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What is ACH?

ACH Payments are an electronic method for transferring funds between financial institutions. Unlike a check, an ACH transaction may be either a debit or credit. Clearing is provided electronically rather than through the physical movement of checks or cash. The ACH Network is an electronic processing and delivery system through which funds are disbursed and settled among a large number of financial institutions. The ACH Network is the nation's largest electronic payments network. Regional Payments Associations like Southern Financial Exchange provide education, training, and a variety of support services for financial institutions and affiliated companies while also helping to create consumer awareness.

ACH Payments use a batch process, store-and-forward system - transactions are accumulated throughout the day, sorted by destination, and transmitted in groups at specified times. ACH Operators accept ACH transactions from ODFIs and deliver them to RDFIs. Participants in the ACH Network must abide by the ACH Rules published by NACHA, The Electronic Payments Association.

ACH Participants & Definitions

• Originator: The company or individual that initiates an ACH transaction according to an agreement with a Receiver.
• Originating Depository Financial Institution (ODFI): The financial institution that transmits ACH files on behalf of the Originator into the ACH Network.
• ACH Operator: The central clearing facility operated by a private organization or Federal Reserve Bank, on behalf of participating financial institutions, to or from which financial institutions transmit or receive ACH entries.
• Receiver: A natural person (or organization) that has authorized the Originator to initiate an ACH entry (debit or credit) to the Receiver's account with the RDFI.
• Receiving Depository Financial Institution (RDFI): The financial institution that receives ACH entries from the ACH Operator and posts the entries to the accounts of the depositors (Receivers).
• Third-Party Processors: Processors that participate between any relationship within the ACH processing flow (i.e., correspondents, sending-point processors or payroll processors).

How It Works (See Diagram 1 above)

ACH Credits

• Originator initiates payment instructions to move funds into a Receiver's account.
• ACH credit transaction flows from Originator, ODFI, Operator, RDFI, Receiver.
• In an ACH credit transaction, the funds flow from the Originator to the Receiver.
• Used for both consumer and corporate payments
• Direct Deposit of Payroll is the most common use.
• Examples:
  • annuities
  • customer initiated transactions
  • corporate-to-corporate payments
  • dividends
  • government vendor payments
  • interest payments
  • payrolls
  • pensions
  • social security payments
  • state tax payments

ACH Debits:

• Originator initiates payment instructions to collect funds from a Receiver.
• Used for both consumer and corporate payment transactions.
• Used by corporations for consolidation of funds from subsidiaries, regional or branch-type offices.
• Transaction flows from Originator, to ODFI, Operator, RDFI, and Receiver.
• Funds then flow from the Receiver to the Originator.
• Debit transfers are used by consumers for mortgage payments and insurance premiums, as well as, association/club dues, cash concentration, distributor/dealer payments, corporate-to-corporate payments, holiday or vacation club payments, POS payments, and utility payments.

Other ACH Applications

• Accounts Receivable Entry
  Originators convert a consumer check received via the U.S. mail or at a dropbox location for the payment of goods or services to a Single Entry ACH debit. The consumer's source document (i.e., the check) is used to collect the consumer's routing number, account number, check serial number, and dollar amount for the transaction.

• Point-of-Purchase Entry
  This ACH debit application is used by Originators as a method of payment for the in-person purchase of goods or services by consumers. These Single Entry debit entries are initiated by the Originator based on a written authorization and account information drawn from the source document (a check) obtained from the consumer at the point-of-purchase. The source document, which is voided by the merchant and returned to the consumer at the point-of-purchase, is used to collect the consumer's routing number, account number, and check serial number that will be used to generate the debit entry to the consumer's account.

• Re-presented Check Entry
  A Re-presented Check Entry is a Single Entry ACH debit application used by Originators to re-present a check that has been processed through the check collection system and returned because of insufficient or uncollected funds. This method of collection via the ACH Network, compared to the check collection process, provides Originators with the potential for improvements to processing efficiency (such as control over timing of the initiation of the debit entry) and decreased costs.

• Telephone-Initiated Entry
  This Standard Entry Class Code is used for the origination of a Single Entry debit transaction to a consumer's account pursuant to an oral authorization obtained from the consumer via the telephone. This type of transaction may only be originated when there is either (1) an existing relationship between the Originator and the Receiver, or (2) no existing relationship between the Originator and the Receiver, but the Receiver has initiated the telephone call. This SEC Code facilitates access to the ACH Network by providing an alternative authorization method, oral authorization via the telephone, for certain types of consumer debit entries.

• Internet-Initiated Entry
  Used for the origination of debit entries (either recurring or Single Entry) to a consumer's account pursuant to an authorization that is obtained from the Receiver via the Internet. This SEC Code helps to address unique risk issues inherent to the Internet payment environment through requirements for added security procedures and obligations.

Uses for the ACH Network are unlimited. Other applications include Machine Transfer Entries, Point of Sale transactions, truncation applications and payments message and payment advice.