ADVANTAGES AND DISADVANTAGES OF Automated Clearing House (ACH)- BANKING TERMS FOR EXAMS

In banking, ACH stands for Automated Clearing House, which is a network that coordinates electronic payments and automated money transfers. 

ACH is a way to move money between banks without using paper checks, wire transfers, credit card networks, or cash.

The types of transfers include external funds transfers, person-to-person payments, bill payments and direct deposits from employers and government benefit programs. (Business-to-business payments are another one.) For sending money to friends and family, many transfer providers — including banks, Zelle and third-party apps like PayPal and Venmo — use the ACH network.

How the ACH Network Works

The ACH Network essentially acts as a financial hub and helps people and organizations move money from one bank account to another. ACH transactions consist of direct deposits and direct payments, including B2B transactions, government transactions, and consumer transactions.

An originator starts a direct deposit or direct payment transaction using the ACH Network. Originators can be individuals, organizations, or government bodies, and ACH transactions can be either debit or credit. The originator's bank, also known as the originating depository financial institution (ODFI), takes the ACH transaction and batches it together with other ACH transactions to be sent out at regular times throughout the day.

An ACH operator, either the Federal Reserve or a clearinghouse, receives the batch of ACH transactions from the ODFI with the originator's transaction included. The ACH operator sorts the batch and makes transactions available to the bank or financial institution of the intended recipient, also known as the receiving depository financial institution (RDFI). The recipient's bank account receives the transaction, thus reconciling both accounts and ending the process.

Delivery of ACH transfers can take several business days, meaning days that banks are open. Unlike the real-time processing of wire transfers, ACH transfers are processed by a network operator in batches only three times a day.

However, ACH transactions are not the same as debit card payments, eChecks, or wire transfers (we’ll explain why next). And while they are electronic payments, it’s important to understand that not all electronic payments are ACH payments. For example, credit and debit card payments are electronic, but that doesn’t make them ACH transactions. ACH is specific to bank account transfers.

For ACH credit transfers, banks might charge a fee of around $3 for sending money between accounts that you have at different banks, but many offer these so-called external funds transfers for free. There’s usually no fee to receive them. Here’s a look at three online banks and their transfer fees and terms:

ACH payments vs. wire transfers: A wire transfer is handled by two individual banks who work directly to verify funds and complete the transaction. If you’ve received a wire transfer in the past, you may have noticed that both the sender’s bank and your bank charged a fee for the transaction—it’s not uncommon to see charges between $10 and $35 per transaction, from both the sending and receiving bank. This reflects the extra work each bank has to do to set up the transfer. ACH transactions, on the other hand, go through the Automated Clearing House, which you can think of as a sort of electronic highway between financial institutions. Instead of two banks having to “build” their own road to move funds between each other, they can simply add them to the flow of payments already moving through the ACH “highway.” ACH batches and automates the flow of payments between financial institutions, which translates to cost savings for you!

Advantages of Automated Clearing House

• Get paid faster with an automated payment, and without waiting for a check to clear
• Automating bill payments to avoid late fees and missed payments
• Making online purchases without having to use a credit card or check
• Minimize paper records that carry sensitive banking information
• Makes money transfers easy with minimal labour and cost
• Allows employee payments without printing checks, stuffing envelopes or paying for postage
• Facilitates regular customer payments without having to transport actual paper checks to the bank
• Has lower fees than credit card payments
• The electronic process makes vendor and supplier payments easier and faster while keeping electronic records of all transactions

Disadvantages of Automated Clearing House

• Companies have direct access to your bank account
• Auto payments are deducted whether or not you have the funds in your account, which can trigger overdraft fees
• Allows other companies to have a direct link to your bank account
• Customers can reverse their payments, although not as easily as with a credit card
• Must monitor the transactions for fraud, as business accounts have fewer protections than consumer accounts
• Companies may need to buy software and invest in training to process ACH payments