What is an Automated Clearing House (ACH)?

The Automated Clearing House (ACH) Network is like email for money...

Instead of paper checks moving around the country, like paper mail used to, there's the electronic equivalent of a check moving through the system. It's cheaper, faster, and more reliable than checks, but the basic logic is the same.

An ACH transfer is an electronic form of moving money around between bank accounts.

ACH stands for Automated Clearing House, which is a system to replace paper as a method of making payments. It was started by the Federal Reserve Bank of San Francisco in the 1970s. It handles domestic payments inside the country.

ACH has also come to be used as a generic term for such systems. The BACs system in the UK, or parts of the PE ACH system in the eurozone could also be considered “an ACH.”

Types of ACH transfers include external funds transfers, person-to-person payments, bill payments, and direct deposits from employers and government benefit programs.

ACH debit transactions are when money is “pulled” from an account. If you set up a recurring bill payment, the company charging you will pull what is owed from your account.

ACH credit transactions are when you “push” money online to accounts at different banks. You may initiate such a transaction to send money to someone, say a friend or family member.

Direct deposit is the use of an ACH bank transfer system. It’s typically used when an organization — say the government with Social Security or a company with payroll — wants to pay a number of people varying amounts at the same time.

Direct wires don’t operate through a centralized system. These transfers are conducted directly from bank-to-bank.

ACH is not a real-time settlements system — Money is not sent instantaneously. Instead, a bank will collect all the payments to be made by its customers and then process them in a batch. These are usually processed three times a day. The system itself manages the transit of all of the varied payments to the receiving banks, which then allocate them to their customers.

The money usually moves the day the instruction is given, although this can vary. A late Friday instruction might not move until Monday morning. Further, the system only operates on “business days,” those days when the banking system itself is open, thus not on weekends and public holidays.

The receiving bank might allocate an ACH transfer to the recipient’s account when received but usually not. A day or two later is normal.

In some cases, it is possible to make sure an ACH is allocated to the recipient’s account immediately upon receipt, but this usually involves an extra fee. It usually takes two to three business days for an ACH bank transfer to complete.

ACH transfers are safe in as much as any of the banking system is safe. Fraud is always a possibility. However, ACH transfers are generally safe — certainly safer than sending cash or a check through the mail.

Once an ACH is made, there is usually a window of time where the sender can withdraw it, if it was made in error. This makes it safer for the sender than a direct wire, which cannot be reversed once completed.

Yes. One to remember is that you must have the funds available in your account to make the transfer. If you don’t, your own bank will ding you with a fee for the attempt — as well as not make that transfer. Your bank may also limit the number of ACH transfers — and/or the amount of such transfers — in a given month.

Also, it’s also usually not possible to make international transfers using ACH. This isn’t an absolute ban –- It’s just that the system only works with the use of an ACH number for the recipient’s bank, something that is usually, but not always, the preserve of a domestic US bank.

Another limitation is that ACH is a batch, not instant, transfer system. So any instruction will wait until the next batch processing time.

Your bank or financial institution will provide instructions to send a payment using ACH or wire transfer — or to link your account to another financial institution.

If you are setting up direct deposit with your employer, they will provide you with a form or electronic system to set it up.

If you are setting up a one-time or recurring payment with a company — like your utility provider or credit card company — they will have instructions online to enter the appropriate information.