The ACH – Automated Clearing House – is a network that electronically links participating banks worldwide but mostly in the United States. It's monitored and managed by NACHA, the National Automated Clearing House Association. The ACH has been in operation since 1972, although NACHA didn't get involved until 1974. The Federal Reserve handles almost all ACH transactions, more than 85 percent. That should give you some measure of confidence that your hard-earned money is being handled properly when and if you see those letters – ACH – pop up here and there on your bank statement.
What Is an ACH Payment?
That ACH notation on your statement means that you've authorized an electronic payment to someone or that someone has paid you electronically. ACH transactions can appear as "ACH debits" or "ACH credits," or sometimes as "direct deposits" or "direct payments."
Almost anytime you set up a recurring monthly bill payment such as with a credit card lender or utility company, these transactions are ACH payments. One-time payments are typically ACH payments as well, although they're processed a little differently. And if your employer pays you by direct deposit, this is almost certainly an ACH payment, too.
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How Does ACH Payment Processing Work?
ACH payments can be initiated and processed in one of two ways. Maybe you want to make sure your car payment is never late or you don't want the hassle of writing a check or authorizing a payment every single month. You can schedule regular automatic payments authorizing your lender to charge your bank account for the amount of your payment each month. This involves providing the lender with your bank routing number and your bank account number.
But maybe you don't want to take the chance that you might not have sufficient funds in your account on that date each and every month so you'd rather authorize each payment as it comes due. This is typically an ACH payment, too, if you don't write a paper check or personally visit the company you're making a payment to so you can swipe your debit or credit card. It's a one-time transaction authorized by you using an electronic means, typically online. In either case, the lender's bank sends electronic notification to the ACH, usually via the Federal Reserve, and the ACH directs your bank to withdraw the sum you've authorized from your account and forward it to the receiving bank.
This might sound like chaos when you consider how very many ACH payments might be authorized all over the country at any given moment. Banks would be under electronic siege to transfer funds every few seconds. That's why NACHA requires that banks must submit their transaction requests to the ACH in batches at scheduled times, four times a day.
How Long Does It Take for an ACH Payment to Go Through?
NACHA changed the rules a little in 2016 to allow for same-day ACH payments. Technically, the funds can now clear your bank account on the same day your payment is submitted. Realistically, however, it's usually the next day. The whole process used to take up to four days prior to the change.
As a practical matter, you should consider that the money is gone the moment you click your mouse to authorize a payment or as of the day you've scheduled an automatic payment to take place. When your bank receives a request for an ACH payment, it generally freezes the money in your account immediately. The transaction might show as "pending" if you check your balance online but that money is no longer available to you and it has been subtracted from your available balance.
Pros and Cons of ACH Payments
Nothing could be more efficient than transacting business via electronic ACH payments, and most transactions are even free of charge. There's generally a fee for sending money out of the country, however.
Of course, you're handing over sensitive banking information – your account and bank routing numbers – to a third party and trusting that the third party will only use them as authorized. That can be a bit unnerving, but it's the same case when you write a paper check. Your account and routing numbers appear right there in print. And NACHA holds the finer details of how payments are processed close to its vest to prevent hacking of the system by unauthorized parties. In fact, instances of fraud have been fairly few and far between over the years.
You reserve the right to dispute transactions that don't appear as you authorized, although this can take some time and you'll be out of the funds in the meantime. You can only dispute an unauthorized transaction, the date or the amount of an ACH payment. You can't allege that you did not receive merchandise or services you purchased and expect the funds to be returned to your account.
And even if you win the dispute, you're still liable for at least [some] of the money – $50 if you cry foul within two days or $500 if you wait longer. Disputes must be received within 60 days of the event or you're out of luck. If you do realize a discrepancy, report it to your bank as soon as possible.