Overview

An automated clearing house (ACH) is a computer-based electronic network for processing transactions, usually domestic low-value payments, between participating financial institutions. It may support both credit transfers and direct debits. The ACH system is designed to process batches of payments containing numerous transactions, and it charges fees low enough to encourage its use for low-value payments.

History

The first automated clearing house was BACS in the United Kingdom, which started processing payments in April 1968. BACS operated from the beginning on a net settlement basis. Netting ACH transactions reduces the amount of deposits a bank must hold.

In the U.S. in the late 1960s, a group of banks in California sought a replacement for check payments. This led to the first automated clearing house in the US in 1972, operated by the Federal Reserve Bank of San Francisco.

Operation

ACHs process large volumes of credit and debit transactions in batches. ACH credit transfers are initiated by the payer and include payments such as: direct deposits, payrolls, retail payments and vendor payments. ACH direct debit collections are initiated by the payee with pre-authorization from the payer; ACH direct debits include consumer payments such as utility bills, insurance premiums, mortgage loans, and other types of bills. Transactions received by the bank during the day are stored and transmitted in batches to the ACH.

ACHs are net settlement systems, so settlement may be delayed for days, and there is some settlement risk. ACHs may allow for the transfer of a limited amount of additional information along with payment instructions.

ACH payments contrast with real-time gross settlement (RTGS) payments which are processed immediately by the central RTGS system and not subject to any waiting period on a one-to-one basis. ACH systems are typically used for low-value, non-urgent transactions while RTGS systems are typically used for high-value, urgent transactions.

Existing systems

There are various ACH systems around the world. The World Bank identified 87 systems in their 2010 survey and 98 systems in their 2012 survey, while other sources have made qualitative analysis of a smaller number of ACH systems.

In addition, there are various ACH associations such as the European Automated Clearing House Association.