What is Automated Clearing House (ACH) And How Does it Work?


Corey Ferreira


Reviewed by


May 16, 2023

This article is Tax Professional approved


Ever wondered how those electronic transactions magically move money between bank accounts? Well, it's all thanks to the magic of Automated Clearing House (ACH), a behind-the-scenes network that makes our digital financial world go round. Let's dive into the fascinating world of ACH and learn how it works, shall we?

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History of Automated Clearing House (ACH)

In the early 1970s, a group of forward-thinking individuals from the banking industry came together to create the Automated Clearing House (ACH). This revolutionary system was founded by the American Bankers Association (ABA) and the Federal Reserve as an electronic alternative to the traditional paper check system. The goal was to increase the efficiency and reliability of financial transactions by streamlining the process and reducing the use of paper.

Fast forward to today, ACH has become an integral part of the United States financial landscape, processing billions of transactions annually. It serves as the backbone for a wide range of transactions, including direct deposits, bill payments, and business-to-business (B2B) transfers. With the continuous evolution of technology and the financial industry, ACH has adapted and expanded its services to meet the ever-changing needs of consumers, businesses, and financial institutions alike.

How Automated Clearing House (ACH) payments works

The who’s who of automated clearing house!

Picture this: you’re making a payment or receiving funds through an Automated Clearing House (ACH) transaction. But who are the key players making this magic happen? Let’s break it down in a fun and friendly way!

1. The ODFI: The bundle master

First up, we have the Originating Depository Financial Institution (ODFI). This party kicks off the ACH process by rounding up requests from folks like you and bundling them together. It’s like they’re gathering all the ingredients for a delicious ACH transaction soup!

2. The RDFI: The transaction chef

Next in line is the Receiving Depository Financial Institution (RDFI). These guys are responsible for receiving and processing the transactions, like a chef preparing a scrumptious meal with the ingredients provided by the ODFI.

3. The ACH operator: The kitchen coordinator

The ACH Operator essentially plays the vital role of a middleman in the ACH system. Their duties are integral in ensuring that ACH transactions are executed efficiently and effectively. So, how exactly does this work?

  1. Transaction Validation: The ACH Operator first validates the transaction details received from the ODFI. This includes checking the account numbers, amounts, and other transaction-related information.
  2. Batch Processing: After validation, the ACH Operator groups the transactions into batches based on the type of transactions - debit or credit.
  3. Transferring Information: The ACH Operator then forwards these batches to the appropriate RDFIs. This ensures that the funds move correctly from one bank to another.
  4. Settlement: Finally, the ACH Operator helps in the settling of accounts between the ODFI and RDFI, ensuring the smooth completion of the transaction.

Isn't it fascinating how this complex process is streamlined and handled meticulously by the ACH Operator? The efficiency of the ACH system is a testament to the robustness of their work!

How long does it take for transactions to be processed through ACH?

ACH transactions are divided into two categories: ACH Credits and ACH Debits. ACH Credits usually take 1-2 business days to process, while ACH Debits can take 2-3 business days. This processing time may vary depending on the financial institution, the type of transaction, and the time of the transaction submission. Be aware that weekends and holidays can also affect the processing time.

What types of transactions can be processed through Automated Clearing House?

Types of transactions processed through the ACH system include direct deposits, bill payments, and funds transfers. Direct deposits are commonly used for payroll and government benefits, while bill payments cover utilities, loans, and other recurring expenses. Funds transfers facilitate the movement of money between accounts at different financial institutions.

An imaginary ACH scenario:

Let’s imagine a scenario: Jane wants to pay her monthly electric bill through an ACH transaction. Jane’s bank, acting as the ODFI, collects her payment request and sends it to the ACH Operator. The ACH Operator then forwards the transaction to the electric company’s bank, which is the RDFI. Upon receiving the transaction, the RDFI processes the payment and credits the electric company’s account.

In summary, the Automated Clearing House is a crucial component of the modern financial ecosystem, providing a secure, efficient, and reliable method for processing various types of transactions. Its key players - the ODFI, RDFI, and ACH Operator - work together to ensure seamless transactions between parties.

Difference between ACH and wire transfers

In the world of electronic transactions, Automated Clearing House (ACH) and wire transfers are two popular methods used to move money between banks. While both serve to transfer funds, they differ in several key ways.

While both ACH and wire transfers allow for the electronic transfer of funds, they differ in key aspects. ACH transfers are typically slower, taking 1-3 business days to process, while wire transfers are faster, often occurring within the same day. ACH transfers are also more cost-effective, with lower fees compared to the higher fees associated with wire transfers. Additionally, ACH transfers are processed in batches, whereas wire transfers are sent individually. Lastly, wire transfers are generally considered more secure due to their direct bank-to-bank nature, while ACH transfers involve intermediary institutions.

The costs of ACH

ACH transactions are known for their cost-efficiency, especially when compared to other payment methods such as checks or wire transfers. In the United States, the cost of an ACH transaction can vary depending on several factors, including the financial institution, the type of transaction, and the volume of transactions.

