What is ACH
ACH is an acronym for Automated Clearing House. It is a secure digital network that banks and other financial institutions use to transfer funds electronically. Through this network direct deposits, electronic payments, and debit-card payments are processed. About 8% of the transactions over the ACH network are government-related transactions (local, state, and federal) such as social security payments and the rest are commercial transactions, with roughly a third related to credit cards and two thirds related to debits. Visa and MasterCard rely on the ACH network. Banks process checks over the network as well.
Created in the 1970 to help banks save money over traditional paper-based check processing, the network has tracked the growth of the Internet. Today it is used for all manner of financial transactions. According to the Electronic Payments Association, NACHA, in just the first quarter alone of 2010 there were about 3.88 billion electronic money transactions over the ACH network worth more than $7.7 trillion. Dollar volume over the ACH network is growing at a clip of about 5% a year. The NACHA acts as a governing body to set the rules about acceptable ACH formats. The NACHA also determines the rights and responsibilities of institutions taking part in ACH transactions, especially financial institutions.
Here’s how it works. The person, company, or entity that submits an ACH payment is referred to as an originator. A member financial institution initiating ACH entries is called an originating depository financial institution (ODFI). A financial institution that is authorized to receive ACH entries is called a receiving depository financial institution (RDFI). Fees for using the network are set by NACHA which imposes a small per-transaction fee on banks and other institutions. Visa and MasterCard collect fees for transactions, and merchants pay fees with they may or many not pass along to consumers.
Why should you care? Well, if you are using a MasterCard or Visa debit or credit card your account information is being passed over the network, so you will be glad to know that the technology is constantly being worked on to ensure that it remains safe and secure. As more payments get made with mobile devices like iPads and smart phones, the technology such as card swipers and encryption software must also keep up. As ACH fees are eyed by companies as a way to squeeze out more profits, the cost for electronic payments is slowly rising, and the government is now considering new regulations to cap prices.
The bottom line, however, is that ACH is here to stay, and the days of paper checks being sent in the mail, taking days to process, is rapidly drawing to a close.
