# What Is the Automated Clearing House (ACH), and How Does It Work?

> **Definition**
>
> The Automated Clearing House (ACH) is a network that’s used to electronically move money between bank accounts.

## What Is the Automated Clearing House (ACH)?

The Automated Clearing House (ACH) is an electronic funds-transfer system managed by the National Automated Clearinghouse Association, known as Nacha. It serves as a versatile feature for conducting digital transactions by processing large volumes of credit and debit transactions. For this reason, many banks, brokerages, and private retail businesses have made this feature available to their customers. ACH has allowed customers to receive direct deposits and pay bills in a timely manner.

The Automated Clearing House traces its roots back to the late 1960s but was officially established in the mid-1970s. The payment system provides many types of ACH [transactions](https://www.investopedia.com/terms/t/transaction.asp), such as payroll deposits, one-time debit transfers, social security benefits, and tax refunds. It takes a debit or credit from the originator and posts a credit or debit on the recipient's end.

The ACH is the American version of the system, but as of October 2023, the same technology carrying slightly varying acronyms was used to process payments in 40 percent of the countries globally.  

### Key Takeaways

*   The Automated Clearing House (ACH) is an electronic funds-transfer system that facilitates payments in the U.S. and internationally.
*   The ACH is run by Nacha.
*   Recent rule changes enable most credit and debit transactions made through the ACH to clear on the same business day.
*   ACH transactions make transferring money quick and easy.
*   Banks may limit the amounts you can transfer, and may impose fees.

![Automated Clearing House (ACH)](https://www.investopedia.com/thmb/QBix_MzlJjAaViCovfe4aDAceFo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Achcopy_final_rev-cc10cb2316b04a2fa0305094f37e21cf.png)

*— Investopedia / Michela Buttignol*

## How the Automated Clearing House (ACH) Works

The ACH Network is an electronic system that serves [financial institutions](https://www.investopedia.com/terms/f/financialinstitution.asp) to facilitate financial transactions in the U.S. It represents more than 10,000 financial institutions. In Q2 2024, the ACH processed over 8.4 billion payments, with a combined dollar value of over $21.5 trillion.

The network acts as a financial hub and helps people and organizations move money from one bank account to another. ACH transactions consist of [deposits](https://www.investopedia.com/terms/d/deposit.asp) and payments, including:

*   [Business-to-business](https://www.investopedia.com/terms/b/btob.asp) (B2B) transactions
*   Government transactions
*   Consumer transactions
*   Payroll and tax transactions  
    

### How ACH Works

An ACH transaction begins when an originator initiates a [direct deposit](https://www.investopedia.com/terms/d/directdeposit.asp) or direct payment on the ACH network, which can be either a debit and a credit. The originator's bank, also known as the Originating Depository Financial Institution (ODFI), collects multiple incoming ACH requests and groups them into batches, which are sent out at scheduled times throughout the day.

An ACH operator, either the [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp) or a [clearinghouse](https://www.investopedia.com/terms/c/clearinghouse.asp), receives the batch of ACH transactions from the originating institution, including the originator's transaction. The ACH operator sorts the batch and makes transactions available to the bank or financial institution of the intended recipient, also known as the Receiving Depository Financial Institution (RDFI). Finally, the recipient's bank account is debited or credited, thus reconciling both accounts and ending the transaction.

> **Important**
>
> Changes to Nacha’s operating rules in March 2021 expanded access to same-day ACH transactions, which now allows for same-day settlement of most (if not all) ACH transactions.

## Special Considerations

The ACH payment system is offered by Nacha. Formerly known as the [National Automated Clearing House Association](https://www.investopedia.com/terms/n/nacha.asp), it's a self-regulating, [not-for-profit](https://www.investopedia.com/terms/n/not-for-profit.asp) institution. The ACH network's history dates back to 1968, although it wasn't officially established until 1974.

This network manages, develops, and administers the rules surrounding electronic payments. The organization's operating rules are designed to facilitate growth in the size and scope of electronic payments within the network.  

> **Fast Fact**
>
> Types of ACH transactions include payroll and other direct deposits, tax refunds, consumer bills, tax payments, and many more payment services in the U.S. and internationally.

## Advantages and Disadvantages of the ACH

### Advantages

The ACH Network batches financial transactions together and processes them at specific intervals throughout the day, making online transactions fast and easy. Nacha rules state that the average ACH debit transaction settles within one business day, and the average ACH credit transaction settles within one to two business days.

