The Basics of the Automated Clearing House

It is estimated that 43 percent of all US households use Automated Clearing House (ACH) to submit payment on their bills.  ACH is a network that links financial institutions for electronic fund transfers throughout the United States. Employers and government agencies also use ACH to deposit pay checks and benefits into consumer checking accounts.

How ACH Works

The Federal Reserve and The Electronic Payments Association (NACHA) regulate the ACH system. Whether funds are being received into or transferred out of an account, the account holder needs to allow the ACH system to access it. A bank may not issue an ACH transaction without the prior consent from the account holder. Along with an authorization to access your account, a voided check is used to confirm your bank account and routing number. Consumers can set up automatic bill pay, a scheduled bill payment service offered through most banks. Companies can pay earnings or salaries to their employees through a direct deposit into their accounts on a biweekly or monthly basis.

The Benefits for Consumers

The ACH system offers the convenience of paying bills without paying the additional cost of postage and replacing checks. Your ACH transfer or automatic bill pay can be set up through online banking (if your bank provides this service), or your bank can set it up for you. You will tell your bank what accounts to pay on, the amount of the payment and the scheduled payment date. After the bill pay is established, payments will be sent every month automatically. You can always cancel an automatic payment, change the payment amount or add more accounts by notifying your bank. Automatic bill pay also has the benefit of helping improve your credit score, since the system is efficient and payments will always arrive on time.

How Businesses Use ACH

ACH offers various ways for a business or government agency to accept or submit payments to consumers. Through ACH, a business has the option to accept online checks, automated payments and checks by telephone. The ACH electronic funds transfer also saves on fees for business. Paper invoices and postage fees are also eliminated when a business signs up for electronic funds transfers. ACH is not the same system that processes credit card transactions, and with the ability to accept online checks and check by phone as payment, expensive credit card processing fees are also eliminated. The following types of companies are currently using the ACH system to process electronic payments:

 • government agencies such as the IRS and Social Security
 • mortgage lenders
 • insurance companies
 • car loan lenders
 • utilities
 • cable TV companies
 • gyms
 • credit card companies
 • e-commerce sites

Some businesses have reported a higher retention rate after signing up for the ACH system. Since the payment is processed automatically every month, it gives a consumer less of a chance to think about whether they want to keep the account open.

The Future of ACH

The ACH system is implementing a process that will enable businesses to convert a personal check to an ACH debit when presented at the time of the purchase. This is advantageous for merchants since the check processing time and cost are reduced, as is the opportunity for fraud. 

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