You may not realize it, but you probably use ACH payments more than you know.
If you've never heard of ACH then this article is for you. Most likely, it's a network you use a lot without even realizing it. The ACH network is something many of us use every day without even knowing it.
But understanding more about what it is and how it works can help you make better decisions when sending and receiving money and can help you understand your personal finances on a deeper level.
What is ACH?
The term ACH stands for Automated Clearing House. It is run by the National Automated Clearing House (NACHA), which is where it gets its name.
It is an electronic system that transfers funds. This electronic money transferring system is most commonly used for payroll, direct deposit, tax refunds, online bill pay, tax payments, loan payments, and other payment or electronic money transfers.
It is how we move money digitally. In fact, it is so essential to modern day finances that almost 93% of Americans use the Automated Clearing House to get paid.
What is Automated Clearing House?
Automated refers to the fact that it's an automated system. This is what makes ACH ideal for transferring electronic funds because the system does it automatically and no one has to manually process each transaction.
The Clearing House is the electronic network that electronic transactions go through to get processed safely and securely. This way each electronic transfer doesn't have to go through lots of other channels to get to where it needs to go.
The Automated Clearing House network can handle our electronic money transfers in the fastest, most secure, and most direct way.
It is used by US financial institutions, businesses, government organizations, and individuals.
What is ACH Payment?
An ACH payment is an electronic payment. Electronic payments use the Automated Clearing House system in order to process the electronic money transfer.
If you make an online payment to pay a bill or a loan payment, it might get referred to as an ACH payment.
ACH Payment Examples:
- Credit card bills
- Debit card payments
- Other bills
- Subscription payments
- Sending money using Venmo or PayPal
What is ACH Number?
An ACH number is an ACH routing number unique to a financial institution. Banks and credit unions use this number to transfer funds from bank to bank.
This 9-digit number can also be referred to as the routing number for electronic deposits or direct deposits.
The ACH routing number may be different than the routing number on your checks or the routing number used to wire funds to or from your financial institution. It's important to ensure you have the correct ACH routing number when providing this to the transmitter.
ACH Number vs Account Number
An ACH number is the financial institution's account number for electronic deposits and transfers.
An account number is the routing number of someone's personal financial account, whether that's a bank account or credit union account.
Each bank account number has a unique account number with 8 to 12 digits. Think of it as a unique identification number for your personal financial account. Meanwhile, the ACH number is the unique identification number for financial institutions.
What is ACH Transfer?
When you transfer money online you are making an ACH transfer. Whether you're moving money from one account to another or sending money to a friend with PayPal or Venmo, you're using the Automated Clearing House to transfer those funds.
ACH Transfer Examples:
- Sending money using Venmo or PayPal
- Transferring money from bank account to another
- Transferring money from your checking account to your savings account
- Direct deposits like paychecks or tax refunds
ACH vs Wire Transfers
Though very similar, Automated Clearing House transfers and wire transfers have a few key differences.
Wire transfers are electronic transfers between bank accounts and Automated Clearing House transfers are direct deposits.
ACH transfers are usually free, processed in batches instead of one by one so they get processed faster and are automatically processed instead of manually processed by a bank teller.
Wire transfers can be sent and received internationally though, while ACH transfers are a network that only operates in the US.
What is an ACH Transaction?
When you buy something online or use an electronic payment method like a debit card or your phone, you're making an ACH transaction.
ACH Transaction Examples:
- Direct deposit
- Automatic bill payments
- Making electronic purchases
- Transferring money to an online bank account
What is ACH Credit?
A credit to your account is when funds are added to your account.
An ACH credit is when funds are given to an account through an electronic deposit.
When you receive a direct deposit of some kind you can refer to that online transfer as an ACH credit because the Automated Clearing House is the system the funds went through to get to your account.
ACH Credit Examples:
- Government benefit checks
- Tax refunds
- Depositing money into your online account
- Getting a refund
What is ACH Debit?
A debit is when funds are subtracted from your account.
An ACH debit is when funds are sent from your account through an electronic withdrawal.
Anytime you make an electronic payment you are using the Automated Clearing House to securely transfer those funds from your account to somewhere else.
These debits are often scheduled to be paid automatically on scheduled dates. Using ACH to set up automatic payments is a great way to make sure you always pay your bills on time.
ACH Debit Examples:
- Utility bills
- Mortgage payments
- Credit card bills
- Loan payments
- Making purchases online
What is an ACH Deposit?
ACH deposits are when funds are added to an electronic account through electronic means. These deposits allow companies and individuals to send and receive money from their online accounts.
ACH Deposit Examples:
- Interest payments
- Social security
- Tax refunds
How Does ACH Work?
First, the originator makes the first move to begin the electronic transaction. The originator will have to provide accurate information like the account and routing number of the receiver for the electronic ACH file.
Second, the file with all the necessary information for processing is electronically sent to the Automated Clearing House network.
Third, the Automated Clearing House will automatically and electronically go through, verify, organize, and schedule the files they receive.
The ACH network holds the electronic transactions and sends them out in groups or batches at scheduled periods throughout the day. This makes the deposit system faster so it doesn't get overloaded at any one time.
What is an Originator?
An originator is a word often used for the person who starts the electronic transfer. So if account A is sending money electronically to account B then account A is the originator and account B is the receiver.
The originator's account might also be referred to as the Originating Depository Financial Institution (ODFI), while the receiver's account might be referred to as the Receiving Depository Financial Institution (RDFI).
Is ACH Secure?
Using the Automated Clearing House to handle your online transactions is one of the safest ways to manage your electronic funds. Since it is operated by the National Automated Clearing House Association you can rest assured knowing your electronic transactions are being handled with the utmost security.
The only real risk in using this electronic money handling network is that you'll need to use your bank account number to send and receive funds.
Some personal information is almost always required in any financial transaction though. So long as you are careful to only give this sensitive information to legitimate people, businesses, and employers your risks are low.
How Long Does it Take for ACH to Deposit?
Because of the batch processing system the Automated Clearing House uses to process electronic transactions faster, deposits can take as little as 1 to 4 business days to fall into the receiver's account.
If you send a deposit during a weekend or holiday, then those funds might not drop until 1 to 4 business days after the holiday is over.
But many times funds can be deposited into an online account that very same day.
Reasons to Use ACH
- Get your funds faster
- A cheaper way to send and receive money without the fees you would have for transactions like cashing a check
- Secure way to send and receive money from your account
- Can schedule regular payments
- Paperless money transfers are better for the environment and less hassle for you
- Won't miss payments if your payments are electronic and automated
- Electronic ACH payments can't get lost in the mail
One downside is that since the Automated Clearing House is an automatic payment you do run the risk of accidentally not having enough funds in your account when the scheduled payment occurs.
You still need to be aware of when you have payments scheduled so you can make sure you have enough in your account.