Small Business Brief

Financial Services

What is An Automated Clearing House?

What is An Automated Clearing House and How Does an ACH Transfer Work?

It may seem confusing at first, but Automated Clearing Houses are actually very simple. In this guide, we’ll explain what an ACH is and how ACH transfers work.

You may not have heard of an Automated Clearing House (ACH) transaction before. But, chances are you have either sent or received money using the ACH network. Direct deposit, recurring online bill payments, and moving money from a traditional to an online bank are all ACH transactions.

In 2016, over 25 billion electronic payments were transferred over the ACH network. They were worth more than $43 billion dollars altogether, increasing 5% from 2015. Clearly, this is a popular way to both send and receive money.

Even so, Automated Clearing Houses and ACH transfers may seem confusing. Lots of people are transferring their money around, but how does the whole system work?

In this article, we’ll go over what an ACH transfer is and how it works. Read on for the complete guide!

What Does ACH Stand For, and What is the ACH Network?

Not many people write checks anymore. Sometimes it even feels awkward paying for things in cash! As technology improves, both businesses and individuals are changing the way they send and receive money.

Take the Automated Clearing House (ACH) network, for example. This is an electronic-funds transfer system, and it’s run by the National Automated Clearing House Association (NACHA).

ACH helps businesses and individuals transfer money from one bank account to another. Everything is done as an electronic payment. This means credits and debits are handled faster and more efficiently than with paper checks.

What is an ACH Payment?

Many ACH payments are ones that you’d recognize. Some of the more common ones include:

  • payroll and direct deposit
  • automatic payments of recurring bills (anytime you provide a voided check, you -are setting up an ACH payment)
  • annuities and interest payments
  • government benefits
  • payments from businesses to vendors and suppliers
  • transferring money to an online bank account
  • tax refunds and tax payments

In the next section, let’s see how the ACH network operates. Read on!

How Does This All Work Anyhow?

The individual or business that initiates the financial transaction is known as the Originator. Using the ACH network, they may want to credit or debit an account.

Their bank is called the Originating Depository Financial Institution (ODFI). The ODFI batches the Originator’s transaction together with other ones. At some point during the day, the ODFI will send the batch out to an ACH operator, either the Federal Reserve or another clearinghouse.

The ACH operator sorts the batch and makes the transactions available to their intended recipient. They are called the Receiving Depository Financial Institution (RDFI). The money enters the recipient’s bank account, and the process is complete.

This all sounds pretty simple and efficient. What are some of the pros and cons of these types of transactions, though? In the next section, we’ll find out.

Advantages and Disadvantages of Using the ACH Network

For both individuals and consumers, ACH payments are a quick and easy way to transfer money. Individuals benefit when they can set up regular payments (no more late fees!) and avoid using their credit/debit cards online.

Businesses can pay their employees without printing checks or paying for postage. They are also able to receive payments from customers on a consistent basis.

Business owners don’t have to make a trip to the bank to avoid a cash-flow problem. What’s more, they have a record of every payment or credit that comes their way.

The downside of ACH payments is similar for both as well. ACH transactions require access to your checking account. For individuals, this may mean an unexpected debit if you forgot about an upcoming bill.

For businesses, unexpected withdrawals are also problematic. In addition, businesses need to watch out for customers reversing charges. That being said, it’s easier to reverse a credit card charge than an ACH payment.

Finally, individual checking accounts come with high levels of fraud protection. Unfortunately, this isn’t true of business accounts. If funds go missing, you may be responsible for recovering them or taking the hit.

For many people, though, the convenience and ease of using the ACH network outweigh these costs.

Conclusion: ACH Transfers

An ACH transfer offers an easy way to make payments or receive funds. Most of us have been using the network for years without knowing it! Now you have the facts to understand how these payments work.

If you enjoyed this article, why not check out some of our other ones? We have many different topics small business owners might find interesting.

Some of these include business advice and how to increase productivity. There’s bound to be something for everyone!