ACH stands for Automated Clearing House, it’s a network that coordinates electronic payments and automated money transfers.
ACH is another way to move money between banks without using paper checks, wire transfers, credit cards, or cash.
On bank statements, ACH means that electronic payment was made to or from your account using you checking account information. You can check out examples of ACH transfers below. So for any ACH transfer to move funds in our out of your account, you need to authorize those transfers and provide your bank account and routing numbers.
On bills, ACH means you have the option to pay bills electronically, includes eChecks, EFT, or AutoPay. So instead of writing a check each time or using your credit card to pay, you can provide your checking account details and pay directly from there. You can control when payment takes place or your biller automatically pulls funds from your account when your bill is due.
What Does ACH Mean?
So what does the Automated Clearing House refer to?
- Automated: The ACH has a system that consists of computers that works together in order to process payments automatically. There’s no need to manually handle the payments either from your part or the biller’s. ACH is a batch of processing system that handles millions of payments at the end of the day.
- Clearing house: It uses two central “clearing houses.” All needed requests goes through either the Federal Reserve or The Clearing House. This will allow for efficiency in matching and processing among numerous financial institution
Examples of ACH Transactions
People –whether personal or businesses – use ACH for everyday transactions like:
- Direct deposit of your wages (from your employer to your bank account)
- When you provide a voided check to your biller, you’re setting up an ACH. Automatic payment of recurring bills like energy bills, insurance premiums, and HOA dues.
- Payments from businesses to vendors and suppliers
- Moving money from you brick-and-mortar bank to your online bank
Just like with technology, using ACH can have it’s pros and cons:
- Making online purchases without having to use a credit card or check
- Minimize paper records that carry sensitive banking information
- Get paid faster with an automated payment, and without waiting for a check to clear
- Automating bill payments to avoid late fees and missed payments
- Facilitates regular customer payments without having to transport actual paper checks to the bank
- Has lower fees than credit card payments
- Electronic process makes vendor and supplier payments easier and faster, while keeping electronic records of all transactions
- Makes money transfers easy with minimal labor and cost
- Allows employee payments without printing checks, stuffing envelopes or paying for postage
- Companies have direct access to your bank account
- Auto payments are deducted whether or not you have the funds in your account, which can trigger overdraft fees
- Allows other companies to have a direct link to your bank account
- Customers can reverse their payments, although not as easily as with a credit card
- Must monitor the transactions for fraud, as business accounts have fewer protections than consumer accounts
- Companies may need to buy software and invest in training to process ACH payments
What does ACH do for Consumers?
- Get paid quickly, safely, and reliably. There’s no need to wait for your paycheck to arrive or to deposit the check at your bank.
- Automating your payments, so you never forget to pay (and your payments arrive on time)
- Making purchases online without using a check or credit card. You pay quickly and avoid credit card processing fees.
- Minimizing the number of pieces of paper floating around with your bank account information
The main drawback is that setting ACH provides business with direct access to your checking account. It’s going to take the money to pay your bills whether you’re ready to pay or not. If you’re short on funds, you might prefer to pay a different way. So you might want to prioritize when you have limited funds and pay only the most important bills first.
What does ACH do for Businesses?
- A low-cost, non-labor-intensive way to transfer money
- Paying employees without the need to print checks or pay postage
- Getting paid by customers easily, quickly, and regularly—no more cash-flow crunches dependent on when you can get to the bank
- Processing fees that are lower than credit card swipe fees
- Getting paid by vendors—or paying suppliers—in a way that’s easy to track and safe (there’s an instant electronic record of everything)
Businesses need to be careful of customers reversing charges and taking back payments. It’s harder to reverse ACH payments than it is to reverse a credit card payment.
Furthermore, businesses need keep careful watching while monitoring for fraud since businesses account do not have the same level of protection against errors and fraud.
Lastly, businesses may need to purchase software or invest time and resources into transitioning to ACH transfers. They’re more likely than recoup those costs over the long run.
Types of Computers
ACH is a network of computers that need to communicate to each other in order to make payments happen. There are two sets for each payment: the one that creates a request and the one that satisfies the request.
- ODFI: For example with direct deposit, the employer is going to create a request to send money to an employee’s account. The employer will be the “Originator” and the employer’s bank is the “Originating Depository Financial Institution” (ODFI). The request will go to an ACH Operator, the clearinghouse that gets requests throughout the day and which routes the request to their destination.
- RDFI: The receiver is the Receiving Depository Financial Institution (RDFI), which adjusts the account of the final account holder, which is the receiver.
Types of Transactions
ACH transactions are done in the two following ways:
- Direct deposits: Payments to a receiver paid int your checking account
- Direct payments: Requests to pull funds from an account.
Since transactions doesn’t happen in real time, banks use “batch processing” and it processes the entire day’s worth of requests at once.
You don’t get paid immediately after your employer authorizes payment, instead, the transaction takes one or two business days to move through the system.
Hopefully after reading this post, you will understand what ACH stand for and what they do for consumers on businesses. ACH payments are a common way to process and receive transfers as it is a safe and reliable method compared to traditional forms payment.
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