Payment processing through an ACH, or Automated Clearing House, forms an important part of the global financial network. It is a system which allows funds to be moved between banks, and it uses several mechanisms to accomplish this, primarily direct deposits and payments. These payments may be recurring or one time transactions, regardless; they are used by merchants, consumers and even governments who must make payments internationally.
The ACH network is used to transfer as much as $40 trillion dollars per year. Within the United States, it comprises about ninety percent of all the electronic payments which are conducted. As you can imagine, this makes it one of the biggest, most secure systems on the planet.
The Automated Clearing House uses batch processing. This means that banks and other institutions will accumulate transactions during the course of a day, and they will be batch processed at a later time. Rather than using paper checks for handling financial data, ACH transactions are managed electronically, which allows for rapid processing while slashing costs. Transactions completed through ACH can be broken down into two categories, and these are direct deposits and direct payments.
Direct deposits and payments will typically be used for employee payroll, taxes, and government benefits. They will also be used with financial entities such as annuities. Whenever a government or business pays a consumer, it will almost always be made via ACH. When a transaction is done in ACH, it will be processed quickly, usually by the following day.
How ACH Processing Works
All ACH transactions begin with an originator. The originator may be a person, corporation or a government. They will initiate a direct deposit or payment by making a request to an ODFI, or Originating Depository Financial Institution. The ODFI will then make an entry based on the request made from the originator. The ODFI will aggregate the payment and send it in specified batches at specific intervals. The payments will then be delivered to an ACH operator.
The ACH operator will then sort the transactions, and provide them to the RDFI, or Receiving Depository Financial Institution, who will then credit the funds to the account of the receiver, depending on the type of entry. Additional service providers may also offer crucial functions for those using ACH networks, which increase its efficiency. NACHA, which is the ACH Network trustee, is responsible for regulating the network and ensuring that transactions are being processed securely and efficiently.