If you live in the United States, chances are you have used ACH payments to receive your paycheck or pay your mortgage and other bills. ACH, which stands for Automated Clearing House, is an electronic network for financial transactions.

The simplest way to think about ACH payments are to think of them as e-checks. Checks are great for paying for large ticket items or recurring payments; however, like checks ACH payments can take a day or more for the transaction to clear.

Many people take our banking system for granted, given how easy it may seem to the average user. Most people think that sending a check or an ACH payment is as easy as the example below.

However, there is a whole process that goes on so that your bank can give the recipient of your check their money.

When you send a check to someone, they go to Bank X and deposit it. Bank X then tells the Clearing House the details of the check and the Clearing House will tell your Bank Y of the check. Bank Y makes sure there are sufficient funds and then credits your account. Bank Y then tells the Clearing House that the transaction can be cleared. The Clearing House then debits the Bank of the depositor and the bank credits their account.

For ACH payments, the process is pretty similar, except the transaction is completely digital. The example provided below illustrates how Bob would use ACH payments to pay his mortgage.

Bob, in this case, would have to authorize the lending institution to charge his account on a monthly basis. The bank can enter the # of months before the mortgage is paid off so that Bob’s account can be charged automatically. This process saves the bank time because they no longer have to send bills and wait for checks.

The ACH network started in 1974 and today the network processes nearly 22 billion financial transactions a year totaling close to 39 trillion dollars, according to NACHA, the Electronic Payments Association. The costs of the network administration fees for financial institutions to use ACH payments is quite low, $0.000162 per entree along with $216 annual fees.

Recently, NACHA announced that it has plans to implement more same-day ACH payment settlements. While this may be one of the biggest improvements to the network in recent years, other countries, such as Singapore have near instant electronic fund transfers on their FAST (Fast And Secure Transfers) network.





If you are interested in learning about how international payments work, read our post about SWIFT Payments.