Automated Clearing House payments, also referred to as e-checks, electronic payments or ACH payments, are linked to checking or savings accounts and are used as a digital payment alternative to credit and debit cards. ACH withdrawals are commonly associated with online transactions to pay bills and make purchases. Automatic bill-pay services also use the ACH system to process regularly scheduled payments. ACH is also used for direct deposits, but when it comes to using ACH to make electronic payments, there are three distinct phases.
Origination of the Payment
The originator is the person or entity using the ACH system to make a payment. For example, to pay an electric bill, a person goes to the payment page on the utility’s website and clicks on the option to pay using an e-check; that person paying the electric bill is the originator. The payment is submitted after the amount to be paid and the routing and checking account numbers are entered by the originator into the website. Origination of an ACH payment can also be done over the phone, if the payee has the capability.
Processing the Payment
Once the payment is originated, the e-check submitted for payment to the payee is sent to a third-party ACH processor which, after recording the transactions, forwards the information to the Originating Depository Financial Institution. The ODFI transmits the payment information to the customer’s bank account, which is referred to as the Receiving Depository Financial Institution. The RFDI debits the customer’s account for the amount of the e-check, confirms that the debit was successful and transmits the payment back through the processing channels to the payee, such as the electric company or credit card company.
ACH transaction are usually processed in large batches by the ACH company. The ACH company can either pull money from a bank account (such as when the payee has automatic payments set up; this is an ACH credit) or push money from one bank account into another (such as when the payee originates a single payment; this is an ACH debit).
Settling the Transaction
The National Automated Clearinghouse Association sets the rules for settling ACH payments, or in other words, completing ACH transactions to their conclusion and properly debiting and crediting the appropriate bank accounts. NACHA requires that the paying account be debited by the following business day. Payment must be credited to the recipient within two business days. While the ACH payment is being processed, the accounts to be debited and credited may both show the transaction as a Pending ACH Payment.