Your Guide to ACH Transactions

The Automated Clearing House, or ACH, is a network used for electronically moving money between bank accounts across the United States and is run by the National Automated Clearing House Association (Nacha).

Nacha governs the ACH network, creating and upholding the rules required for the ACH network to operate as a safe and effective payments system. The organization was formed in 1974 and has overseen the development of ACH since then. In 2021 over $72.6 trillion worth of funds was transferred as ACH transactions, a year-on-year increase of over 17%.

Transaction types include government, consumer, and business-to-business transactions, as well as international payments.

The ACH network may also be referred to as the ACH payment system, scheme, or simply as ACH.

An ACH payment is a type of electronic bank-to-bank payment. The ACH system is a way to transfer money between bank accounts, rather than going through card networks or using wire transfer, paper checks, or cash.

The Automated Clearing House network is a US-based network that also covers the U.S. Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands.

ACH payments are not generally made in the UK, Eurozone, or anywhere else outside the United States and associated territories, because although international ACH transfers are possible, typically they are sent via wire transfer. ACH payments are also commonly referred to as ACH transfers or transactions.

Merchant ACH (Automated Clearing House) transactions must adhere to various regulatory requirements to ensure compliance with federal laws, prevent fraud, and maintain the integrity of the payment system. Nacha oversees the ACH network, and its rules are crucial for compliance. Additionally, Regulation E, part of the Electronic Fund Transfer Act (EFTA), governs all ACH transactions involving personal bank accounts. ACH transactions must also comply with the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations to prevent financial crimes, with key elements including customer due diligence and suspicious activity reporting. Finally, ACH transactions must meet Office of Foreign Assets Control (OFAC) and Gramm-Leach-Bliley Act (GLBA) requirements.

There are several key participants who work together to facilitate ACH payments. At the start is the Originator, which can be an individual, company, or organization initiating the transaction. This transaction is then handled by the Originating Depository Financial Institution (ODFI), the bank or financial institution responsible for sending the payment into the ACH network. The payment is processed by an ACH Operator, like the Federal Reserve Bank or The Clearing House, which manages the sorting and delivery of transactions. The transaction is then received by the Receiving Depository Financial Institution (RDFI), which credits or debits the appropriate account. The final participant is the Receiver, the individual or entity who gets the payment. Additional support can come from Third-Party Service Providers (TPSPs), such as Bill360, which help Originators or ODFIs with processing, and Nacha the organization that sets the rules and standards for the network to ensure smooth and secure transactions.

Direct deposits involve the electronic transfer of funds into a recipient's bank account. Common examples include payroll deposits, government benefits and tax refunds.

Direct payments involve the electronic transfer of funds from an individual's or entity's bank account to pay bills or other obligations. Examples include bill payments, vendor payments, online purchases, donations and subscription services.

ACH transactions encompass two primary types: credits and debits, each serving distinct purposes in electronic fund transfers. ACH credits typically involve funds being deposited into a recipient's account, such as direct deposits of payroll, tax refunds, or vendor payments. These transactions are initiated by the payer or employer and are processed through the ACH network to the recipient's bank, where the funds are credited to their account. Conversely, ACH debits involve withdrawals from an account, initiated by the recipient to authorize payments like utility bills, mortgage payments, or subscription fees. The ACH system facilitates these transactions by electronically transferring funds from the payer's bank to the payee's bank, ensuring efficient and secure money transfers.

Bill360 clients are required to obtain proper authorization for processing ACH payments as mandated by Nacha. Proper Authorization is not only a regulatory obligation, but is also a crucial step for several reasons, including ensuring security, compliance, and customer trust. ACH Authorizations serve as a legal and procedural safeguard, protecting both the payer and the payee in electronic fund transfer process. For payers, authorization ensures that only approved transactions are processed, preventing unauthorized withdrawals from their accounts. This security measure helps mitigate the risk of fraud and unauthorized access to funds. For payees, obtaining proper authorization ensures compliance with regulations and payment processing rules set by organizations like Nacha. It also fosters trust with customers by demonstrating transparency and accountability in financial transactions. By requiring authorization, businesses and financial institutions uphold integrity in their ACH operations, safeguarding both parties involved in electronic payments.

Proper authorization refers to Bill360 clients obtaining explicit consent from their customer before initiating an ACH transaction, ensuring that the authorized signer of the bank account is fully aware of and agrees to the terms of the payment. Consent can be provided in writing (including electronically) or verbally, depending on the circumstances. The authorization should include key details such as the amount, frequency, and purpose of the transaction.

Authorization retention requirements refer to the obligation of Bill360 clients to securely store customer payment authorizations for a specified period, as mandated by Nacha. You are typically required to retain these records for at least two years from the date the customer revoked their authorization or from the date of the first or last transaction, whichever is longer. These records must be stored in a manner that ensures they are easily accessible in case of an audit, dispute, or inquiry by the customer or a regulatory body. The stored authorization should clearly outline the terms agreed upon by the customer.

All ACH transactions are classified by a Standard Entry Class (SEC) classification that describes how an ACH payment was authorized by the consumer or business receiving payment via an ACH transaction. SEC codes are defined and maintained by Nacha, the governing body for the ACH network.

In a B2B environment, most ACH transactions are classified with an SEC of either CCD or CTX. Both are used exclusively for transactions between two businesses. The required authorization is the underlying business agreement between the Originator and Receiver, typically the purchase order.

In some cases, businesses that primarily sell to other businesses may sell goods or services to an individual consumer who pays using a personal bank account or to a small business that utilizes a personal bank account for business purposes. In these cases, depending upon how the transaction was authorized.

• PPD – the ACH payment must be authorized in writing that specifically states that the account holder is authorizing the transaction. This authorization is typically a form the account holder completes and provides to the Receiver. As an example, the form that is completed for authorizing payment to be made from your account for a club membership.
• TEL – the ACH payment information and related authorization is received by the Receiver (the business) via the telephone. There must be an existing relationship between the parties (represented by either a signed written agreement such as a purchase order or purchases made within the past 2 years). If no such relationship exists, an ACH transaction via telephone is only allowed if the call is initiated by the account holder.
• WEB – used when the authorization from the account holder is received by a business via the internet.