The ACH Network
The ACH Network is a processing and delivery system that provides for the distribution and settlement of electronic credit and debits among financial institutions. The ACH Network was developed in response to the astronomical growth of check payments and the many technological advances in the mid-twentieth century and functions as an efficient, electronic alternative to paper checks. Through a nationwide telecommunications network, each ACH Operator is able to communicate with other ACH Operators to exchange entries quickly and efficiently, regardless of geographic distances involved. The ACH network offers an assortment of technical formats that can be used for a variety of payment applications, products and services. The ACH network is governed by operating rules and guidelines, which are developed by the actual users of the system, and is administered through a series of agreements among financial institutions, customers, trading partners, and ACH Operators.
History of the ACH
The ACH movement began in the early 1970s when a group of California bankers formed the Special Committee on Paperless Entries (SCOPE). In direct response to the rapid growth in check volume, the Committee was chartered to explore the technical, operational, and legal framework necessary for an automated payments system.
SCOPE laid the groundwork for the first Automated Clearing House (ACH) association, which began operation in 1972. The establishment of this ACH association led to the formation of similar groups in other parts of the country. Agreements were made between emerging regional ACH associations and the regional Federal Reserve banks to provide facilities, equipment, and staff to operate regional ACH networks. Two notable exceptions to this type of arrangement occurred in New York and Chicago, where private clearinghouses were formed to handle ACH transactions.
In 1974, the National Automated Clearing House Association (NACHA) was formed to coordinate the ACH movement nationwide. Through the joint efforts of NACHA and the Federal Reserve System, local ACHs were linked electronically on a nationwide basis in 1978. The main benefits associated with the use of the ACH Network are cost reduction and improved productivity over paper check transactions.
ACH Operators may be private companies or the Federal Reserve Bank (FRB). The current private sector ACH Operator is Electronic Payments Network (EPN). ACH Operators are responsible for editing electronic entries received from other ACH Operators or Originating Depository Financial Institutions (ODFIs), submitting them for processing, and for providing settlement between the ODFIs and Receiving Depository Financial Institutions (RDFIs). ACH Operators are linked together for transaction exchange and provide a nationwide ACH system accessible to all depository financial institutions.
In an effort to improve the payments system, Congress enacted the Monetary Control Act in 1980. As a result of that Act, private sector ACH Operators were encouraged to compete with the Federal Reserve, which could no longer offer its service free of charge and was required to recover its operating costs. A private sector adjustment factor (i.e., profit margin) is included in Federal Reserve processing so that the Federal Reserve Bank charges as though it were operating on a "for profit" basis.
Transactions exchanged between private sector ACH Operators and the Federal Reserve Bank ACH Operator are governed by the interregional deposit and presentment times outlined in Federal Reserve Operating Circulars.
NACHA oversees American's largest electronic payments network. NACHA's primary roles are to develop and maintain the NACHA Operating Rules, to promote growth in ACH volume, and to provide educational services to its members and other ACH participants. Regional ACH Associations (RPAs) provide management, education, consulting, audit and other services to their member institutions. RPAs link all types of financial institutions (commercial banks, savings banks and credit unions) across the United States. Several of these associations also develop and implement local ACH rules, which apply to intra-regional ACH transactions. The regional ACH associations offer a wide variety of educational sessions ranging from origination and receipt operations to audit and control.
The ACH system is a batch processing, store-and-forward system. Transactions by the financial institution during the day are stored and processed later in a batch mode. Rather than sending each payment separately, ACH transaction are accumulated and sorted by destination for transmission during a predetermined time period. This provides significant economies of scale. It also provides faster processing than paper checks, which must be physically handled. Instead of using paper to carry necessary transaction information, ACH transactions are transmitted electronically between financial institutions through data transmission.