Author: Stephanie Schmidt, Assistant Vice President Member Services
ACH, or Automated Clearing House, is an electronic network used for financial transactions in the United States. The ACH network facilitates various types of electronic payments for consumers and businesses every day, including direct deposits, direct payments, and electronic fund transfers.
The policies and rules governing the ACH network are primarily administered by NACHA, the National Automated Clearing House Association. NACHA is a nonprofit organization that develops the operating rules and standards for the ACH network. They establish the guidelines that financial institutions, ACH operators, and ACH service providers must follow to ensure the secure and efficient processing of ACH transactions. NACHA regularly updates these rules and resources to adapt to changes in the financial industry and improve the ACH system's functionality and security.
ACH FAQ
ACH transactions are a crucial part of modern banking and understanding how they work is vital to providing excellent service to members. In this blog, we will address common questions and provide helpful resources to support your knowledge.
What is an ACH service provider?
A third-party ACH service provider is an organization that performs ACH functions on behalf of an entity processing (creating, sending, or receiving) ACH transactions. Third-party service providers such as third-party senders, sending points, and receiving points help facilitate ACH transactions and may also facilitate compliance with ACH rules. A reliable service provider can streamline ACH processing and enhance the efficiency of your financial institution’s operations.
What are the different types of ACH providers?
There are various types of ACH providers, including banks, credit unions, and third-party payment processors. Banks and credit unions typically have ACH departments, while third-party processors specialize in providing ACH services to financial institutions. Choosing the right ACH provider depends on your credit union's specific needs and the level of control and customization required.
What are the different types of ACH transactions?
ACH transactions primarily consist of ACH credits and ACH debits, however non-dollar transactions are also utilized to verify account accuracy and provide transaction remittance data. There are also non-dollar transactions that facilitate the correction of information and other various notifications. A few transaction types are listed below:
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ACH Credit: Results in the deposit of funds to an account, often used for direct deposit of salaries, tax refunds, and person-to-person payments where a credit is sent.
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ACH Debit: Results in the withdrawal of funds from an account, often used for various payments, such as bill payments, loan repayments, and subscription fees.
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Prenotification: A non-monetary entry sent prior to the initiation of a transaction to allow the receiving financial institution the ability to verify the account information.
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Zero-Dollar Entry: A non-monetary entry transmitted to convey payment related remittance data.
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Notification of Change: A non-monetary entry identifying incorrect information contained withing a transaction, along with corrected data to be used for future entries.
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Death Notification Entry: A non-monetary entry giving notice by a US Government agency that a receiver has passed away.
These transaction types can be further categorized into consumer and corporate payments, each with its own set of rules and regulations.
What is an ACH?
To dive deeper into understanding ACH transactions, we recommend reading the Federal Reserve's overview on
How ACH Works. This comprehensive resource will provide a solid foundation for ACH operations.
Is an ACH risk assessment required?
Yes, conducting an ACH risk assessment is essential to identify and manage potential risks associated with an ACH transaction. NACHA provides guidelines and resources for risk management in ACH transactions, which can be found in their
ACH Risk Management Handbook.
How do ACH payment solutions work?
ACH payment solutions work by electronically transferring funds between accounts. These transfers are initiated through a network that connects financial institutions, enabling secure and efficient transactions. For a detailed explanation, you can explore the How ACH Works section on the NACHA website, linked above.
How long does ACH processing typically take?
Once appropriate authorizations have been established, ACH transactions may be processed within hours, depending on the time of day the transactions are initiated. ACH transactions are based on a batch and forward system consisting of two parts: the transactional information that directs where the funds should go and how they should be posted, and the actual funds which are received in settlement files by the financial institutions involved on both sides of the transaction.
Same Day ACH transactions and funds are sent and settled on the same day, provided the transactions are submitted to the Federal Reserve Bank (FRB) prior to the same day transmission deadline. Most transactions and funds are submitted one day prior to the expected settlement date. In some cases, primarily seen with direct deposit or tax returns, some transactions are initiated a couple of days prior to the expected settlement date and are held in a pending status. In some cases, some financial institutions opt to give their members access to these pending funds prior to the settlement date, if they are familiar with the entity that is sending the funds.
The NACHA guidelines specify the timeframes for ACH transaction processing.
The FedACH Processing Schedule provides the transmission deadlines, target distribution times, and settlement schedules for all transactions flowing through the FRB. Keep in mind, many ACH service providers have different deadlines and distribution times in place to facilitate their submission and receipt of ACH transactions from the FRB.
What is the difference between ACH debit and ACH credit?
To answer this question, you must identify the intent of the transaction. Some financial institutions will only facilitate the sending of ACH credits because there is less risk involved. For example, a member needs to pay a loan at another institution. In this case, the financial institution debits the member’s account and sends an ACH credit to the other financial institution to pay the loan. If a member has a loan to pay at their own financial institution, the financial institution will send an ACH debit to pull funds from another financial institution to make the payment on their member’s in-house loan.
Many transactions are created with an “offset,” meaning an equal and opposite transaction impacting the financial institution’s accountholder or internal GL. If an ACH credit is sent, an ACH debit must be received to balance and vice versa. The offset transaction is a very useful way for a financial institution to balance more efficiently.
How and when are ACH transactions processed?
ACH transactions are processed in batches, with specific processing windows defined by NACHA and typically facilitated through the FRB. The specific processing times may vary by financial institution.
What are some alternatives to ACH payments?
There are several alternatives to ACH payments, including wire transfers, checks, online payment platforms, and credit card payments. Each method has its advantages and disadvantages, depending on the specific needs of the member.
How does international ACH work?
International ACH Transactions (IAT) involve a gateway operator, which is an ACH operator or participating depository financial institution that acts as an entry point to or exit point from the United States. IATs coming into the United States are received as SWIFT or proprietary messages first to a foreign gateway operator who then passes that message to a United States gateway operator. The United States gateway operator then sends the message, now in the form of an IAT, to a United States ACH operator or receiving depository financial institution. Outbound IATs work in reverse. The IAT information first goes to a United States Gateway Operator who then forwards the information as a SWIFT or proprietary message to a Foreign Gateway Provider, and finally is routed through that country’s domestic payment system to its final destination. These transactions have specific rules and requirements for compliance with international regulations. To learn more, refer to the NACHA International ACH Transactions (IAT) Resource Center.
What are the new rules for ACH?
To stay current, we recommend visiting the official website of NACHA. They regularly update their operating rules to reflect changes and new requirements.
Learn more about Corporate Central’s ACH Solution and the future Money Movement ACH Beastro module.