What Does ACH Stand For?
ACH stands for Automated Clearing House. The ACH Network is a network of banks and financial institutions that processes more than 25 billion transactions in each year.
The network is governed by Federal Reserve Bank regulation and the National Automated Clearing House Association (NACHA), which makes its rules.
According to NACHA, the ACH Network handled nearly six billion transactions in the second quarter of 2018, a 6.2% increase from Q2 in 2017.
The ACH Network has formed the foundation of the United States payment industry since 1974. In 2017, more than $43 trillion moved through the Network.
Use this post to get a better understanding of the ACH Network and the differences between an ACH credit and ACH debit.
Transfers between bank accounts are considered ACH transfers. An ACH transfer—also known as an ACH payment—can credit or debit a bank account.
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.
How do ACH Transactions work?
ACH transfers are between two bank accounts. This facilitation can look slightly different depending on the specific action taking place. There are two options: an ACH credit or an ACH debit. We’ve discussed this in more detail before, but here is an overview.
ACH Debit Transactions
Let’s explain how ACH debit transactions work. Imagine you’re paying a utility bill. You have connected your bank account (or the utility company has set up an instant account verification solution), and enabled auto-pay.
After you’ve enabled this functionality, your utility company can send a request to its bank to initiate an ACH debit entry FROM your account TO its account.
This transfer doesn’t happen instantly.
While the transaction is being processed, we call the transaction a ‘pending ACH transfer.’
ACH Credit Transactions
For the second example, we’ll explain how a CREDIT works, which is similar to an ACH debit, except in reverse since you’re receiving funds.
Imagine you’re receiving Direct Deposit from your employer.
You provide your account and routing number to your employer (some employers can use an instant account verification solution), and when payday comes, your employer initiates an ACH credit TO your account FROM its account using the ACH Network.
How long does it take for ACH to go through?
There is a lot of nuance around the timing of ACH payments and new innovations like Same Day ACH are being pushed into the marketplace to speed up clearing times.
In short, a standard ACH transaction using Dwolla may take as long as four to five business days to complete.
This is because the transfers settle on day one or two, and then the funds may be held for up to three days to allow for any potential ACH reject notifications to be returned.
Why Does an ACH transaction Fail?
If an ACH transaction fails, there are dozens of potential return codes that could come back. The first four return codes are below. Here is a full list of the possible ACH return codes in the system.
R01 – Insufficient funds
The available and/or cash reserve balance is not sufficient to cover the dollar value of the debit entry. Basically, there were insufficient funds to complete a debit transaction.
R02 – Account closed
A previously active account has been closed by action of the customer or the RDFI. In other words, the bank account is closed, and this transaction should not be re-submitted.
R03 – No account or unable to locate account
The account number structure is valid and it passes the check-digit validation, but the account number does not correspond to the individual identified in the entry or the account number designated is not an existing account.
R04 – Invalid account number
The account number structure is not valid. The entry may fail the check digit validation or may contain an incorrect number of digits. This means that the account number entered is definitely not valid, for instance, your customer may have entered only half of the digits needed for a routing number.
Is there anything else I should know about ACH?
ACH payments are being used all around us, in ways you may not have even considered.
Did you recently withdraw funds from a peer-to-peer payments app? That was probably an ACH transaction.
Did you get paid out after selling some shoes on a marketplace? That was also probably an ACH transaction.
If you’re a business that would like to learn more about ACH, reach out to our team. Our developer-friendly ACH API can help businesses update their current payment process.