Automated Clearing House (ACH)

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An Automated Clearing House (ACH) is a digital payment settlement system that facilitates capital transfers between connected financial institutions. The first ACH system was implemented by the United Kingdom in 1968, and subsequently adopted by the San Francisco Federal Reserve Bank in 1972.

How Does an Automated Clearing House Function?

ACH systems can handle a large transaction volume, but do not process payments in real-time. Accordingly, the typical operations of an ACH include several steps. First, the user will initiate a transaction manually or via bank request. Then, the bank will aggregate all transfer requests and send that information to the ACH at predetermined times throughout the business day, otherwise known as batching. From there, the ACH relays the net settlement amount to the bank, verifies that the pertinent accounts have sufficient funds, and then executes the transaction.

What Is an Automated Clearing House Used For?

ACH systems are used for low-value transactions. ACH systems settle transactions in batches at preset times throughout the business day, and can take three to four days to complete a transfer. For that reason, ACH systems are not ideal for large or time-sensitive payments.