ACH Processing 101: A Beginner's Guide

Originally published on 2/10/2014.

Updated on 2/16/2022.

What Is ACH?

ACH (Automated Clearing House) is a nationwide electronic funds transfer (EFT) network that processes large volumes of transactions involving credit or debit. The ACH is a private system that facilitates the secure transfer of electronic payments by connecting to financial institutions throughout the United States.

How Does ACH Payment Processing Work?

The Receiver is the first step in the process of a transaction involving the ACH. Receivers must first grant authorization to the Originators who issued the ACH credit or debit request. The Originator’s account is then identified by the financial institution’s routing number and their account number. When the Originator has received the authorization, they will create a new ACH entry, which is then sent to the correct originating institution. This can be done as long as the financial institution performs ACH origination. The entry is distributed to an operator at ACH who continues the process by disseminating it to a receiving institution. At this stage, the Receiver’s account will receive a credit or a debit depending on the nature of the transaction.

Some Usages Would Be:

• Direct deposits
• Vendor payments
• Automatic debit transfers, such as mortgage loans
• (POP) Point-of-purchase check conversion

How Is It Protected?

The Receiver sends the Originator a set of codes which serve as valid authorization. NACHA (National Automated Clearing House Association) and the Federal Reserve are the two organizations that monitor the ACH’s actions and establish protocols for their internal processes.

What Are The Benefits To Working With The ACH?

Some of the top benefits to using ACH are:

• A secure network online and by phone
• Quick, easy payment processes from your customers
• ACH check conversion
• Effective internet delivery channel
• Reduces manual processing costs
• Easy to manage
• Controls customer risks, which reduces collections
• Handles auto-recurring transactions from any financial institution
• Handles direct deposit and receivables
• Saves time and costs
• Reduces invoicing costs
• Efficiently handles bill payments in a timely manner
• Increases retention by providing the web-based service to the customer

How Does ACH Translate Into An Online & Mobile Society?

ACH is e-commerce. Customers can make payments 24/7 from almost any payment processing platform through their personal computer, mobile device, credit card, and tablet. Customers are tech savvy and want the capability to make payments easily. Many prefer the ‘paperless’ transaction, because it cuts down on energy usage and it is environmentally friendly.