Automated Clearing House | ACH

What is an Automated Clearing House (ACH)?

An automated clearing house (ACH) is an electronic interbank payments system in which participating banks exchange electronic transactions, eliminating the need for paper transactions and speeding up the settlement process.

To encourage its use for low-value payments, the ACH system processes batches of payments containing multiple transactions and charges low fees.

ACH enables the settlement of batch credit and debit transactions, such as direct deposit payroll payments and Direct Debit payments. In theory, any batch item can be settled individually or in batches, but certain time-sensitive applications, such as US payrolls, are typically paid in batches.

How does an Automated Clearing House (ACH) work?

Money is moved between bank accounts through an ACH network. If you are an employer, you would initiate a transfer from your organization's bank account to your employee's bank account.

A Receiving Depository Financial Institution (RDFI) and an Originating Depository Financial Institution (ODFI) are both involved in every ACH transaction (RDFI). This is how they work:

  1. The direct deposit or payment is initiated by the originator (employer/business) via an ACH network. In general, ACH portals allow you to set up both one-time and recurring payments.
  2. The payment amounts are electronically entered into the ACH network.
  3. The ACH network establishes contact with the employer's bank, also known as the Originating Depository Financial Institution (ODFI).
  4. The ODFI aggregates payments and sends them to an ACH operator in batches.
  5. The ACH operator transfers funds to employees' banks, also known as Receiving Depository Financial Institutions (RDFIs). RDFIs then deposit the funds into the employees' bank accounts.

What information do you require from employees in order to post an ACH to their accounts?

Employers must receive the following information before posting an ACH to an employee's account:

  • The name of the employee's bank or credit union from which they will receive their funds.
  • The type of account into which the employee would like their funds to be deposited (checking or savings account).
  • The ABA routing number of the employee's bank. This is a nine-digit code that is used to identify banks in the United States.
  • The employee's account number. This is an 8 to 12-digit number that identifies a person's bank account.

Is it possible to stop an ACH payment?

It is possible to halt an ACH payment. Three business days before the scheduled payment date, contact your billing department or bank (whichever initiates your employees' paychecks). You must provide them with the name of your organisation as well as the payment amount.

If the ACH payment has already been posted, you can only reverse it under the following conditions:

  • The payment/transfer amount was incorrect.
  • The account number had been entered incorrectly.
  • There were several duplicate transactions (the transfer was made more than once).
  • Reversals must be made within five business days of the original transaction.
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