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What is Automated Clearing House (ACH)? – Work, Benefits, and More

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The Automated Clearing House Network, also recognized as ACH, is a channel operated by the National Association of Automated Clearing Houses (ACHA) that electronically transfers funds from one location to another. Nacha works to fuel the growth of electronic payments in the United States for payroll, direct deposit, utility bills, tax payments, etc.

ACH transactions are similar to paper checks; However, the main difference is that the payment is made digitally. Therefore, they are often called:

  • Electronic Funds Transfer (EFT)
  • electronic controls

How the ACH Network Works

How the ACH Network Works

The ACH network serves a variety of financial institutions totalling more than $40 billion annually through electronic transactions. The ACH system acts as a channel that helps people and institutions transfer money from one bank account to another; The form of payment may include direct fees or deposits for government, consumer or business-to-business purposes.

The Federal Reserve or clearinghouse classifies the lot and ensures that the banks are authorized and able to perform the intended recipient’s transaction. The recipient’s bank account then receives the funds transacted by the sender.

For Example, ACH Payments Allow Businesses to do the Following Online

  • Customers pay a service provider
  • The employer deposits money into the employee’s current account
  • Companies pay recurring funds to suppliers for materials
  • Transfer money from a single bank account to a different

How to Make ACH Payments

The sender needs the recipient’s bank account information to transfer money from one party to another using the ACH method. Therefore, they need the following information to set up direct deposit:

  • Name of the bank used by the recipient
  • Type of bank account (chequing or savings account)
  • ABA bank sort code
  • Beneficiary account number

Advantages of the Automated Clearing House Network

Since the ACH network processes transactions by sending them in batches, online transactions have become a more straightforward and convenient process. Parties do not essential to be physically present to cash, transport or process paper checks.

Additionally, ACH transfers are a more cost-effective option for people who want to transfer money from one location to another via direct deposit or electronic funds transfer. Further, ACH payments lead to a reduced carbon footprint. Since no physical resources such as envelopes, ink, stamps, printers, etc., are use, less paper and pulp are use because the entire transaction can done online.

So, in summary, the advantages of the ACH network are:

  • Ease of handling/convenience
  • The cheapest way to transfer money
  • Reduced carbon footprint

Disadvantages of the ACH Network

Because the ACH network processes transactions in batches, there will be times when transfers will not go through until thresholds are reached or complete during a specific time of day; therefore, ACH payments tend not to be suitable for time-sensitive transactions.

Suppose a sender runs out of funds to pay the recipient due to batch processing delays. In that case, the recipient may not be able to complete the decline transaction until after the product or service can delivered or completed. So the process is also a bottleneck.

When Should ACH Payments be Use?

If the business uses paper checks, ACH transfers may be recommend as they are convenient, easier to process, and environmentally friendly since payment can made online. With low cost and high safety, ACH payments are ideal for recurring payments of personal expenses for homeowners, utilities and monthly credit card payments.

For businesses with a relatively large number of employees, ACH payment methods would be recommend. They allow for direct deposit and reduce the hassle of distributing physical checks to all company employees.

Conversely, if the business is concerned about payments that may be inaccurate or “undeliverable” and not made until the product or service is deliver, ACH would not be the suggested option.

Conclusion

An automated clearinghouse is a computerize electronic network use to process transactions between participating financial institutions, typically small domestic payments. It can support both bank transfers and direct debits.

Also Read: What is Computer Network? – Components, Characteristics, and More

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