The Automated Clearing House (ACH) network connects more than 25,000 financial institutions across the country to move money electronically between accounts. ACH transactions fall into two different types: ACH credit and ACH debit.
ACH credit comprises more than 40 percent of all ACH transactions made in the United States, and that number is increasing as more and more businesses pay their employees through direct deposit. 82 percent of U.S. employees are paid via direct deposit—and therefore ACH credit—which is up from 74 percent in 2011. According to a survey by NACHA, which oversees the ACH network, employees prefer being paid via ACH credit because it grants them faster access to funds than a check, doesn’t cost anything, and is convenient.
An ACH credit transaction occurs when the originator (such as a business) authorizes a financial institution to send money from its account to recipients’ accounts. The information required to transfer the funds flows from the Originating Financial Depository Institution (ODFI) and gets put into a batch with other ACH requests. The batch is then transmitted to an ACH Operator such as the Federal Reserve at a predetermined time. The ACH Operator transfers the information to the Receiving Financial Depository Institution (RDFI), which deposits the credited amount of money in the recipient’s account.
The other type of ACH transaction is an ACH debit transaction, in which the originator authorizes the recipient to withdraw money from the account. For example, taxes can be paid electronically using ACH debit; the state is instructed to withdraw the funds from the originator’s account. The difference between the two types of ACH transactions is slight: In an ACH credit transaction, the bank sends money directly upon the originator’s request; in ACH debit, the bank receives a request for the money to be sent, upon the recipient’s request. For this reason, ACH credit is sometimes referred to as a “push” transaction, and ACH debit is sometimes referred to as a “pull” transaction.
ACH credit transactions usually settle within one to two business days. The delay is generally due to the batching process discussed above, which does not transfer the request for the transaction immediately. However, earlier this year, NACHA introduced Phase 1 of Same Day ACH, which enables financial institutions to process and settle ACH credit transactions on the same day they are initiated. This is made possible with the addition of two new clearing windows for batched ACH credit transaction requests from ODFIs. As of September 2016, ACH credit transactions can clear at 10:30 AM ET with settlement at 1:00 PM at the RDFI’s local time and at 2:45 PM ET with settlement at 5:00 PM. Same Day ACH enables more efficient insurance or bill payment for urgent transactions and lets employers guarantee same-day payroll. It also enables faster P2P transactions, which happen via ACH credit.
Phase 1 of Same Day ACH applies only to ACH credit transactions below $25,000. Other ACH transactions currently continue to settle on the next business day. Though the implementation of same-day ACH credit processing is optional, NACHA found that 95 percent of financial institutions aim to introduce it this year, a boon for their customers for whom having fast access to money is important. However, the service brings with it an additional processing fee of 5.2 cents per transaction, paid by the ODFI to the RDFI. This fee may get passed along to merchants.
The full implementation of Same Day ACH is broken up into three phases to allow banks time to gradually adjust to the new reality of processing. While Phase 1 focuses on ACH credit, Phase 2—which will be implemented in September 2017—will enable same-day ACH debit transactions.
Phase 3 will make same-day settlement even more efficient, allowing for all same-day payments to settle by 5:00 PM, as opposed to by the end of the day. It will be introduced in March 2018 and will complete the Same Day ACH project.
In short, ACH credit forms the backbone of much of today’s money movement, from paychecks to bills. As NACHA’s Same Day ACH vision rolls out over the next two years, ACH transactions will become even more efficient and convenient and likely even more widespread.