On average, the cost per ACH transaction ranges from $0.20 to $1.50 for a business. However, some banks and credit unions may offer lower fees or even free ACH transactions for certain account types or customers with high transaction volumes. Additionally, third-party ACH processing providers may have different pricing structures, which can also impact the cost.

Below is a summary of the average cost per ACH transaction:

Type of ACH Transaction Average Cost
ACH Credit $0.20 - $1.50
ACH Debit $0.20 - $1.50
Returned ACH Item $2.00 - $5.00

It’s essential for businesses to carefully consider the costs associated with ACH transactions when choosing a payment processing method. By comparing fees and weighing the benefits of ACH transactions, businesses can make informed decisions about their payment options.

Can international transactions be processed through Automated Clearing House?

Yes, international transactions can be processed through the Automated Clearing House (ACH) network. However, these transactions may be subject to additional requirements, such as currency conversion and adherence to international banking regulations. It’s important to work with a financial institution experienced in international transactions to ensure smooth processing.

What are the security measures in place to protect ACH transactions?

In this era of digital transactions, it’s crucial to understand the differences and security features of various payment methods. With **Automated Clearing House (ACH) **as a popular money transferring, it offers a unique level of security and efficiency. Let’s dive into:

  • Encryption: ACH transactions are encrypted to ensure the protection of sensitive data during transmission.
  • Authentication: Banks and financial institutions authenticate the identities of parties involved in ACH transactions to prevent unauthorized access.
  • Firewalls and intrusion detection: Network firewalls and intrusion detection systems are used to prevent unauthorized access and monitor for suspicious activity.
  • Regular audits and compliance: ACH operators and participants undergo regular audits and must adhere to strict compliance standards set by regulatory bodies.
  • Transaction limits and monitoring: ACH transactions may have limits to reduce the risk of fraud, and unusual activity is closely monitored for potential threats.

Are there any limits on the amount that can be transferred via ACH?

While the Automated Clearing House (ACH) system offers a convenient and efficient method of transferring funds, it does come with certain limitations. The limits on transfer amounts may differ depending on the financial institution or the type of transaction being conducted. Here are some of the factors that can affect the transfer limits:

  1. Bank policies: Individual banks may enforce their own limits on ACH transfers, both for incoming and outgoing transactions.
  2. Transaction type: Transfer limits may vary depending on whether it’s a personal, business, or international transaction.
  3. Security measures: Some banks may have lower limits in place as a security measure to protect against fraudulent activities.

In order to determine the exact limitations on ACH transfers, it’s best to consult with your specific financial institution for their policies and guidelines.

ACH credit vs ACH debit

In the world of Automated Clearing House (ACH) transactions, there are two main types: ACH Credit and ACH Debit. While they both involve the transfer of funds between accounts, there’s a key distinction between the two.

With an ACH Credit, the sender initiates a payment to the recipient’s account. For example, when your employer deposits your paycheck directly into your bank account, that’s an ACH Credit transaction. On the other hand, an ACH Debit occurs when the recipient initiates the transfer, pulling funds from the sender’s account. This is what happens when you set up automatic bill payments with a utility company.

Remember: ACH Credits are like giving a gift, while ACH Debits are like taking a loan.


The primary difference between ACH and EFT lies in their scope and application. ACH (Automated Clearing House) is a specific type of EFT, which facilitates the electronic transfer of funds between banks and financial institutions within a country. ACH transactions are typically used for direct deposit of salaries, bill payments, and other recurring transactions.

On the other hand, EFT (Electronic Funds Transfer) is a broader term that encompasses all forms of electronic transfers, including ACH, wire transfers, and credit card transactions. While ACH focuses on domestic transactions, EFT can include both domestic and international transfers, making it a more comprehensive term for electronic money movement.

Meet the top 3 ACH processors

1. Dwolla

  • Pros: Offers instant account verification, supports a high volume of transactions, and provides robust security features.
  • Cons: The user interface may be challenging for non-technical users, and their customer support could be more responsive.

2. Stripe ACH

  • Pros: Easy integration with other Stripe products, comprehensive API documentation, and offers flexible payment options.
  • Cons: Transaction fees may be higher than competitors, and the verification process can be slow.


  • Pros: NACHA is the organization that manages the ACH network, ensuring reliability and adherence to regulatory requirements.
  • Cons: Since NACHA is a governing body rather than a direct service provider, businesses must work with a third-party for payment processing.

The bottom line

Voilà, dear readers! Behold the enchanting realm of the Automated Clearing House in all its glory. With a mesmerizing tapestry of electronic transactions, it weaves efficiency, security, and convenience into the fabric of our daily lives. So, the next time you triumphantly click “confirm” on that online treasure or witness your hard-earned paycheck grace your account, offer a tip of your hat to the ACH for orchestrating such seamless sorcery. Happy transacting!

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
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