What is

Automated Clearing House (ACH)


ACH is a financial network that helps individuals and companies digitally move money between different bank accounts in the US. Read the full definition.

Digitalization has changed the way we bank. Financial transactions are now fast, convenient, and more secure than ever before. 

In the US, one of the key systems that has facilitated this shift is the Automated Clearing House (ACH). ACH is crucial for simplifying and streamlining how individuals and companies pay bills online, receive payments, and make direct deposits.  

What Is ACH?

An Automated Clearing House (ACH) is an electronic funds transfer system. It lets both people and organizations securely and efficiently move money between various financial institutions across the US. 

The ACH network is a reliable alternative to traditional paper-based methods such as checks and wire transfers. It offers end users a cost-effective way to electronically transfer funds.

How Does ACH Work?

ACH transactions allow users to electronically transfer funds from one bank account to another. The process follows the steps outlined below. 

  • Authorization: The sender obtains authorization from the recipient to initiate an ACH transaction. This can be done through signed agreements or online consent.
  • Initiation: The sender provides the necessary transaction details to their financial institution. For the purpose of ACH transactions, this is called the originating depository financial institution or ODFI. The information includes the recipient's bank account number, routing number, and the amount to be transferred.
  • ODFI processing: The ODFI collects and verifies the transaction information provided by the sender and forwards it to the ACH operator.
  • ACH Operator: The ACH operator acts as a central hub for processing ACH transactions. It receives the transaction files from ODFIs and distributes them to the respective receiving depository financial institutions (RDFIs).
  • RDFI processing: The RDFI receives the transaction details from the ACH operator and credits the funds to the recipient's account.
  • Settlement: The ACH operator facilitates the settlement process. At this point, the funds go from the ODFIs to the RDFIs. This settlement typically occurs in batches and can take one or two business days.

Benefits of ACH

There are several important advantages to using ACH for money transfers. First off, the process is a lot more efficient than wire transfers or traditional paper-based transactions. With little manual processing, everything happens much faster. 

On top of being faster, ACH Is also more cost-effective, helping users reduce transaction costs. 

ACH also offers individuals and companies the option to schedule transactions in advance. This is very convenient for recurring payments, such as subscriptions or regular bills. 

Finally, ACH is very secure. It uses encryption and several other measures to protect sensitive financial information. Since transactions take place online, there is no risk of losing paper checks or associated paperwork. 

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