Electronic payments or ACH are a simple way to transfer and receive funds. You likely use ACH transfers daily and don’t realize it. ACH transactions simplified our lives, making transferring funds safer, faster, and easier, but what does ACH stand for?
In this article, we give the answers to the ACH definition, and discuss the question, "what does ACH stand for". We'll also go over how it's used, and examples of ACH transactions so you can understand the process of getting paid or paying bills electronically.
The ACH definition and history
The ACH definition: ACH which stands for Automated Clearing House, is the electronic processing of financial transactions. You’ve likely used it many times in your life.
For example, if you’ve received payment via direct deposit or you’ve allowed a creditor to debit your account for your monthly payment automatically, you’ve used ACH.
While it seems like ACH came about rather recently, it has deeper roots than most people realize, dating all the way back to 1968.
Discussions between a group of California bankers and the American Bank Association began at this time when both entities realized the current system (paper checks) wasn’t feasible long term. They knew it would overload the system and delay payment processing.
By 1972, ACH was formed in California. In just a few short years, more regional operations popped up, which prompted the formation of NACHA (National Automated Clearing House Association).
Shortly after the formation, Direct Deposit began. The U.S Air Force and the Social Security Administration were the first two entities to use it.
Today, everyone uses ACH in some way, including direct deposits, direct payments, business payments to vendors and suppliers, and bank account transfers.
The ACH abbreviation
As mentioned earlier, ACH abbreviation stands for Automated Clearing House, and the ACH network processes financial transactions. If you look at the terms individually, it makes more sense.
The ‘Automated’ part refers to the computers in the network talking to one another to ‘automatically’ transfer funds. The transactions happen without your input - they are automatic.
The ‘Clearing House’ refers to the house that clears the funds. The U.S. has two clearing houses - The Federal Reserve and The Electronic Payments Network (EPN). Their job is to make sure all numbers match and make sense for the transaction.
You’ve likely come across ACH in a variety of places, including your bank statements, bills, and when you receive direct deposits.
What does ACH stand for in banking, and with your bills and payments?
Now let's talk about how ACH affects your day-to-day financial life and also discuss the question "what does ACH stand for in banking" plus more!
ACH in banking
When it comes to banking, payments from your account are initiated by an originator. They basically send a request to your bank, which in this scenario is known as the Originating Depository Financial Institution (ODFI).
This request is then sent to the Receiving Depository Financial Institution (RDFI) and the funds are routed accordingly to be deposited where the payments are due. This account where the payments are deposited is also known as the receiver's account.
ACH and your bank statements
When you see ACH on your bank statements it means there was an electronic transfer.
If you allowed electronic payments from your accounts, such as to make your car payment or credit card credit payment, that’s an ACH transaction. If you transferred money to your account or had it transferred to your account, that’s also an ACH transaction.
ACH and your bills
On your bills, you may see ACH as a payment option. Which just means you can pay your bill electronically. You might use the ACH payment system with a utility company to pay utility bills, for example.
You usually have two options:
Set up an automatic payment
Let the creditor pull the payment from your account on the same day each month using automatic payments.
Electronically pay the bill manually each month
Rather than the creditor pulling the money automatically, you initiate the transaction, paying the bill online for one-time use.
ACH and your paycheck
If your employer offers a Direct Deposit, you may see it called ACH, electronic transfer, or Direct Deposit. It means your employer will transfer your earned income directly to your bank account when they do payroll. Sometimes it gives you early access to your paycheck versus if you waited for a paper check.
What does ACH debit mean?
You've heard the term, but what does ACH debit mean? With ACH debit transactions, you can make payments from your checking account. The person taking the money will pull it from your account when it's owed.
To do this, you need to give the person you're paying access to your account number, and routing numbers are also required. Debit transactions take only one business day.
What does ACH credit mean?
ACH credit transactions are not like using credit card networks, but rather they allow you to take money from your account and give it to someone.
They are often described as "push transactions" because you push the money out of your account and to someone else's. An ACH credit transaction will take two business days maximum, but it can be less.
Pros and cons of ACH
Now you're familiar with the answer to, "what does ACH mean". But there are good and bad things about ACH, so here's a quick highlight of both pros and cons.
- Funds transfer faster, whether you’re receiving payment (paycheck) or paying someone.
- You don’t have to mess with paper checks or wait for the recipient to cash them.
- You can pay bills on time and avoid late fees.
- Increased security results since you aren’t carrying your bank information around on paper checks.
- You have to share your bank details, which can increase the risk of a security breach.
- You have to keep track of automatic payments or risk an overdraft.
How ACH is used by banks, individuals and businesses
While we've gone over what ACH stands for in banking and the pros and cons, we haven't yet discussed how it's used in detail. Banking institutions, individuals, and businesses use ACH, each realizing different benefits from it.
Banks use ACH for transfers, both internally and externally. They also use it to process bill payments electronically.
For example, you transfer money from your savings account at your bank to your checking account at the same bank. That’s an ACH electronic transfer.
You may also transfer money from your savings account at one bank to your friend’s account at another bank, which is also an ACH transfer with the bank.
It isn't just financial institutions that use ACH. Individuals use ACH more than many people realize. Receiving your paycheck via direct deposit, setting up an automatic bill payment, or buying items online are all examples of how individuals use ACH.
Businesses are on the other end of the ACH transactions that individuals initiate. For example, they set up Direct Deposit, electronically transferring your income to your bank account.
Businesses also use ACH to pay vendors and suppliers and receive payment from customers.
Examples of ACH transactions
ACH transactions happen daily with individuals, banks, and businesses. Here are a few examples:
Set up automatic payments for your car payment
If your car payment is due on the 5th of each month, the bank will automatically transfer the funds from your bank account to the bank holding your car loan. You don’t have to write a check or initiate the transaction.
Businesses send payments to suppliers
When businesses buy supplies, they do so on credit, paying the bill usually in Net 30. Rather than writing a check to the supplier, a business pays the bill online, initiating an ACH transaction.
Transfer funds from one bank to another
You use ACH transfers if you have a bank account at your local bank, but you set up automatic transfers to your online high-yield savings account each month. Keep in mind that ACH transfers are different from wire transfers, which are faster but generally cost more.
ACH transactions are very helpful and make life more convenient!
Now that you know the ACH definition you probably realize how much you use ACH, and how it’s improved your life.
Whether you love direct deposit, automated payments, or you own a business and can easily transfer funds to your vendors or employees, it’s a convenience for everyone that can be used in many ways.