An ACH payment is a transfer of funds through the Automated Clearing House Payments Service. While you might not even know you are using the ACH system, chances are you benefit from its services quite often. Payments you make or receive electronically using your bank account typically are ACH transfers. As with any payment system, ACH payments carry both benefits and risks.
How ACH Payments Work
Transfers using the ACH system follow a sequence of simple steps. First, the originator of the payment authorizes a deduction from a financial institution, known as an Originating Depository Financial Institution or ODFI. The ODFI then transfers the funds to the ACH Operator, typically the Federal Reserve. The ACH transfer then is directed to the proper Receiving Depository Financial Institution, or RDFI. The RDFI assigns the ACH transfer to the correct receiving account. Per ACH transfer rules, ACH debits settle in one business day, while ACH credits appear in one to two business days.
Essentially, ACH transfers are the electronic equivalent of writing a paper check. You're using an ACH transfer any time you pay a bill online or send money to another individual from your checking or savings account. The ACH system also processes recurring electronic transfers you set up online, such as monthly payments to your mortgage or credit card company.
If you receive your paycheck via direct deposit, that represents an ACH transfer.
The main benefit of an ACH transfer is convenience. Parties in a financial exchange no longer have to endure the time and expense of writing a paper check, mailing it, waiting for it to arrive and taking it to the bank. Instead, the transfer can be initiated online and appears directly in the recipient's bank account. An ACH transfer also eliminates the risk that a check can be lost or stolen in the mail.
All banking transactions, including ACH payments, carry certain risks. In the case of ACH payments, operational risk, credit risk and fraud risk are the most significant risks identified by the Federal Reserve. In the realm of operational risk, clerical or communications errors can delay transfers, or result in transactions being deducted from or credited to an erroneous account. Credit risk occurs when the payment initiator doesn't have sufficient funds to process a transfer. Fraud also can afflict an ACH transfer in a number of ways, from an inside employee embezzling funds to an identity thief gaining unauthorized access to the system.