Automated Clearing House

Automated Clearing House (ACH) is an electronic network for financial transactions in the USA. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit payroll and vendor payments. ACH direct debit transfers include consumer payments on insurance premiums, mortgage loans, and other kinds of bills. Debit transfers also include new applications such as the Point-of-Purchase (POP) check conversion pilot program sponsored by NACHA-The Electronic Payments Association. Both the government and the commercial sectors use ACH payments. Businesses are also increasingly using ACH to collect from customers online, rather than accepting credit or debit cards.

Rules and regulations governing the ACH network are established by NACHA (formerly the National Automated Clearing House Association) and the Federal Reserve (Fed). In 2002, this network processed an estimated 8.05 billion ACH transactions with a total value of $21.7 trillion. (Credit card payments are handled by separate networks.)

The Federal Reserve Banks are collectively the nation's largest automated clearinghouse operator and in 2005 processed 60% of commercial interbank ACH transactions. The Electronic Payments Network (EPN), the only private sector ACH operator in the U.S., processed the remaining 40%. FedACH is the Federal Reserve's centralized application software used to process ACH transactions. EPN and the Reserve Banks rely on each other for the processing of some transactions when either party to the transaction is not their customer. These interoperator transactions are settled by the Reserve Banks.

  
Uses of the ACH payment system

• Direct deposit of payroll, Social Security (USA) and other government payments, and tax refunds
• Direct debit payment of consumer bills such as mortgages, loans, utilities, insurance premiums, rents, and any other regular payment
• Business-to-business payments
• E-commerce payments
• Federal, state, and local tax payments
• Bank Treasury management departments sell this service to business and government customers

  
SEC Codes
Some common Standard Entry Class (SEC) Codes:

ARC

Accounts Receivable Entry. A consumer check converted to a one-time ACH debit.

CCD

Corporate Cash Disbursement. Primarily used for business-to-business transactions.

IAT

International ACH Transaction. This is a new SEC Code for cross-border payment traffic. This code replaces the PBR and CBR codes. This new code is implemented since September 18, 2009.

POP

Point-of-Purchase. A check presented in-person to a merchant for purchase is presented as an ACH entry instead of a physical check.

POS

Point-of-Sale. A debit at an electronic terminal initiated by use of a plastic card. An example is using your debit card to purchase gas.

PPD

Prearranged Payment and Deposits. Used to credit or debit a consumer account. Popularly used for payroll direct deposits and preauthorized bill payments.

TEL

Telephone Initiated-Entry. Verbal authorization by telephone to issue an ACH entry such as checks by phone. (TEL code allowed for inbound telephone orders only. NACHA disallows the use of this code for outbound telephone solicitations unless a prior business arrangement with the customer has been established.)

WEB

          Web Initiated-Entry. Electronic authorization through the Internet to create an ACH entry.

ACH process

An ACH transaction starts with a Receiver authorizing an Originator to issue ACH debit or credit to an account. A Receiver is the account holder that grants the authorization. An Originator can be a person or a company (such as the gas company, a local cable company, or one's employer). Accounts are identifed by the bank's Routing Number and the account number within that bank.

 

Example 1: Alice buys a teeshirt at Bob's Gift Shop with a check for $15. Alice is the Receiver; her bank account will eventually receive the order to take $15 out from her account. Bob's Gift Shop is the Originator. The check, signed by Alice, authorizes Bob's Gift Shop, Inc to originate the ACH transaction, code POP. The check has Alice's routing number and account number.

 

 

Common issues ACH payments have been around for some time now, but people are just getting used to them, especially with the ARC, POP, and RCK SEC Codes, where the original instrument was a physical check. One problem occurs when the account holder issues a stop payment on a physical check not knowing that the check was presented as an ACH entry. Time frame differences can cause loss towards an 'Receiving Depository Financial Institution' when returned ACH entries are subject to the Regulation E. An example is for the ARC and POP SEC Codes, where an RDFI has only 60 days from the date of settlement to return an unauthorized debit, and the consumer has 60 days upon notification to dispute a transaction in his statement under Regulation E. The consumer can receive notification via a statement 30 days after settlement. With these time frames, it is possible that the 60-day period allowed for ACH return would expire even before the consumer's 60-day protection (under Regulation E) would expire, leaving the RDFI open to loss. Another problem deals with compliance where the merchant presented with a check issues an ACH entry with SEC Codes ARC or POP. However, the merchant then fails to comply with the handling of the physical check and presents the physical check for payment as well. This causes a double-debit against a consumer account.