Recently, the ACH System has been in the financial and banking news. Why? Same day ACH clearing is on the way in the not too distant future. While this is a major change in how electronic payments will move in the future, very few people are well versed in the world of ACH payments.
NACHA, also known as the Electronic Payments Association, serves as the Trustee and Overseer of the ACH Network. NACHA manages the development, administration, and the many rules for the ACH payment network, which currently has 12,000 participating financial institutions in the United States alone. The ACH network moves money and information from one bank account to another and handles 90% of the total value of all electronic bank payments in the U.S.
Unless you work in corporate finance or banking, you probably did not realize the extent and sheer volume of payments moving through the ACH network. Almost every type of payment moves across the ACH Network, including: debit payments, credit payments, direct deposit payroll, consumer transactions, business transactions, recurring payments, one-time payments, government payments, international payments and payment information.
Operating as the linchpins in the ACH Network system are these financial participants: the ACH Operator (service provider), the ODFI (originating depository financial institution) and the RDFI (receiving depository financial institution). Bank accounts at either the ODFI or RDFI are the vehicle for the movement of funds from a payee to payer or vice versa. The ACH operator is the entity that acts as the central facility for clearing, delivery and settlement of entries between participating DFI’s (depository financial institutions).
In the ACH system, the terms Originator and Receiver refer to the participants that initiate and receive ACH entries. Unlike the check system, where a check is always a debit instrument, an ACH entry may be either a credit or debit transaction. The ACH can be either a debit or credit transaction on both sides: an originator can originate both ACH debits and credits.
The ACH Network is a batch processing system, whereby financial institutions accumulate ACH transactions and sort them by destination for transmission during predetermined time slots. All ACH transactions are transmitted electronically, with no paper. In a typical ACH transaction, there are five participants as follows:
The ACH operator is responsible for effecting settlement of ACH transactions among participating DFI’s, in accordance with NACHA rules, DFI agreements and in compliance with the rules of the Federal Reserve. The Federal Reserve provides settlement services for ACH entries processed by the FED and the ACH operators. On a daily bank day basis, the Fed calculates the net credit and debit positions of financial institutions and applies those credits or debits to the reserve accounts of the financial institutions (or their correspondent banks) that are maintained on the books of the Federal Reserve.
ACH transactions are typically classified as either consumer payments, corporate (non-consumer) payments or government payments, depending on the relationship of the parties involved in the transaction. All ACH payments have a standard entry code (sec) to distinguish amongst the many types of ACH transactions. While the ACH codes are numerous, here are some of the common ones:
CCD – Corporate credit or debit: either a debit or credit application when unrelated corporate parties transfer money.
ARC – Accounts receivable entry: this enables ACH originators to convert an eligible paper check received via US mail to a single entry ACH debit.
BOC – Back office conversion entry: this enables ACH originators to convert (during back office processing) an eligible check received at point of purchase or bill payment location to a single entry ACH debit.
POP – Point of purchase entry: this enables an ACH debit at the point of purchase, via a paper check, provided that the payer is notified at the time of purchase and the check is voided and returned to the issuer.
CEI – Customer initiated entry: typically when a consumer initiates a payment to a company for money owed, via banking service or bill payment service
PPD – Prearranged payment and deposit entry: typically a direct deposit credit or a direct payment debit to a consumer account…for payroll, interest or monies owed
WEB – Internet/Mobile initiated entry: typically a debit or credit, one-time or recurring, to a consumer receiver account
The ACH system continues to experience large year over year increases in both terms of dollars and transactions. The ACH system is a very efficient system for both consumer and corporate payments for three very compelling reasons: 1) the system can handle both dollars and information exchange; 2) the system is generally cheaper then both the payment card system and the wire transfer system; and 3) the system is much more efficient then the payment card system or the checking system.
As the leading authority and expert in payments and treasury operations, Vizant works with its clients to implement actionable and real world solutions that will maximize the efficiency and reduce the ongoing costs of their payments and treasury functions. Our business model is truly unique in the world of professional services and advisory firms: We operate with a 100% results based performance pricing model.