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ACH (Automated Clearing House)
An automated clearing house (ACH) is a computer-based electronic network for processing payments between participating financial institutions.
Most ACH payment systems support the following types of transactions:
- Credit transfers –Initiated by the payer and include payments such as direct deposits, retail payments, payrolls, and vendor payments.
- Direct debit payments –Initiated by the payee with pre-authorisation from the payer and include consumer bills such as mortgages, loans, utilities, rents, insurance premiums, and any other regular or membership-style payment.
The ACH system is designed to process large volumes of credit and debit transactions in batches. Thus, transactions are received by the bank during its business hours and are stored and transmitted in batches to the ACH. Since ACHs are net settlement systems, settlement may be delayed for days, which might involve some settlement risk. Moreover, because batches are processed throughout traditional business hours and not in real-time, this type of payment contrasts with real-time gross settlement (RTGS) payments. RTGS transfers are processed immediately by the central RTGS system and are not subject to any waiting period on a one-to-one basis. ACH systems are typically used for low-value, non-urgent transactions, while RTGS systems are typically used for high-value, urgent transactions.
Going beyond financial lingo, ACH is a way to move money between banks without using cash, paper checks, wire transfers, or credit card networks. Consumers may be using ACH transfers without even realising. For instance, paying bills online through a bank account, making single or recurring deposits into an individual college or retirement account, or users getting paid via direct deposit are all forms of ACH transfer. ACH can also be used by business owners to pay vendors or receive payments from clients and customers.
There are various ACH systems around the world. A report from the World Bank revealed that, in 2016, a total of 90 ACH systems served 97 countries for the processing of retail electronic credit transfers and direct debits. In some countries where an ACH does not exist (e.g. Turkey), electronic fund transfers of low value are still common, and credit transfers might be processed through the RTGS System. ACH infrastructures worldwide are undergoing significant change. In some countries comprising the EU, local ACHs have been discontinued and moved to the pan-European platform. In other countries, ACH systems have been added as components to modern automated transfer systems (ATS) that can handle both retail and large-value payments.
Some examples of existing ACH worldwide include Bulk Electronic Clearing System (BECS) in Australia, Retail System—known formally as the Automated Clearing Settlement System (ACSS)—run by Payments Canada in Canada, China National Advanced Payment System (CNAPS) and Bulk Electronic Payment System (BEPS) in China, a pan-European automated clearinghouse for the Single Euro Payments Area, STEP2 in Europe, Bacs Payment Schemes Limited in the U.K., Deutsche Bundesbank and equensWorldline in Germany, equensWorldline in Italy, STET in France, SIBS in Portugal, Bankart in Slovenia, equensWorldline in the Netherlands, Iberpay in Spain, Eurogiro and Nets Group in Denmark, National Automated Clearing House, National Electronic Funds Transfer in India, and Federal Reserve Bank’s FedACH and The Clearing House’s Electronic Payments Network (underpinned by NACHA’s ACH Network in the U.S.).
Referring strictly to the U.S., 6.6 billion ACH network transactions were processed (3.7 billion were debits, 2.9 billion were credits) in Q2 2020, with 7.9% year-over-year (YoY) volume growth over Q2 2019 (an increase of 484 million transactions). The magnitude of NACHA’s growth, in both transaction volume and value, has generally been increasing since 2012, and although the current pandemic makes it hard to predict how the transactions volume will be impacted, the overall growth continues, setting up the ACH network to have its biggest year ever in 2020.
There are a few categories of ACH payments that tend to dominate NACHA. These include business-to-business (B2B) payments, direct deposit payments, internet payments, and P2P payments. In 2016, NACHA introduced Same Day ACH, an innovation to ACH payment processing times. Thus, virtually all types of ACH payments are now eligible for same-day processing, enabling businesses to operate with greater payment efficiency.
Besides B2B payments, ACH is also growing quickly as a convenient payment method in healthcare. In 2019, 343 million ACH payments were made between insurance companies and doctors, representing 70% of all healthcare claim payments. Other areas where these types of payments are widely used are donation and recurring subscription payments.
Users are relying on ACH transfers as they feel more relaxed authorising recurring payments out of their checking account to avoid situations when a debit or credit card expires and to take advantage of the lower costs associated with ACH payments.
Advantages of ACH Transfers
- Convenience – Paying mortgages, utility bills, or other recurring monthly expenses using an electronic ACH payment may be easier and less time consuming than writing and mailing a check.
- Speed – Sending and receiving ACH payments is usually quick. According to NACHA, settlement generally happens the next day after the transaction is initiated. The network’s operating rules require that ACH credits settle in one to two business days and ACH debits settle the next business day.
- Costs – ACH payments are often free depending on where the user banks and the type of transfer involved. For instance, a bank may charge a user a small fee to move money from a checking account to an account at a different bank.
- Eliminate the need for checks – ACH helps eliminate the need to print, sign, and cash checks. Still, this payment method has started to decline, especially during the pandemic.
- Ubiquity – The ACH network has been around for more than 40 years, so every financial institution that works with traditional checking and savings accounts is a part of it.
Disadvantages of ACH Transfers
Transaction limits – Many banks impose limits on how much money can be sent via an ACH transfer, resulting in per-transaction limits, daily limits, and monthly or weekly limits. Also, there might be one limit for bill payments and another for transfers to other banks, or, sometimes, one type of ACH transaction may be unlimited but another may not. Banks can also impose limits on where money can be sent. For example, they may prohibit international transfers.
Timing – Because banks don’t send ACH transactions for bank processing at the same time, there may be a cut-off time by which consumers need to get their transfer in to have it processed for the next business day. Initiating an ACH transfer after the cut-off could result in a delay, which may be an issue if a consumer is trying to meet a payment deadline to avoid a late fee.
Payment automation isn’t always a benefit – Not knowing about potential errors or having insufficient funds in a bank account can cause an overdraft fee in the case of recurring payments.
Some of these disadvantages can be overcome by using alternative payment methods. The global increase of non-cash payments creates a dynamic landscape that will bring plenty of rewards to those who understand the developments that drive future changes.
Watch out for our next instalment to learn about other convenient ways to send or receive money.