Automated Clearing House (ACH)

Definition

The Automated Clearing House (ACH) is an electronic funds-transfer network that moves money between bank accounts in the U.S. It handles large volumes of credit and debit transactions—such as payroll direct deposits, bill payments, tax refunds, and government benefits—by batching and clearing them through participating financial institutions.

How ACH Works

• Originator initiates a payment or deposit (credit or debit).
• The originator’s bank (Originating Depository Financial Institution, ODFI) groups transactions into batches and sends them to an ACH operator.
• An ACH operator (the Federal Reserve or a private clearinghouse) sorts the batches and forwards individual transactions to the receiving banks.
• The receiving bank (Receiving Depository Financial Institution, RDFI) posts the debit or credit to the recipient’s account, completing the transfer.

Key components:
– Originator: the person or organization initiating the transaction.
– ODFI: originator’s bank that sends batches into the ACH network.
– ACH operator: sorts and routes transactions.
– RDFI: recipient’s bank that posts the transaction.

Same‑Day ACH and International Transfers

Recent rule changes expanded same‑day ACH processing, allowing most ACH transactions submitted by established cutoffs to settle on the same business day. The network also supports International ACH Transactions (IAT) for transfers that involve a foreign bank or require cross-border compliance.

Types of ACH Transactions

• Direct deposit (payroll, government benefits)
• Consumer bill payments and e-checks
• Person-to-person bank transfers
• Business-to-business (B2B) payments
• Tax payments and refunds
• International ACH Transactions (IAT)

Advantages

• Cost-effective compared with many card or wire options
• Automates recurring payments (payroll, bills)
• Improved processing speed with same‑day capabilities
• Widely supported by banks and businesses

Disadvantages

• Some banks impose per-transaction fees
• Financial institutions may limit transfer amounts
• Large transfers may require splitting into multiple transactions
• Returns and reversals are governed by NACHA rules and can have specific time windows and conditions

Common Questions

What is an ACH transaction?
– An ACH transaction is an electronic debit or credit between bank accounts processed through the ACH network. It can be a payroll deposit, bill payment, e-check, or other bank-to-bank transfer.

How long do ACH transfers take?
– Traditional ACH transfers typically settled within one to two business days; same‑day ACH is available for transactions submitted within established processing windows.

Are there fees or limits?
– Fees and limits vary by bank. Some institutions charge per-transaction fees or set maximum transfer amounts, so check with your financial institution before initiating large or frequent transfers.

Bottom Line

ACH is a broadly used, efficient system for transferring money between bank accounts. It supports a wide range of payment types, offers same‑day settlement options, and is generally cost‑effective—though fees and transfer limits depend on your bank. Confirm your bank’s ACH policies, cutoffs, fees, and limits before initiating transactions.