Automated Clearing House (ACH) is an electronic network for financial transactions in the United States. 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.[1] (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
SEC Codes
Some common Standard Entry Class (SEC) Codes:
- ARC
- Accounts Receivable Entry. A consumer check converted to a one-time ACH debit.[2]
- CBR
- Corporate Cross-border Payment. Used for international business transactions, replaced by SEC Code IAT.[3]
- CCD
- Corporate Cash Disbursement. Primarily used for business-to-business transactions.
- CTX
- Corporate Trade Exchange. Transactions that include ASC X12 or EDIFACT information.[2]
- DNE
- Death Notification Entry. Issued by the federal government.
- IAT
- International ACH Transaction. This is a new SEC Code for cross-border payment traffic. The code will replace the PBR and CBR codes. The new code will be implemented September 18, 2009.[3]
- PBR
- Consumer Cross-border Payment. Used for international household transactions, replaced by SEC Code IAT.[3]
- 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.
- 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 telephone solicitations.)
- WEB
- Web Initiated-Entry. Electronic authorization through the Internet to create an ACH entry.
- XCK
- Destroyed Check Entry. A physical check that was destroyed because of a disaster can be presented as 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).
In accordance with the rules and regulations of ACH, no financial institution may issue an ACH transaction (whether it be debit or credit) towards an account without prior authorization from the Receiver. Depending on the ACH transaction, the Originator must receive written (SEC Codes: 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 transaction date. An electronic 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 that passes it on to the Receiving Depository Financial Institution (RDFI), where the Receiver's account is issued either a debit or credit.
The RDFI may, however, reject the ACH transaction and return it to the ODFI if, for example, the account had insufficient funds or 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 returned transactions are completed within 24 hours from midnight of the day the RDFI receives the transaction.
An ODFI receiving a returned ACH entry may re-present the ACH entry two more times for settlement. Again, the RDFI may reject the transaction. After which, the ODFI may no longer represent the transaction via ACH.
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 RDFI when returned ACH entries are subject to the Electronic Funds Transfer Act (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.
See also
References
External links
