How ACH Works

It’s the primary network for electronically settling monetary transactions between financial institution in the United States.

How ACH Works?

The primary network for electronically settling monetary transactions between financial institution in the United States, the Automated Clearing House (ACH) is a highly reliable and efficient nationwide batch-oriented electronic funds transfer system.

Governed by the rules set forth by the National Automated Clearing House Association (NACHA), the ACH Network provides for the interbank clearing of electronic payments for roughly 98% of the depository financial institutions in the United States. Through this system, the Federal Reserve and Electronic Payments Network act as ACH Operators, providing the central clearing facilities through which financial institutions transmit or receive ACH entries.

Examples of ACH payments are direct deposit of payroll, Social Security and other government benefits, Federal and State tax payments and refunds, direct payments of consumer mortgages, loans, utility bills and insurance premiums, business-to-business payments, E-checks, E-commerce and Internet retail payments. In short, ACH payments are an option for virtually any business, public or commercial entity that receives payments.

ACH Terminology

Originator

Any individual, corporation, or other entity that initiates entries into the Automated Clearing House Network.

Originating Depository Financial Institution (ODFI)

A participating financial institution that initiates ACH entries at the request of and by agreement with its customers. ODFIs must abide by the provisions of the NACHA Operating Rules and Guidelines.

Receiving Depository Financial Institution (RDFI)

Any financial institution qualified to receive ACH entries that agrees to abide by the NACHA Operating Rules and Guidelines.

Receiver

An individual, corporation, or other entity who has authorized an Originator to initiate a credit or debit entry to an account held at an RDFI.

Returns

Any ACH entry that has been returned to the ODFI by the RDFI or by the ACH Operator because it cannot be processed. The reason for each return is included with the return in the form of a “return reason code.”

Notification of Change (NOC)

Information sent by an RDFI to notify the ODFI that previously valid information for a receiver has become outdated or that the information contained in a prenotification is erroneous. The standard entry class code is COR.

ACH Payments include:

e-Commerce Payments
Business-to-business Payments
Direct Deposit of payroll, Social Security and other government benefits, and tax refunds
Direct Payment of consumer bills such as mortgages, loans, utility bills and insurance premiums
Federal, State and Local tax payments

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