint or effectively build out an entire application.
You can create an account anytime and test how Dwolla works within the sandbox.
Further, Dwolla offers a wealth of documentation to help developers or other users understand the API.
If the sandbox is considered the vehicle—a functional application that facilitates the testing of ACH transfers—then the developer documentation serves as the roadmap, leading you during development.
Explore the Dwolla Sandbox
Get your hands dirty in our testing environment.
Dwolla splits its developer documentation portal into four sections:
- Guides – Step-by-step instructions for getting developers up and running as quickly as possible
- API Docs – A technical breakdown of all our endpoints with code examples
- Resources Articles – In-depth looks at certain features and best practices
- SDKs – Helper libraries simplify the process of integrating with Dwolla’s API
What kinds of businesses use Dwolla?
All kinds of businesses with all kinds of different needs. What Dwolla’s customers have in common is that they need to initiate transactions efficiently and they are forward-thinking.
For example, Rally Rd. is a free app that allows a user to easily invest in individual, blue-chip collector automobiles.
When the company was looking for a payment platform, Chris Bruno, Rally Rd. CEO and co-founder, said he wanted something tied directly to a bank account and didn’t want to accept credit cards. Dwolla built a custom solution for them.
GOAT is an online shoe marketplace that needs to send and receive payments to both buy and sell sneakers. Dwolla helps them do that.
There’s a company that facilitates the rental of privately-owned boats. There’s an app that allows users to round up purchases to save for travel. There’s a restaurant delivery platform that needs to accept payments from users and payout couriers. Dwolla works with many kinds of businesses that want to save time and money on their payments.
Ok, well, it looks like our time is up. I hope you all have enjoyed this brief overview of the ACH Network and how Dwolla helps businesses connect to it. Now, you’re ready to use Dwolla to facilitate efficient automated payments. Thank you.
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Thanks for reading.
Dwolla put that technology layer in the way. And it looks like it’s coming from us, with our look and feel so customers always feel like they are in our environment.