Summary: The Automated Clearing House (ACH) system processes payments for businesses and individuals in the United States banking system. Learn about it here.

If you’ve ever wondered how your employee salaries end up in their bank accounts, you’re not alone. We all know it’s normally done by bank transfer, but what does that actually mean, and how are these payments processed? Understanding the ACH or Automated Clearing House network is key to answering these questions. In this review, we’ll keep things from getting technical but still help you understand how over 30 billion ACH payments were set up and made last year.

What Is an Automated Clearing House Network?

An automated clearing house network is an electronic system that checks, manages, and processes payments electronically between financial institutions.

Let’s explain this by looking at the history of clearing houses.

In the past, almost all employers and financial institutions relied on paper checks to move funds around. Employers would issue paychecks to their employees who would deposit them with their banks and wait for them to clear. Government institutions would send checks for benefits or tax refunds, and the recipients would again need to deposit these checks with their banks. In order to inspect checks and coordinate the movement of funds from one bank to another, clearing houses were created. Clearing houses still act as centralized bodies that clear checks and approve withdrawals from the payer’s account and transfers to the payee.

In the late 1960s and early 1970s, banks used computing technology to create ways to digitally approve transfers and move funds between banks. These new automated systems were dubbed “automated clearing houses” since they performed a similar role to the check clearing houses of the past.

What Are ACH Payments?

When an employer transfers money from its own bank account into that of an employee, it uses an ACH payment. When the IRS sends a taxpayer their tax refund, it uses the same kind of transfer. ACH payments are electronic transfers of funds between financial institutions (mostly banks, payment processing companies, and credit unions) on the same ACH network.

ACH transfers are often used for batch payments because they can be processed in high numbers and incur very small fees. In the US, over 33.6 billion payments were made on the ACH network in 2024. 

Regular ACH payments typically take between three and five days to transfer funds between accounts. However, there are also two-day, next-day, and same-day transfers available which are processed faster for higher fees. In the US alone, 1.2 billion same-day transfers were made in 2024 with a total value of $3.2 trillion. 

ACH transfers are made up of two major transaction types:

Direct Deposits

ACH direct deposits are transfers into individuals’ accounts from businesses and government institutions. They’re largely used by employers to pay their employees’ wages and by government agencies to pay things like benefits and tax refunds.

Direct Debits

ACH direct debits can be set up to automatically send money out of individual accounts. These payments are pulled out of the payer’s account upon request by the payee and approval by the payer. Direct debits are most commonly arranged for bill payments and can be set up to follow flexible schedules and varying amounts.

Who Regulates ACH Networks?

Different countries have developed their own ACH networks which are normally created by associations of financial institutions. However, no single bank regulates a network. Instead, independent regulators are created to govern ACH systems, create rules, oversee transfers, incorporate technologies, and drive interoperability between payment systems. 

In the US, an independent organization called Nacha (formerly NACHA, the National Automated Clearinghouse Association) regulates the American ACH network. Nacha manages this network and accredits financial institutions that can use it.

How Do ACH Transfers Work?

If you’re an employer who wants to use the ACH network to pay your employees their salaries by direct deposit, you’re considered the originator of the transaction. You initiate the transaction by telling your bank how much you need to send from your bank account to each of your employees’ bank accounts, usually using your bank’s software. 

Your bank then becomes the Originating Financial Institution (OFI). It collects your transfer requests and those of all its other customers and sends them out in batches during the day. This could include thousands of transfers to thousands of other banks each day. 

An ACH operator will receive these transactions and sort them, directing them to the Receiving Financial Institutions (RFIs) where the transfer recipients have their accounts. The funds are debited from the sender’s account and credited to the receiver’s account. In this way, your employees will receive their wages in their accounts once the ACH transfers clear, which may take a few days.

What Are ACH Payments Used For?

ACH payments can enable the movement of large sums of money without senders having to worry about individual or daily transaction limits that might be placed on debit and credit card payments. ACH payments are reliable, relatively quick, and easy to arrange through most banks. ACH payments are used for many different types of transactions, including:

  • Business-to-business transactions: invoice payments, subscriptions for ongoing services, etc.
  • Person-to-person transactions: personal loans and payments, gifts, support, etc.
  • Consumer bill payments and other transactions: utilities, rents, mortgage payments, credit card bills, charitable donations, etc.
  • Direct deposit transactions: employee payroll, tax refunds, government benefits, etc.

Advantages and Disadvantages of Automatic Clearing House Transfers

ACH transfers have a lot of competition these days, including everything from traditional checks to wire transfers, credit card payments, and digital payment platforms. Let’s look at the relative advantages and disadvantages of using an ACH network:

Advantages of ACH Transfers

Despite the competition, ACH transfers are popular because they provide the following benefits:

  • High Security: ACH networks are protected by multiple layers of security and are checked by clearinghouses and banks alike to maintain accuracy and reduce the chance of fraud.
  • Low fees: ACH transfer fees are quite low, especially compared to wire transfers and credit card payment fees. They make sending money affordable for businesses and individuals.
  • Convenience: ACH payments can be set up easily, and these networks can handle bulk payments with ease. This makes them convenient to use, especially for large businesses. You’re also able to set up recurring direct payments that you don’t have to spend time monitoring once approved.
  • Integration: Most popular accounting software packages can be used to set up your ACH payments and process them by integrating with banking software. This can save a lot of time in financial administration.

Disadvantages of ACH Transfers

Compared with some other payment methods, ACH transfers may also have some drawbacks, including:

  • Slower processing times: ACH payments can take anywhere from one to five business days. This means that payments sometimes have to be set up in advance to ensure funds are received on time, like for payday. Other methods can take just seconds.
  • Transaction limits: Some, but not all banks will place limits on the amounts they allow for single ACH transfers or total transfers per day.
  • Country-specific: Different countries have their own ACH networks and don’t integrate with each other. This means that you can’t use the ACH in the US to send transfers overseas.
  • Reversal and rejection: ACH payments, like checks, can bounce if the originator doesn’t have enough funds in their bank account. The originator can also request to reverse ACH payments within five days of sending them which can create confusion or even risks, such as in the case of a supplier providing a product or service thinking that they’ve already been paid. 

ACH System Payments Summarized

The automated clearing house system is an electronic transfer system shared by banks and credit unions in a single country. These transfers, often known as direct deposits, can be easily set up and processed for small transfer fees. While it can take a few days to move funds, ACH transfers are preferred by most employers and government agencies as a method to make high volumes of payments at a low cost. Trillions of dollars pass through ACH systems annually as their convenience and security are hard to beat.

FAQs

EFT stands for electronic funds transfer and refers to any type of transfer using an electronic or digital system. Therefore, ACH is a type of EFT but so are things like wire transfers and credit card payments.

No, these are two different types of transfer systems. ACH transfers are only domestic and can take up to five days, but incur very small fees. Comparatively, wire transfers are much more expensive but can take just minutes to hours to process and can also be sent internationally.

The World Bank identified 105 ACH systems worldwide in a 2023 survey. These systems have some overlap and some may be shared by several countries like the STEP2-T system used by the European Union. In general, however, transfers can’t be made between these systems.