The use of the ACH network has also improved the efficiency and timeliness of government and business transactions. More recently, ACH transfers have made it easier and cheaper for individuals to send money to each other directly from their bank accounts via direct deposit transfers or [e-checks](https://www.investopedia.com/terms/e/electroniccheck.asp).

ACH for individual banking services typically took two or three business days for monies to clear. Starting in 2016, NACHA rolled out in three phases for same-day ACH settlement. Phase 3, launched in March 2018, requires receiving depository financial institutions (RDFIs) to make same-day ACH credit and debit transactions available to the receiver for [withdrawal](https://www.investopedia.com/terms/w/withdrawal.asp) no later than 5 p.m. They must be in the RDFI's local time on the settlement date of the transaction and are subject to the right of return under NACHA rules. The latest update, implemented on March 19, 2021, created a third Same Day ACH processing window that expands Same Day ACH availability by 2 hours - allowing Same Day ACH transactions to be submitted as late as 4:45 p.m. ET.

Originally, the ACH network only worked between U.S. accounts. This meant you couldn't conduct any international transfers using this payment system. However, Nacha eventually introduced International ACH Transactions (IAT), which allow banks to transact internationally.

### Disadvantages

Certain financial institutions may restrict the amount of money you can transfer. If you want to do a large transfer, you may have to break it down into multiple smaller transactions. For instance, if you're transferring money to your child who's away in college, you may be limited to transfers of $1,000. If they need more for books and rent, you will be required to make more than one transfer.

Additionally, some banks charge [fees](https://www.investopedia.com/terms/f/fee.asp) for ACH transactions, which can be be on a per-transaction basis. If you do multiple transactions, this can add up and put a dent in your [bottom line](https://www.investopedia.com/terms/b/bottomline.asp).

Pros

*   Makes online transactions quick and easy
    
*   Increases efficiency and timeliness
    
*   Provides same-day banking transactions
    
*   Internationally available
    

Cons

*   Banks may limit transaction amounts  
    
*   Fees may apply
    

## How Does the Automated Clearing House Work?

An Automated Clearing House or ACH transaction begins with a request from the originator. Their bank batches the transaction with others, and sends those batches out at set times throughout the day. The batch is [received and sorted by a clearinghouse](https://www.investopedia.com/ask/answers/06/chipsuid.asp), which sends individual transactions out to receiving banks. Each receiving bank deposits the money into the recipient's account.

## What Is an Automated Clearing House Transaction?

An Automated Clearing House (ACH) transaction is an electronic transfer that can either debit or credit a bank account, depending on the nature of the transaction (e.g., bill payments or direct deposits). These transactions are processed through a clearinghouse, which batches and forwards them to the recipient’s bank.. Transactions are usually executed on the same day as long as they are received before 4:45 p.m ET.

## Are There Any Disadvantages to Automated Clearing House Transactions?

ACH transactions may come with fees, depending on your bank, meaning the more you require, the more you'll spend on fees. Certain banks limit the amount of money you can transfer through the system, so if you want to transfer large amounts of money to other people, you may have to do so through multiple transactions.

## The Bottom Line

Sending money to someone used to be a hassle, but the advent of electronic technology has made things much easier. The Automated Clearing House (ACH) facilitates transfers between banks. This eliminates the need to withdraw money from one account and deposit it into another.

The network now allows businesses and individuals to execute transactions on the same day. Keep in mind that you may be limited in how much you can transfer, and the banks may charge fees for ACH transfers. Check with your bank to get the latest details on how it handles ACH transactions.

> **Article Sources**
>
> 1.  Nacha. "[History of Nacha and the ACH Network](https://www.nacha.org/content/history-nacha-and-ach-network)."
>     
> 2.  The World Bank. "[Payment Systems Worldwide](https://documents1.worldbank.org/curated/en/099011624132054588/pdf/P1787031cca90801019d011a41f21efe348.pdf)."
>     
> 3.  Nacha. "[Overall ACH Network Volume](https://www.nacha.org/content/ach-network-volume-and-value-statistics)."
>     
> 4.  Nacha. "[Expanding Same Day ACH](https://www.nacha.org/rules/expanding-same-day-ach)."
>     
> 5.  Nacha. "[History of Nacha and the ACH Network](https://www.nacha.org/content/history-nacha-and-ach-network)."
>     
> 6.  Nacha. "[Expanding Same Day ACH](https://www.nacha.org/rules/expanding-same-day-ach)."
>     
> 7.  Nacha. "[History of Nacha and the ACH Network](https://www.nacha.org/content/history-nacha-and-ach-network)."