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What is Nacha?

What is Nacha?

Electronic payments have become the norm in the business world—but it’s still important that moving money between consumers, businesses, and banks remains safe and efficient. This requires standard regulation. That’s where Nacha comes in: Nacha’s role ensures you can send and receive funds electronically without worrying about security issues or errors while transferring. In this guide, we’ll jump into what Nacha is and how it helps your business in ways you might not even realize.

What is Nacha and how does it work?

Nacha (formerly known as NACHA, or the National Automated Clearing House Association) manages the ACH Network, the electronic funds transfer system used within the United States.

This organization is responsible for the administration, development, and governance of the ACH Network and ACH transactions. Essentially, Nacha is the body behind all safe electronic payments in the U.S.

A diagram showing how Nacha works

Nacha is a non-profit association funded by financial institutions using the ACH Network. Although not a federal agency, this organization does work closely with the Federal Reserve, U.S. Treasury, state banking agencies, and various financial institutions in the U.S.

Whether you’re paying employees or purchasing supplies online, using automated clearing house transactions streamlines a good chunk of your business’s financial transactions. The ACH Network links bank accounts in the U.S. and makes payments and electronic money transfers easy and safe. So, instead of having to send checks (which involves more time and changing hands), businesses can send and receive money swiftly, efficiently, and securely.

But why exactly is Nacha important for small businesses? Let’s look at an example of how Nacha impacts business payments.

Where Nacha comes from 

Before electronic payments existed, banks moved money via paper checks. Bankers would go to clearing houses at the end of the day to collect checks and make sure all of the money was adequately accounted for.

But quickly, the growing number of checks became challenging to manage, and banks needed to find a more efficient alternative. That’s when several check clearing houses partnered with the federal government to build an automated payment method that banks could use.

This national network of automated clearing houses enabled citizens and businesses to pay for goods and services more efficiently. Since the system’s efficiency increased, transfers then required more control. That's when Nacha was founded: In 1974, Nacha was created to regulate the ACH system.

The difference between Nacha and ACH

ACH is a network and payment system that has revolutionized the payments industry by making fast, secure electronic transfers accessible to everyone. Nacha, on the other hand, is a governing organization that oversees the ACH Network.

Simply put, Nacha creates rules and standards, and the ACH Network operates under them.

(It’s important to know that Nacha does not run the network itself; ACH operators run the network. Through cooperation and innovations, Nacha improves and grows the use of ACH payments.)

Using ACH payments helps your business pay suppliers and employees conveniently and on time. The network lets you know your funds are safely debited and credited to the correct financial institution, but Nacha ensures your funds are safe by providing regulations about how the ACH Network needs to process transactions.

Nacha in action

When making an electronic financial transaction, the originating depository financial institution (ODFI) sends money to the receiving depository financial institution (RDFI). Both of these financial institutions operate within the ACH Network.

Let’s say your business pays employees using direct deposit. Both your business bank account and your employee’s bank accounts use the ACH network, so in order to deposit your employee’s paycheck, you'll need their bank’s name, account number, and routing number.

For the transaction to happen, the ODFI (your bank) initiates the transfer request to the ACH Network, telling it to debit funds and then credit them to the employee’s bank account. The ACH bundles this message with outgoing financial messages from other banks and repackages them based on the recipient banks. Then, the RDFI (your employee’s bank) gets the message to credit the funds to your recipient’s account.

All of this happens within about one business day. And, since it’s digital and automated, the process requires almost zero effort from you or the person receiving the direct deposit. Your business initiates the transaction, and your recipient waits for the funds to deposit.

The process is so easy, which is why many American businesses rely on electronic payments. In 2021, more than 29 billion transactions were made via the ACH network, with a total value of nearly $73 trillion. These transactions included online payments, bill payments, and direct deposits.

All of these payments were secure because they complied with the rules and standards established by Nacha.

The importance of Nacha compliance

The Nacha operating rules control how the ACH Network operates by determining the roles and responsibilities of all parties, ensuring valid transactions for businesses and individuals, preventing fraudulent payments, and providing security with Buyer Protection. But beyond that, Nacha rules are essential to ensuring the ACH payment system serves its purpose as the foundation of electronic payment transfers in the U.S.—and here’s how.

Nacha instills confidence in ACH

Fraudulent payment activities have forced Nacha to develop and implement standards to ensure secure payments. By ensuring funds are transferred safely, Nacha increases customer confidence in ACH payments and facilitates a stable electronic payment network that everyone (i.e., businesses, banks, credit unions, and individuals) is comfortable using.

Nacha reduces exception processing

As Nacha standards apply to all members, it will not accommodate financial institutions seeking exception processing to suit their business model. This makes for a consistent and reliable method that all participating businesses must abide by.

Nacha allows arbitration claims

Nacha’s compliance keeps the ACH Network safe—and if any violations occur, your business can file an arbitration claim to recoup supplier losses or damages. Nacha’s arbitration proceedings are more efficient and affordable than civil lawsuits and litigations.

How Nacha’s rules help your business

While Nacha is an essential organization that prevents fraud and enforces safe money transferring for millions of people and businesses nationwide, Nacha’s control and oversight of electronic payments can specifically help your business in several ways.

  • The same rules apply to everyone. Nacha’s primary responsibility is writing, maintaining, and implementing the ACH Network practices. As ACH is used for money transfers by various entities, creating regulations and standards that apply to all participants ensures a level playing field.
  • Your business is protected if you’re wronged. Nacha’s regulations enable your business to claim a refund for defective or undelivered goods or services.
  • Your business can rely on timely transfers. Electronic transferring is instant, so you can maintain a good relationship between your business, employees, and vendors by trusting your bank to make timely deposits.
  • There is less fraud. Fraudulent transactions are difficult to process and easily detected on the ACH network.

Without Nacha, we would operate in a time of paper checks and slow money moving. This is hardly a reliable resource for businesses that must work daily to keep their operations afloat. Thanks to the Nacha operating rules, financial processes can instead be completed within a day—ensuring that nobody’s business is ever slowed down due to a lack of money transference.

Choose an ACH payment system powered by automation

Imagine spending less time on transactions to focus more on your business. Well, the right ACH payment processing solution lets you send and receive funds faster.

BILL provides data integration and automation to help your business manage your payables and receivables processes from one place. Learn more about how ACH payment processing can benefit your business.

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