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Tuesday, November 24, 2020

Automated Clearing House: What is it all About?

On many occasions, we come across the term ACH while discussing banking topics. ACH stands for Automated Clearing House. It is a computer-oriented electronic network to process transactions. Typically, ACH is used for low denomination payments for inland transactions. 

ACH Payment Meaning

ach processingACH is essentially in use by financial or banking institutions that comprise a particular network. It supports both direct debits and credit transfers. A direct debit or direct withdrawal is a monetary transaction where one person can withdraw money from the bank account of another individual.  Additionally, a credit transfer, also known as bank transfer or wire transfer, is a technique of transferring funds electronically from one individual or entity to another. The entire ACH payment scheme has been tailored for processing sets of several transactions. The cost of processing ACH finance is quite affordable and the method has been invented to advocate its application for low denomination payments.

Some useful ACH information  

how does ach workThe first ACH began its operations in April 1968. Set up in the United Kingdom, its name was BACS (Bacs Payment Schemes Limited). A cluster of banking institutions in California, United States pursued a substitution for check payments. The first ACH began its operations in the country in 1972. The owner of this automated clearing house was the Federal Reserve Bank of San Francisco.

In the United Kingdom, BACS ran its operations from the start based on net settlement or inter-bank transactions. Netting ACH deals diminish the sum of deposits a bank should have.

ACH Bank operations: How do they take place?

In ACH bank operations, the processing of huge numbers of debit and credit transactions takes place in bunches. The payer or drawee arranges automated clearing house credit transfers and they incorporate payments like the following:

what is ach direct deposit

  • Direct deposits 
  • Retail payments 
  • Payrolls 
  • Vendor payments



The drawer or payee arranges for the automated clearing house direct debit proceedings. However, the payer or drawee has to preauthorize or grant clearance for it. Automated clearing house direct debit transactions consist of customer payments like the following:

ach transfer

  • Utility bills 
  • Mortgage loans 
  • Insurance premiums 
  • Other kinds of bills

The bank keeps the transactions operated by it throughout the day and channelizes them in batches to the Automated Clearing House. These houses function based on the net settlement method. Therefore, the procedure might take some time, even days. Besides, there is the involvement of some risk. On certain occasions, these clearinghouses might permit the transmission of a small quantity of some extra details together with payment orders.

ach processing networkThere are several differences between RTGS (real-time gross settlement) payments and ACH payments. The central RTGS system initiates RTGS payments for instant payments.  They don’t necessitate any waiting time on a one-to-one footing. On the other hand, low-denomination transactions, that are not vital, use Automated Clearing House methods. At the same time, high-denomination, vital transactions generally use RTGS schemes.

Related Article: How to be a Successful Banker

ACH financial system has diverse usage throughout the world and is becoming increasingly popular among small businesses for its convenience and affordability.


Kiara Dutta
Kiara Dutta comes from an Engineering background, with a specialization in Information Technology. She has a keen interest and expertise in Web Development, Data Analytics, and Research. She trusts in the process of growth through knowledge and hard work.

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