Transactions received by the financial institution during the day are stored and processed later in a batch mode. Rather than sending each payment separately, ACH transactions are accumulated and sorted by destination for transmission during a predetermined time period. This provides significant economies of scale. It also provides faster processing than paper checks, which must be physically handled. Instead of using paper to carry necessary transaction information, ACH transactions are transmitted electronically between financial institutions through data transmission.
Typically, five participants are involved in an ACH transaction:
- (a) the originating company or individual (Originator),
- (b) the Originating Depository Financial Institution (ODFI),
- (c) the Automated Clearing House Operator,
- (d) the Receiving Depository Financial Institution (RDFI), and
- (e) the receiving company, employee or customer (Receiver).
The ACH Network is a processing and delivery system that provides for the distribution and settlement of electronic credits and debits among financial institutions. The ACH Network was developed in response to the astronomical growth of check payments and the many technological advances in the mid-twentieth century and functions as an efficient, electronic alternative to paper checks. Through a nationwide telecommunications network, each ACH Operator is able to communicate with other ACH Operators to exchange entries quickly and efficiently, regardless of geographic distances involved. The ACH Network offers an assortment of technical formats that can be used for a variety of payment applications, products and services. The ACH Network is governed by operating rules and guidelines, which are developed by the actual users of the system, and is administered through a series of agreements among financial institutions, customers, trading partners, and ACH Operators.
The ACH movement began in the early 1970s when a group of California bankers formed the Special Committee on Paperless Entries (SCOPE). In direct response to the rapid growth in check volume, the Committee was chartered to explore the technical, operational, and legal framework necessary for an automated payments system.
SCOPE laid the groundwork for the first Automated Clearing House (ACH) association, which began operation in 1972. The establishment of this ACH association led to the formation of similar groups in other parts of the country. Agreements were made between the emerging regional ACH associations and the regional Federal Reserve Banks to provide facilities, equipment, and staff to operate regional ACH networks. Two notable exceptions to this type of arrangement occurred in New York and Chicago, where private clearing houses were formed to handle ACH transactions.
In 1974, the National Automated Clearing House Association (NACHA) was formed to coordinate the ACH movement nationwide. Through the joint efforts of NACHA and the Federal Reserve System, local ACHs were linked electronically on a nationwide basis in 1978. The main benefits associated with the use of the ACH Network are cost reduction and improved productivity over paper check transactions.
In an effort to improve the payments system, Congress enacted the Monetary Control Act in 1980. As a result of that Act, private sector ACH Operators were encouraged to compete with the Federal Reserve, which could no longer offer its services free of charge and was required to recover its operating costs. A private sector adjustment factor (i.e., profit margin) is included in Federal Reserve processing so that the Federal Reserve Bank charges as though it were operating on a "for profit" basis.
- "Understanding the ACH Network: An ACH Primer," at 18.