How the Automated Clearing House Network (ACH) Functions
The use of credit/debit card processing has skyrocketed over the last decade. Accepting credit and debit cards through mobile phones, tablets and computers has made it extremely convenient for businesses to offer payment processing services saving them time and money. One of these services is the Automated Clearing House Network.
The Automated Clearing House Network (ACH) plays a crucial role in helping businesses provide secure payment processing services. Their job is to manage the fund transfer process and ensure that network members follow the rules and regulations of processing. This powerful network of financial institutions make it possible for your electronic transaction to be completed securely and efficiently.
How Does the Automated Clearing House Network Operate?
The Automated Clearing House Network is best described as a network of financial institutions located throughout the nation. They monitor money transfers from one institution to the other. They also ensure the transfer process remains as secure as possible when it comes to sending and receiving electronic transactions in large batches across the nation. They also assist the process of approval or denial.
The ACH network is run by two parties: The Reserve Bank or the Electronic Payments Network (EPN). These two parties will receive batch transactions from a financial institution within their network. They will edit and sort the payments and deliver either an electronic debit or credit payment to the appropriate financial institutions. While the operators are two separate networks, they still work together to move the payments to the correct financial institution.
These transactions cover all types of electronic processing services including credit processing services such as direct deposits, refunds and the transfer of retirement benefits to your bank account.
The Automated Clearing House Network also processes electronic debit transactions such as bill pay, payment of in-store retail purchases and purchases made online.
The ACH network used to largely process recurring payment transfers. However, the network today is being used extensively to process one-time debit transfers, such as converted check payments and payments made over the telephone and Internet.
History of ACH Network
In the 1970’s, financial institution started to recognize a need for consistent processing regulation to ensure that the power of processing remained secure. Banks had started to see an increase in consumers using checks to pay for purchases or services. This put a lot of strain on an already overburden and underdeveloped computer system that processed these checks.
About this time, the Federal Reserve decided to get involved with transaction processing. They helped provide the updated computer systems desperately needed to continue to process large amounts of checks. The new computer system also helped to process and settle the transactions between different financial institutions.
In 1974, the NACHA (National Automated Clearing House Association) was formed to help govern the Automated Clearing House Network which had been established. They quickly set rules that needed to be followed by financial institutions for processing electronic payments. At that time, the technology was such, that transaction batches were sent via magnetic tapes and discs transported back and forth between financial institutions within the Automated Clearing House Network.
In 1994, the Federal Reserve made the switch to a true electronic system. All transactions were required to be deposited or credited electronically through the computer systems.
Today, “with the increasing movement toward an electronic, interconnected and mobile infrastructure, it’s critical that electronic payments work safely and efficiently for all users. The ACH Network enables just that: by using batch processing and a store-and-forward system, it moves almost $39 trillion and 22 billion electronic financial transactions each year. For more than 40 years, NACHA has been the trustee of the ACH Network, employing a collaborative, self-regulatory model to facilitate the expansion and diversification of electronic payments on the ACH Network.” (Source: nacha.org/ach-network)
The Purpose of NACHA:
Establish Rules: NACHA is in charge of the overall rules guiding the electronic transaction process. The rules are vetted and tested and go through a rigorous review process before being implemented into the network. They want the rules to work for all of the financial institutions involved in electronic processing.
Rule Enforcement: Participation and compliance with the rules set forth by NACHA is critical to maintaining network security. The NACHA goes to great lengths to ensure that all those within the ACH network stay up to date with the latest rules and regulations. They work to enforce the rules and regulations of the industry through education and communication to all members.
Continued Network Development: The NACHA is always working to ensure the needs of all members of the network are met. They are always looking to engage with financial institutions to help provide the best electronic payment network available to their customers.
Types of ACH Transactions
Direct Deposit via ACH
The Automated Clearing House network is responsible for all direct deposit transactions. Through their network money is transferred from the payer to the payee. This is mostly utilized by businesses to pay their employees directly. It eliminates the need and the hassle of writing checks and getting the checks cashed and deposited.
There are many benefits resulting from direct deposits. Financial institutions can be reassured that their deposits are securely transferred. Businesses use less paper waste printing checks and can efficiently move money from the business to the employees. Consumers receive funds without the hassle of running to the bank to make deposits.
Direct Payment via ACH
The Automated Clearing House Network can also manage the transfer of direct payments from one account to the other. They can help you manage your personal bills. They can also help you set up your businesses payables and receivables. With the Automated Clearing House Network, you will be able to set up your customers for recurring payments if necessary. This will help ensure that your customers pay on time.
The Automated Clearing House Network was built to meet a growing demand for electronic processing. If you are interested in learning more about the rules and regulations, please visit: achrulesonline.org
