ACH Processing 101

ACH History

Simply put, ACH is an electronic financial transactions network in the U.S. The ACH network is governed by NACHA (The Electronic Payments Association) and the Federal Reserve. ACH got its start in the seventies when it became clear that the number of paper checks used by consumers and businesses would soon outstrip the ability of the existing system to process and handle them. The Federal Reserve was included in early discussions of the network and also offered to supply the requisite computer systems. The most common types of business check processing transactions are salary payments, Social Security benefit payments, and recurring bill payments.

What It Does

Computer World magazine aptly described ACH, calling it a private and secure electronic payment transfer network that connects all financial institutions in the United States. ACH is just one of several groups that have networked together in order to exchange electronic transactions and handle business check processing. Most companies prefer ACH to process business checks because it is less expensive and much faster than dealing with paper checks. ACH extends both to the business-to-business world and the business-to-consumer realm. Some well-known electronic fund transfers that go through this network include debit card transactions and direct deposit transactions for paychecks.

The System’s Uses

Business check processing is just one function of the very versatile ACH system. Here are a few of the uses of ACH processing:

• E-commerce payments
• Federal, state, and local tax payments
• Banks sell the service to government and business customers
• Business-to-business (B2B) transactions
• Direct debit payment or automatic bill pay for bills such as mortgage payments, rent, insurance premiums, utilities, etc.
• Direct deposit of Social Security benefits, tax refunds, and payroll
• Debit card transactions

Problems with ACH

Although the ACH system has made business check processing infinitely cheaper and easier, the network is not without its problems. One such problem might occur when a party tries to stop payment on a physical check without realizing that the check actually was processed as an ACH entry. Another problem arises when a merchant presents a check for ACH processing without following the compliance guidelines for the handling of the physical check. The merchant then may also present the physical check for payment, resulting in a double-payment situation.