Automated Clearing House (ACH) is the name of an electronic network for financial transactions in the United States. ACH processes large volumes of both credit and debit transactions which are originated in
batches. Rules and regulations governing the ACH network are established by NACHA-The Electronic Payments Association, 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.[1]
In the rest of the developed world, these rules and regulations are defined by each country's regulatory bodies. European
Payments Council is currently implementing a PE-ACH, Pan-European ACH.
ACH credit transfers include direct-deposit payroll payments and payments to contractors and vendors. ACH debit transfers
include consumer payments on insurance premiums, mortgage loans, and other kinds of bills. Businesses are also increasingly using
ACH to collect from customers online, rather than accepting credit or debit cards.
Debit transfers also include new applications such as the Point-of-Purchase (POP) check conversion pilot program sponsored by
NACHA. FedACH is the Federal
Reserve's centralized application software used to process ACH transactions. Both the government and the commercial sectors use
ACH payments. The Electronic Payments Network (EPN) is the only private sector ACH Operator in the United States.
The Federal Reserve Banks are collectively the nation's largest automated clearinghouse operator and in 2005 processed 60% of commercial interbank ACH transactions. The EPN processed the remaining 40%. EPN and the
Reserve Banks rely on each other for the processing of some transactions in which either the Originating Depository Financial
Institution (ODFI) or Receiving Depository Financial Institution (RDFI) 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 and other
government benefits, and tax refunds
- Direct Payment of consumer bills such as mortgages, loans, utility bills, and insurance premiums, rents, and any other
regular payment.
- Business-to-business (B2B) payments
- E-check
- E-commerce payments
- Federal, state, and local tax payments
ACH process
In accordance with the rules and regulations of ACH, no financial institution may simply issue an ACH transaction (whether it
be debit or credit) towards an account without prior authorization from the account holder (known as the Receiver in ACH
terminology).
An ACH entry starts with a Receiver authorizing an Originator to issue ACH debit or credit to an account. An
Originator can be a person or a company (such as the gas company, a local cable company, or one's employer). Depending on
the ACH transaction, the Originator must receive written (ARC, POP, PPD), verbal (TEL), or electronic (WEB) authorization
from the Receiver. Written authorization constitutes a signed form giving consent on the amount, date, or even frequency
of the transaction. Verbal authorization needs to be either audio recorded or the "Originator" must send a receipt of the
transaction details before or on the date of the transaction. A WEB authorization must include a customer reading the terms of
the agreement and typing or selecting some form of an "I agree" statement.
Once authorization is acquired, the Originator then creates an ACH entry to be given to an Originating Depository
Financial Institution (ODFI), which can be any financial institution that does ACH origination. This ACH entry is then sent
to an ACH Operator (usually the Fed) and is passed on to the Receiving Depository Financial Institution (RDFI),
where the Receiver's account is issued either a credit or debit, depending on the ACH transaction.
The RDFI may, however, reject the ACH transaction and return it to the ODFI with the appropriate reason, such as that there
were insufficient funds in the account or that the account holder indicated that the transaction was unauthorized. An RDFI has a
prescribed amount of time in which to perform returns, ranging from 2 to 60 days from the receipt of the ACH transaction.
However, the majority of transactions, if going to be returned, are done so within 24 hours from midnight of the day the RDFI
receives the transaction.
An ODFI receiving a return of an ACH entry may re-present the ACH entry two more times, or up to three total times, for
settlement. Again, the RDFI may reject the transaction. After which, the ODFI may no longer represent the transaction via
ACH.
Standard entry class code
The Standard Entry Class (SEC) code is a three letter code that identifies the nature of the ACH entry. Here are some common
SEC codes:
- ARC
- Accounts Receivable Entries. Checks received by a merchant through mail or drop box and presented as an ACH
entry.
- BOC
- Back Office Conversion. Checks that are converted from paper to an electronic debit at a centralized location.
- CCD
- Corporate Cash Disbursement. Primarily used for business to business transactions.
- DNE
- Death Notification Entry. Issued by the Federal Government.
- 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 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.
- RCK
- Represented Check Entries. A physical check that was presented but returned because of insufficient funds may be
represented as an ACH entry.
- 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 telphone solicitations calls. )
- WEB
- Web Initiated-Entry. Electronic authorization through the Internet to create an ACH entry such as PayPal.
- XCK
- Destroyed Check Entry. A physical check that was destroyed because of a disaster can be presented as an ACH
entry.
Some problems with ACH
ACH payments have been around for some time now, but people are just getting used to them, especially with the ARC, POP, and
RCK, 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.
A timeframe problem can cause potential loss towards an RDFI due to irregular timeframes provided for the return of ACH entries that
are subject to Electronic Funds Transfer Act (Regulation E). An example is
a POP and ARC entry, 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. With these timeframes, 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.
Another problem deals with compliance where the merchant causes an ODFI to issue an ARC or POP entry (for check presentment) and 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.
External links
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