Every year, more than $40 trillion worth of electronic payments are conducted through the Automated Clearing House (ACH).

Operated exclusively by the Federal Reserve and the Electronic Payments Network (EPN), more than ninety percent, or 23 billion financial transactions in all, happen over the national network annually.

Businesses in the United States can initiate ACH transactions through the Automated Clearing House network through banks or third parties, like Dwolla.

The ACH network was created in the early 1970s, and for more than forty years has been processing electronic financial transactions between businesses, the government and consumers. An ACH payment is not a direct bank to bank transfer. Rather, the originator initiates an ACH transfer and bank “A” initiates the ACH entry at the request of the originator by sending instructions for an ACH transfer to the ACH operator. The ACH operator sorts through the ACH transactions and will make the originator’s ACH transfer available to the bank “B.” The receiver’s account is debited or credited by bank “B”. The transfer of funds is not immediate, as the ACH operator accumulates transactions during the course of the day and then batch processes all of them at once.

Automated Clearing House Transactions

ACH transactions can be either debits or credits. Common examples are the direct deposit of payroll, social security benefits and tax refunds, or the electronic payment of bills such as mortgages and utilities. The transactions can be recurring or one-time payments, and consumers can initiate them through online bill pay systems, e-commerce sites, or over-the-phone.

In the example of a direct deposit payroll, your employer sends its payroll information to the ACH operator. The ACH operator settles the day’s transactions with the employer’s and your financial institution, so that funds are pulled from your employer’s account and deposited into your bank account. Your paycheck is just one of thousands of financial transfers handled that day, and you usually have access to the money the day after the “pull.”

Most banks and credit unions utilize the ACH system for their online bill pay services. This means that if you pay your bills through your bank’s online system, they are likely initiating an ACH transfer on your behalf, taking funds from your account and transferring them to the business you designate.

Benefits of the Automated Clearing House

As the largest, safest, and most reliable method of electronically moving money from one place to another, the ACH system has a number of benefits.

First, ACH transfers eliminate the need for paper checks, thus increasing transaction speed. Paper checks written for large sums of money can take up to ten days to clear, though this differs based on each financial institution’s policies. An ACH transaction eliminates much of this wait. Under the rules set by the National Automated Clearing House Association (NACHA), the governing organization for the ACH network, funds transfers must be completed in one to two business days. Debits are typically completed by the next business day, while credits can take up to two business days.

The ACH process is getting even faster. As of September 23rd of this year, the system now supports Same Day ACH Transfers. This upgrade to the system will allow some types of transfers to happen same-day.

Because of the efficiency of the system, payments processed via ACH also help businesses (including financial institutions) reduce costs. Wire transfers, another popular method of electronically sending money, require a person on each end to handle the transaction. With an ACH, the process is automated. Banks receive their ACH transactions from the ACH operator in batches that are processed all at once. This eliminates the need for a bank employee to “touch” each item individually.

ACH transfers are also typically low cost, offering a tremendous savings to companies when compared to the fees associated with credit cards or wire transfers. Credit cards charge merchants fees of up to 2.5% for each transaction. That means that every time you swipe your credit card, the merchant pays the credit card company to process that transaction. Wire transfers can cost between $10 and $35, and fees are charged to both the sender and the receiver.

Overall, the ACH system is safe, reliable, and fast…and getting faster. From direct deposit to online bill pay and e-commerce, it is the most popular way to move funds electronically for businesses, the government and consumers alike.

Dwolla makes it easy to use the Automated Clearing House system and facilitate ACH Transfers with our ACH API and business tools.


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