By: Mariah Young,

We mention the acronym ACH quite a bit on the Dwolla blog: ACH payments, ACH Payouts, and API for ACH. But I realize that this term may not be crystal clear for those who don’t deal in payments on a daily basis. We’re taking a step back to break down how ACH payments work.

What Does ACH stand for?

ACH stands for Automated Clearing House.

No, the Automated Clearing House is not a physical place; it’s an electronic network that allows banks and their customers  to send funds between one another in the United States. Basically, when you pay a bill online and opt to use a ‘bank account’ rather than a credit card, your payment is being processed through the ACH network. By entering your account and routing number instead of your credit card number, you’re initiating an ACH transaction.

Other acronyms to know: ODFI or Originating Depository Financial Institution and RDFI or Receiving Depository Financial Institution. These two acronyms refer to the bank or credit union that will eventually send or receive funds.

How does ACH work?

For a debit (such as paying a bill using ACH): Here we’re assuming you’ve previously connected your bank account and routing number, and set up auto-pay. Your utility company’s bank sends an ACH debit entry to their ODFI. The ODFI and RDFI ensure that the funds are available in your bank account and then process the transaction so that the funds are sent to the utility company’s bank account. While the transaction is being processed, the transaction is known as a ‘pending ACH transfer’.

For a credit (such as receiving your paycheck via direct deposit): A credit, or receiving money to your bank account works similarly to the above, except in reverse since you’re receiving funds. You simply provide your account and routing number to your employer, and when payday comes, your employer’s ACH processor initiates the funds transfer (via an ODFI) to your bank account using the ACH network.

For more detail, check out these rules from NACHA.

Who’s using ACH payments?

ACH payments probably creep into your day-to-day life more than you realize. Employers use ACH to pay employees, utility companies use ACH to collect on usage, various platforms use it to pay their contract workers, the list goes on. In 2012 the Federal Reserve reported that about 22.1 billion transfers were made annually.

According to a report from the Federal Reserve, there is less fraud involved in ACH transfers as compared to credit card transactions.

How can my business use ACH payments?

So ACH transactions sound pretty interesting, right? You can send funds between bank accounts, and that’s cost-effective and useful. However, building your own infrastructure to handle processing bank transfers, rejections and corrections can be costly when navigating compliance and security requirements. With Dwolla, we make integrating ACH payments into your platform easy and seamless, and we help you manage fraud and compliance considerations.

We have a wide variety of partners leveraging Dwolla in innovative ways to bake ACH payments into their platform:

Curious how you might be able to power payments for your business using Dwolla’s powerful ACH payments tools? We have integration specialists to help.

Get started with your own integration

We'll help you design your ideal payments experience.


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Financial institutions play an important role in the Dwolla network.

Dwolla, Inc. is an agent of Veridian Credit Union and Compass Bank and all funds associated with your account in the Dwolla network are held in pooled accounts at Veridian Credit Union and Compass Bank. These funds are not eligible for individual insurance, including FDIC insurance and may not be eligible for share insurance by the National Credit Union Share Insurance Fund. Dwolla, Inc. is the operator of a software platform that communicates user instructions for funds transfers to Veridian Credit Union and Compass Bank.