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The Automated Clearing House (ACH) may not be something you pay much attention to, yet it likely plays a major role in your daily life by allowing you to get paid and make payments. Consisting of a nationwide network used by banks to clear checks and transfer funds electronically, the ACH processes everything from direct deposit of paychecks to mortgage and credit card bill payments.
“Consumers may not realize that they’re using ACH,” says Dave Fortney, executive vice president, product development and management at The Clearing House, “but most people use it a lot.”
In fact, the ACH network processed about 30 billion payments in 2022 worth over $72.6 trillion, according to Nacha, an organization that works to enhance and enable ACH payments.
How does an ACH transaction work?
Any kind of electronic deposit to a consumer from an employer or the government happens over the ACH network, Fortney says. “You’re pushing funds from one bank into an account at another bank.”
In addition to processing direct deposit of your paycheck or Social Security benefits, the ACH handles electronic payments you make. For example, you can provide your bank information to your mortgage lender or servicer, and your account can be debited for a recurring amount on the same day of each month.
ACH transactions take place throughout traditional business hours, although they don’t happen in real time.
The network has two submission windows. Payments submitted by 10:30 a.m. ET are settled at 1 p.m. ET, and payments submitted by 2:45 p.m. ET are settled by the close of business at 5 p.m. ET.
“If you use one of the money movement platforms such as Venmo, Zelle or PayPal, a lot of that is ACH, too,” Fortney says. “Some of those platforms have more than one way that they move money, but ACH is the primary method.”
Benefits of ACH transactions
The ACH network helps ensure you can send and receive payments in a reliable, quick manner. Specific benefits of the ACH system include:
- It helps eliminate the need for checks. Electronic payments are often processed more quickly than paper checks. In fact, the number of check payments processed has decreased dramatically from 42.6 billion in 2000 to 11.2 billion in 2021, according to Federal Reserve data.
- It’s used by most financial institutions. The ACH network has been around for more than 40 years, so every financial institution that works with traditional checking and savings accounts is part of it.
- It makes it easier to handle your personal finances. ACH “removes friction” from the payment experience by making it more automated, according to Bridget Hall, leader of real-time payments at Miami-based payment systems company ACI Worldwide. “A top [benefit] would be the ease of scheduling recurring debits from an end consumer’s bank account, originated on the consumer’s behalf by the payee company or government with no additional effort on the part of the consumer after initial authorization,” Hall says.
- ACH transactions are cheap. If you need to send someone money, doing so through the ACH network is often inexpensive or free. While wire transfer fees often run around $30, ACH transactions are a fraction of that cost.
Cons of ACH transactions
“There are downsides to every payment type, and ACH is no different,” Hall says. Cons of ACH transactions may include:
- Automated payments can trigger overdrafts. While not having to remember to pay your utility bill may make your life easier, it’s possible to forget about a scheduled payment and not have enough money to cover it. “Recurring payments happen automatically,” Hall says, “and the end consumer may not be prompted to review their invoice for potential errors or may not review their bank account to ensure sufficient funds are available, causing an overdraft fee.”
- You might not receive payments until the following business day. ACH payments operate on a same-day network, but that network is “business-day driven,” according to The Clearing House’s Fortney. So, if a payment is made over a weekend or a holiday, it will not appear in your account the next business day.
- Bills you pay may be delayed as well. The ACH network being business-day driven can also affect payments you initiate on the day a bill is due. “For non-recurring payments, ACH sometimes isn’t fast enough,” ACI Worldwide’s Hall says. “If a bill is due today, an ACH payment may not get there in time to avoid late payment penalties.”
An alternative to ACH transactions
If you’re pressed for time, you may be better off finding an electronic payment option that runs on the Real-Time Payment (RTP) network. Launched in 2017 and run by The Clearing House, the RTP network allows consumers and businesses to send payments in real-time on a 24/7 basis. Currently, 65 percent of bank accounts in the U.S. are connected to this network, according to The Clearing House.
“The RTP network doesn’t behave differently based on a weekend or time of day,” Fortney says. “No matter when the payment is made, it’s completed immediately.”
RTP transactions are processed more quickly than ACH ones because RTP payments clear and settle individually in real time, whereas ACH payments are processed in batches nationally.
ACH transactions are a convenient way to get paid and make payments, whether you’re waking up to find a direct deposit in your checking account or avoiding the need to mail a paper check to the electric company. These transactions are a safe and relatively quick way of transferring money between banks.