Automated Clearing House (ACH)

What Is an Automated Clearing House (ACH)?

An Automated Clearing House (ACH) is an electronic network that manages electronic banking transactions. Any entity (business, government organization, or individual) can use the ACH network to send or receive funds. Employers typically use ACH to pay their employees through direct deposits.

The ACH network is regulated by the federal government and managed by the National Automated Clearing House Association (NACHA). 

How Does an ACH Work?

In an ACH network, funds are transferred from one bank account to another. If you are an employer and need to conduct payroll, you would initiate a transfer from your organization’s bank account to your employee’s bank account. 

Each ACH transaction involves an Originating Depository Financial Institution (ODFI) and a Receiving Depository Financial Institution (RDFI). Here’s how they work:

1. The originator (employer/business) begins the direct deposit or payment using an ACH network. ACH portals generally allow you to set up one-time and recurring payments. 

2. The payment amounts are entered electronically into the ACH network. 

3. The ACH network makes a connection with the employer’s bank, or Originating Depository Financial Institution (ODFI). 

4. The ODFI aggregates payments and transmits them in batches to an ACH operator. 

5. ACH operator pushes funds to employees’ banks, or Receiving Depository Financial Institutions (RDFIs). RDFIs then post the payments into employees’ bank accounts. 

What Information Do You Need from Employees to Post an ACH to Their Accounts?

Employers must receive the following information to post an ACH to their employee’s account:

• The name of the employee’s bank or credit union through which they will receive their funds. 

• The type of account the employee would like their funds to be deposited into (checking or savings account). 

• The ABA routing number of the employee’s bank. This is a nine-digit code that identifies banks in the U.S.

• The employee’s account number. This is an 8 to 12-digit number that identifies an individual’s bank account. 

How Long Does It Take for an ACH Payment to Post?

ACH payments traditionally took three to five business days. But as technology advanced and the demand for faster transactions grew, NACHA began same-day payments in 2016. Employers now have the option to select same-day, next-day, or two-day payments. Processing time does not include weekends and national holidays. 

When NACHA began same-day ACH payments, it opened up two new clearing windows: 

• A morning ODFI submission deadline at 10:30 a.m. ET. The payment transfer would occur at 1 p.m. (in the RDFI’s local time) that same day.

• An afternoon ODFI submission deadline at 2:45 p.m. ET. The payment transfer would occur at 5 p.m. (in the RDFI’s local time) that same day.

Can You Stop an ACH Payment?

Yes, it is possible to stop an ACH payment. Contact your billing department or bank (whichever initiates your employees’ paychecks) three business days before the scheduled payment date. You will need to provide them with the name of your organization and the payment amount. 

If the ACH payment has already been posted, you can reverse it only under these specific circumstances: 

• The amount that was paid/transferred was incorrect. 

• The account number was incorrect. 

• There were duplicate transactions (the transfer was made more than once). 

Reversals must occur within five business days of the transaction. 

ACH vs. EFT vs. Direct Deposit 

EFT, or Electronic Funds Transfer, ACH, and direct deposits are all forms of electronic payments. Direct deposit and ACH are just two different types of EFT payments. You can think of EFT as an umbrella term that includes ACH payments, direct deposits, wire transfers, and other electronic payments.