Understanding the ACH network.
In today's digital age, money moves faster than ever. At the heart of this rapid financial landscape lies the Automated Clearing House (ACH) network. While often unseen, ACH transactions power a vast array of everyday financial activities, from direct deposits to bill payments.
Whether you're a consumer curious about your paycheck or a business owner seeking to optimize payment processing, this resource will provide you with a comprehensive understanding of how ACH works, the different types of transactions available, and the security measures in place to protect your funds.
About ACH transactions.
Have questions about ACH transactions? You're not alone. This section aims to provide clear and concise answers to common inquiries about ACH payments. From understanding the basics to regulatory requirements, Bill360 is here to help you. But please remember, interpretation of legal rules and regulations and the impact of such rules and regulations on your business may involve in-depth legal analysis which Bill360 cannot provide to you. None of the information contained in this section is "legal advice" so be sure and consult your attorney for more detailed advice regarding compliant 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.
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.
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.
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.