Everything you need to know about ACH
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In a nutshell:
The ACH Network is a batch processing network that allows money to be transferred between bank accounts in the United States. The truth is, there is a 99% chance you have already sent/received payments via the ACH Network.
A Clearing House acts as a mediator between two entities that are involved in a financial transaction.
Clearing Houses made their appearance in the 19th century. At the time, bank employees had to deliver checks to the corresponding bank. Because the process was very time consuming and checks started to gain popularity, bank employees decided to meet at a certain place for clearing and settling the checks; these places were later known as the Clearing Houses.
All the ACH payments are processed in batches. In other words, all transactions are aggregated and processed at a specific time of the day. This process is automatable because ACH files follow a specific format for encoding the information for the ACH transaction.
An ACH file is made up of multiple lines of ASCII text. Each line is 94 characters long and is known as a “record”. There are 5 record types in an ACH file and each of them is responsible for recording a section of the information in a transaction.
File Header Record: Contains high-level information of the ACH file, such as creation time, name of the ODFI, and name of the originator’s company.
Batch Header Record: Contains the shared characteristics of each of the ACH entries.
PPD Entry Detail Record: Contains information specific to the ACH entry such as the amount of the transaction, account number of the recipient, and RDFI’s routing number.
Batch Control Record: Immediately follows the PPD entry Detail Record. Contains information to verify whether the previous ACH batch is valid. For example, the total credited/debited amount of the batch and identification number of the ODFI.
File Control Record: The last record in each ACH file, and it contains information for verifying whether the ACH files is valid.
Gusto Engineer Edward Kim has a fantastic write-up on interpreting the ACH file in detail. Read more
If any of the following events sound similar to you, there is a good indication that you have already taken advantage of the ACH Network.
When your employer pays you in the form of a direct deposit.
When you receive a tax refund via direct deposit.
When you set up a recurring payment with your electric company or internet provider.
When you use a peer-to-peer app to pay friends back for a meal.
When you transfer money between different bank accounts.
When you or your business sends an eCheck or request an invoice through Checkbook.io.
The process starts when an originator (a individual, corporation, or any other entity) initiates an ACH Transaction.
For instance, a service provider (Checkbook.io) will request information about your bank account and routing number upon setup for a recurring payment. In this case, the service provider acts as the originator for the ACH payment.
After the originator collects the information and authorization from the customers, the originator’s bank, known as the Originating Depository Financial Institution (ODFI), enters the ACH entry at the request of the originator.
ODFIs will accumulate all the ACH transactions and send them in batches at a predetermined interval to an ACH Operator.
An ACH operator can either be the Federal Reserve or a Clearing House. They act as a central facility for handling all the ACH Transaction entries received from the ODFIs.
The ACH Operator will sort and distribute the entries to the corresponding Receiving Depository Financial Institutions (RDFI).
Once the RDFIs receive the information for the ACH transaction, they will be responsible for checking if the account involved has sufficient funds to complete the transaction. The most common way to verify the account is through a Micro-deposit, which refers to the process of sending two small test deposits to the customer’s account.
Yes, like a check that can be “bounced”, an ACH transaction can fail for a couple reasons, ACH return codes are used to describe the reason and detail about a failed ACH transaction. Here are examples of some ACH codes.
ACH return code R01: Insufficient Funds
The available and/or cash reserve balance is not sufficient to cover the dollar value of the debit entry.
ACH return code R02: Account Closed
A previously active account has been closed by action of the customer or the RDFI.
ACH return code R03: No Account/Unable to Locate Account
The account number structure is valid and it passes the check digit validation, but the account number does not correspond to the individual identified in the entry, or the account number designated is not an open account.
ACH return code R04: Invalid Account Number
The account number fails the check digit validation or may contain an incorrect number of digits
ACH return code R05: Unauthorized Debit Entry
Account number structure not valid: entry may fail check digit validation or may contain incorrect number of digits.
ACH return code R06: Return per ODFI’s Request
The ODFI has requested that the RDFI return the ACH entry.
Direct Deposit via ACH refers to the transfer of money into a payee’s account without writing any physical checks. Employers and businesses often use ACH Direct Deposits to pay their employees and customers. In addition, government benefits and tax returns involve the usage of ACH Direct Deposits.
Direct Payment via ACH refers to the process of sending and receiving payments electronically. It usually comes in two forms: ACH debit and ACH credit.
In simple terms, consider ACH debit as a transaction that “pull” money from your account, and ACH credit as a transaction that “push” money to another account.
ACH debit brings convenience to paying reoccurring bills and the automation process is less prone to error compared to processing the payment manually. ACH credit on the other hand eliminates the need for paper checks when issuing funds. Therefore, ACH payment in general, helps businesses streamline their payment handling process, which in turn reduces the cost of operation and improves efficiency.
If you are a business, schedule a Demo with us to find out all the possibilities that checkbook.io can help accelerating your payments handling process.
The ACH payment are processed in batches, which means that the ODFIs will collect a number of requests and then send them to the ACH operator. Delivery time varies depending on the type of ACH transaction. A standard ACH transaction can take up to 3~4 business days to complete. However, starting in 2014, NACHA has adapted a new rule that allows both ACH credit and debit to become eligible for same-day processing. As a result, funds are available by 5PM at the RDFI’s local time.
There are two ACH operators in the United States. The Federal Reserve Banks’ Automated Clearing House ( FedACH ) is responsible for handling most of the ACH transactions. The other ACH operator is the Electronic Payments Network (EPN), which is a private-sector ACH operator that owns 26 major banks including JP Morgan & Chase, Wells Fargo, Bank of America, Citibank, etc
In addition to the ACH operators that process the transactions, National Automated Clearing House Association ( NACHA ) is a not-for-profit company funded by all the financial institutions in the ACH Network. It is responsible for the development, administration, and governance of the ACH Network. In order to cover the cost of operation, NACHA charges a fee to all the financial institutions in the ACH Network.
A wire transfer is the direct electronic transfer of money between banks or credit unions. On the other hand, ACH payments rely on the ACH operator to act as a middleman between the ODFIs and RDFIs. The difference between ACH and wire transfers are listed below:
Speed of the Transaction
Wire Transfers (domestic) can be processed within the same day, usually within a serval hours. However, the recipient’s bank still needs to validate the funds before making the money available to the recipient. With Same Day ACH, ACH transactions can also be made available to the recipients by 5PM local time.
Security of the Transaction
Wire transfers are very safe for the recipients because the sender has to have sufficient funds before initiating the wire transfer. However, because a wire transfer can not be reversed, the sender needs to be certain who the money is sending to. On the other hand, ACH payment offers more security to the sender since there are rules for banks to authorize reversals on deposits.
Cost of the Transaction
The cost of Wire transfers, which depends on the type and bank, can range from $ 15 to 30. On the other hand, ACH are much more affordable.
Despite having a slight disadvantage on processing time. ACH is still a more cost effective and high security solution for transferring funds online, especially for businesses.
Checkbook is eliminating paper checks while increasing efficiency and security with Digital Check transactions. Based in Sunnyvale, CA, Checkbook was founded in 2015 by former VISA chief architect PJ Gupta and is funded by multiple VCs and individual investors including Tim Draper, Rocketship.vc., Angelist and Founders Fund.