Glossary

What is the Automated Clearing House (ACH)?

The Automated Clearing House (ACH) Network is a U.S. system for electronic funds transfer, or EFT. Since 1974, it’s been operated by the NACHA, or National Automated Clearing House Association. Through the ACH network, individuals and businesses can make and receive a variety of electronic payments including for bills, payroll, direct deposits, tax payments and refunds, and much more.

Operated and regulated entirely by NACHA, the ACH network is designed to grow and expand with the growing needs for electronic funds transfer in an increasingly online-only world of payments and requests. One of the primary goals of NACHA has been to reduce the processing time of ACH payments, to the point that the majority of both credit and debit transactions can now be processed and cleared in a single business day. This had added to the convenience and appeal of ACH transfers and transactions on the ACH network for a wide range of consumers and businesses.

Origins of ACH

While NACHA was the first U.S. organization to set up an automated clearing house, the first global automated clearing house was in the United Kingdom. In 1968, BACS (Bankers’ Automated Clearing System) processed its first payments. The U.S. was quick to follow suit, as a group of California-based banks were looking for a way to replace payments by paper check with something more convenient, secure, and automated. The Federal Reserve Bank of San Francisco was the first institution to operate an automated clearing house in the U.S. beginning in 1972.

As more and more regional ACH associations began to form, they eventually came together in 1974 to form a unified ACH that would serve the entire nation— this was the beginning of NACHA. 

NACHA today is in charge of all administration of the network, and works closely with the Federal Reserve, which handles the actual processing of transactions. NACHA is funded almost entirely by the financial institutions it administers over, and every year it facilitates the processing of billions of payments.

Around the world, there are now over 100 ACH systems in countries across the globe. There are also associations of multiple ACH systems, usually organized by region such as the European Automated Clearing House Association.

ACH Network Basics

The ACH network processes 25 billion electronic financial transactions every year from over 10,000 banks and financial institutions. The transactions processes span a wide range, from B2B payments for services rendered or goods received to government payments to taxpayers and to receive payments from those taxpayers, from person-to-person transactions and for bill payment for rent, mortgage, utilities, and more.

An originator for an ACH payment can be nearly anyone, including individuals, businesses, and government agencies. ACH transactions can be made via debit or credit, and payments are sent out throughout the day depending on each financial institution’s policies.

How Direct Deposit Works

Direct deposit is most closely associated with being one of the most common (and convenient) ways for employees to receive their payroll checks. But direct deposit can be used for a range of other services as well. According to NACHA’s website, direct deposit can be used to receive:

  • Travel and other employee expense reimbursements

  • Bonuses and commissions

  • Pension/401(k) disbursements

  • Annuities

  • Dividend and interest payments

  • Social security and other government payments

  • Tax refunds and other refunds

To set up direct deposit, an employee first must authorize their employer to send their salary and other benefits directly into their account via automated clearing house. She must provide her bank account information directly or provide a voided check, which will include her bank’s routing number and account number.

The employee’s payroll manager will then enter this information into their computer system, and instead of receiving a printed check for each payment, the company creates and sends a payment file directly to the individual’s bank on the set date. The rest of the process follows the general ACH operating procedures, outlined in the next section.

The ACH Process and Operating Rules

In a typical transaction within the ACH system, a set of operations occurs— usually happening completely behind the scenes and almost invisible to the payer and payee. While each individual ACH system around the world may have its own quirks and variations in their process, the NACHA ACH network follows this basic protocol for each transaction:

  1. A customer initiates a transaction. This can be done either manually or by sending a request to a bank to initiate the transfer.

  2. Each bank receives batches of these initiations from the full spectrum of customers, combining manual and file-based transaction initiations together.

  3. On a preset schedule, the bank generates a file that includes all of the information for transaction initiations that have occurred within a specific period. This file is then sent to the ACH. For some banks, this file is generated and sent to the ACH once per day, at the end of the business day. Other banks generate and send these files multiple times per day, spread out over the course of the day.

  4. These files are received by ACH operators, who then combine this info into a large batch and compile the net total that each bank is responsible for during that period for all transactions.

  5. The ACH operator receives these net settlements, then ensures that they are in the correct amount and that all participants in the process have made their proper settlement.

  6. The ACH operator then contacts the destination bank where payments will be received, transferring entails about the incoming transaction; sender, amount, recipient details, etc.

  7. The transaction is sent to the destination bank, and the bank then creates a transaction to credit the recipient’s account. At the same time, the sender’s bank debits their account for the amount sent. The transaction is now complete.

Costs of Using ACH

Many individuals and businesses wonder how much it costs to send or receive money via ACH. The answer is that it depends on the type of transfer.

For payroll direct deposits and bill payments, ACH debit transfers are usually free. In cases where transfers can be expedited, there will usually be an associated fee of a few dollars or more.

If one is trying to make transfers between two linked accounts at different banks, a fee could range from nothing to a few dollars. Receiving transfers like these from a 3rd party are almost always free.

Other ACH Services

In addition to providing a network for domestic transactions, automatic clearing houses also provide a range of other services, including:

  • Providing unique account identifiers for banks and financial institutions, allowing them to receive payments without having to give out their confidential and sensitive banking information

  • Offering a screening service that serves as the only centralized database for screening all ACH transactions conducted internationally within a cost-effective and secure service network

  • Fraud detection services designed to identify misuse within the ACH network and proactively warn involved parties about potential fraud, misuse, or suspicious activity

  • Education and professional services in order to inform individuals and businesses about the benefits, processes, and use cases involved with ACH-related transactions and services

Need to process ACH transactions? Bill.com makes it easy through our ACH payment processing, where you can initiate and receive payments directly through Bill.com.


The content found here is for informational purposes only, and not for the purpose of providing advice, including but not limited to, financial, legal, or tax advice. Any opinion found here does not necessarily represent those of Bill.com.

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