What Is an ACH Transaction?

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An ACH transaction is a direct bank-to-bank money transfer completed via an independent third party that verifies fund availability. In banking, ‘ACH’ stands for ‘Automated Clearing House.’ It has been the backbone of bank-to-bank transfers for over fifty years and has been updated to accept ACH transfers online.

Who Is the Third Party That Verifies Transfers?

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The third party that verifies these transfers is the clearing house, so what does a clearing house do? A clearing house has three main priorities: verifying that the sender has the necessary funds to complete the transfer, verifying that the receiver is correct and has received the money, and guaranteeing the transaction. 

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In the United States, the primary clearing house is known as ‘NACHA’ (National Automated Clearing House Association). NACHA is a not-for-profit organization funded by the banks to ensure everyone has access to the same system and data. 

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What About Disputes?

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Remember when we mentioned guaranteeing transactions? Disputes fall under this headline. For example, a dispute may be filed if an ACH payment is returned due to a lack of available funds and is not received by the sender. 

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It’s the clearing house’s job to ensure all the money goes where it should. Thanks to the ACH system, the process is relatively straightforward. The ACH system tracks payments in all directions and can quickly identify the source of the problem. 

Once the problem has been identified, the ACH system can resolve it. However, if it cannot be resolved, the clearing house is on the hook for its mistake, and a clear-cut process is initiated between the banks and the clearing house. 

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Pros and Cons of ACH

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The Pros:

ACH is still used today because it allows banks and customers to fix their mistakes and cancel transactions. Instantaneous bank-to-bank transfers could be more secure. There is no recourse if a wire transfer is sent in error or to a fraudulent account. Once the money is sent, it’s gone, and if the receiver decides to withdraw the funds, there is nothing that can be done.

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The Cons:

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The ACH system was invented over fifty years ago, so it’s quite slow. The process of sending money can take several business days as the money makes its way between accounts, and the ACH facilitates the transaction. 

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ACH is slow because all verification and payments are handled in batches overnight after settling the day’s accounts. Because of this, an ACH payment made in the morning may be processed that night, while one made in the afternoon or on a holiday may be forced onto the next available business day. 

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