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The technical side of ACH - What's going on behind the scenes?

An ACH, which stands for Automated Clearing House, is a very common form of bank transaction. Many people use ACHs on a regular basis without even realizing it. An ACH is essentially an automatic type of payment that takes place between banks electronically.  These forms of payments are typically overseen and regulated by the National Automated Clearing House Association as well as the rest of the federal government.

What are Examples of ACH Payments?

There are two main types of ACH payments, which are ACH credits and ACH debits. An ACH credit takes place when someone automatically makes a payment out of their account and an ACH debit takes place when funds are automatically withdrawn from an account.

An example of an ACH credit is if a bank customer creates an electronic payment to a utility company or other vendor. An ACH debit takes place when a bank customer provides a company or vendor with the ability to pull funds out of their account when payment comes due. Common examples of ACH debits include payments for gym memberships or similar bills. Banks will provide customers with access to ACH payments due to the flexibility it provides.

When wondering what is an ACH payment, it is important to understand how the ACH process works. There are seven main steps that are involved in the ACH process.

Steps of ACH Process


1 – ACH Transaction is Originated

When completing an ACH transfer, the first step that will occur will come when a customer originates the ACH. The customer can originate the ACH using their online banking system to complete either one-time ACH payments or recurring payments. This can take place when a customer tries to submit a credit or if a vendor is requesting funds through an ACH debit. This process will include inputting the recipient bank account’s information, the date of the transfer and amount of transfer.

2 – Bank Submits ACH Entry

After initiating an ACH, the ACH transfer will need to be approved, processed and submitted by the bank. Prior to submitting the ACH entry, the bank will review the basic information to ensure there are proceeds available for ACH credits to ensure the bank account is not overdrawn. This process is almost always completed automatically through a bank’s systems. If there are issues, the ACH transfer may be flagged and denied until certain items and issues are cleared up.

3 – ACH Bank Sends Entry to ACH Operators

If the bank approves the ACH entry, they will then send the entry to the local ACH operators for their approval and processing. Banks will typically send the ACHs in batches fairly frequently each hour. This helps to keep the process efficient and better organized for all users.

4 – ACH Operator Organizes Entries

The ACH operator is responsible for organizing all ACH requests and ensuring the right amount is sent to the right bank. Once they have received the batch of ACH requests from the banks, the ACH operator will organize the entries. They will then run a variety of tests to ensure the ACHs are properly organized before they are sent out to the next bank.

5 – ACH Operator Sends Entries to Recipient Bank

After going through the process of reviewing, organizing and validating the ACH entries, the ACH operator will then send the entries to the recipient banks. This is commonly sent to the bank in batches several times each hour to ensure the process remains efficient and organized.

6 – Bank Confirms Originator’s Account Has Funds to Cover

Once receiving the ACH entries, the banks will again confirm that there are enough funds to manage the ACH accounts. This is done to help prevent recalled ACH transactions and overdrafts.

7 – Bank Posts or Withdraws Entry to or from Account

The final part of the ACH process is to post the funds to the recipient's account. In most cases, as soon as the ACH is posted, the recipient will have full access to these funds. While it includes seven different steps, the entire ACH process will normally be completed within a matter of one to two business days.  

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Risks of ACH Processes

The use of ACH credits and debits is very common and banks continue to offer these services as a way to provide conveniences to their customers. Further, the regulations set forth by the federal government and NCHA help to ensure accuracy and reduce the risk of fraud. However, there are risks that come with ACH transactions that banks, customers and regulators should be aware of.

ACH Credit Risks

Due to the potential timing process that can take place, there is a risk that funds could leave an account and not be properly covered by the appropriate parties. This risk is normally the most significant in a situation when a business declares bankruptcy while an ACH is still open and then is not willing or able to cover the ACH. If this occurs, the bank is likely going to be the institution that takes on the credit risk.

ACH Debit Risks

Another risk that could take place is with ACH debits. The largest risk that occurs with ACH debits is if someone obtains the bank account information of a customer and tries to put forth a fraudulent ACH debit request. If a customer is not paying attention to their accounts regularly, the fraud could take place regularly and a significant amount of money could be stolen.

Operational Risk

The process of a funds transfer when processing ACH is largely automated, but there are some operational risks for all parties involved. When submitting an ACH, the success of a transfer is reliant on all parties submitting the correct information. Simple mistakes can end up canceling the ACH entirely or lead the funds to be sent to the wrong institution or bank account. This could then require the ACH to be formally recalled, which can be challenging if the incorrect recipient is not compliant or responsive.

Why Work With BankCard Services?

Here at BankCard Services, we understand companies need flexibility in how they receive and process payments.  That’s why we offer a number of solutions from online or in-storepayment processing, to loyalty cards or ACH Payment solutions we’re here with simple and secure payment processing solutions that help you focus on what matters most—growing your business. Get in touch today to learn more about our All-In-One Merchant Platform, and find out how easy it can be to qualify.

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