Automatic Clearing House transactions offer an alternative to using paper checks by transmitting payments electronically. Commonly referred to as e-checks, the electronic transmission of payments through the ACH system facilitates faster processing at a lower cost than paper checks. An ACH transaction is a 4-step process that can be originated as a credit or a debit.
The ACH Transaction Process
An ACH transaction originates when it is entered into the system using the 9-digit routing number and the checking account number that will be used to make the payment. This information is transmitted for processing to either the Federal Reserve Banking System or the Electronic Payment Network. The processor debits the account being used for payment and then transmits the funds to the account where the money will be deposited.
Debits are recorded by the next business day while credits must be recorded within 2 business days, according to rules set by the National Automated Clearinghouse Association, which governs ACH transactions.
Origination as a Debit
ACH payments that start as a debit are originated by an entity that is seeking payment. The most common of these types of transactions is when a merchant or service provider enters a request for payment into the system to debit the account of an individual or a business. Referred to as pulling funds, examples of these transactions include purchases with merchants and recurring debits for utility bills, auto payments and mortgages.
A credit transaction, or pushing funds, occurs when the account owner originates a transaction to deposit funds in the account of the recipient. Examples of transactions that start as credits include one-time payments of utility bills, direct deposits of paychecks and direct deposits of social security payments.