How Does ACH Processing Work?

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How does ACH processing work?

ACH processing refers to the moving of money electronically using
the Federal Government's Automated Clearing House. This clearing
house provides a centralized communication network that allows
for both the electronic transfers of funds and the reporting of
these transfers.

Essentially banks have a pipeline (usually called a Fed Line)
that connects them directly into the ACH network. This pipeline
allows information to be transmitted that instructs the clearing
house to transfer funds to and from bank accounts. The banks
typically receive raw data reporting bank from the Federal
Reserve ACH system. (Note: There are private clearing houses
as well).

Most banks possess at least the ability to use a Fed Line. Some
make use of this and some don't. Those that do typically have
very limited front end tools. By front end we mean methods of
getting transaction data to them. Their reporting systems tend
to be even more primitive.

For these reasons third party processors (TPP's) entered the ACH
arena. The third party processor saw the myriad benefits and
opportunities to provide businesses the ability to easily move
money electronically. By developing user friendly front end tools
and robust reporting the third party processor has been able to
offer businesses tools they need. The vast majority of TPP's
have a partner bank(s) and they tie into that bank's Fed Line.

If you are familiar with credit card processing you may assume ACH
processing operates in a similar fashion. It doesn't. Whereby a
credit card transaction places a hold on available credit on the
customer card an ACH transaction is quite different.

The ACH transaction proceeds as if the customer being debited has
a valid bank account with the requisite funds available. The TPP
typically receives provisional credit for the ACH transaction the
day after the transaction is initiated. The two banks involved in
the transaction (TPP bank and customer bank) have up to 4 days to
"settle" the transaction. Settlement refers to the banks agreement
that the money has been transferred.

Most of the time the transaction is "settled". However there are
a variety of reasons it may "reject" or become a "return".
NSF, closed account, invalid account are some of the many reasons.
You also have the potential (as in a credit card transaction) of
a chargeback by the consumer.

For the reasons detailed above the TPP typically imposes a 4 day
hold on funds to mitigate the risk they would be exposed to if
they gave faster credit. Here is a risk scenario. A business is
credited $10k on Wednesday for transactions performed on Monday.
Return information comes form the customer bank and the bottom
line is that $5k was "returned". That $5k has to be debited from
the business that initiated the transaction. If the TPP is unable
to get that $5k they are on the hook. This goes to the heart of
risk mitigation.

In summary ACH processing is not an instantaneous transfer of funds.
Most of the time you will find out through your reporting within
48 hours if the transactions is going to result in a "return". You
can use our advanced verification products to reduce your exposure
to potentially unsuccessful transactions. In conjunction with
advanced recollection techniques you can enjoy efficient
payment processing.

If your business possesses an IT staff and sufficient transaction
we can in cases provide you a direct relationship with a bank
with a Fed Line. Contact us for details.

©2004 by Wayne Akey