ACH payment processing operates via the ACH network. Every ACH transaction goes through a seven-step process involving six ACH payment processor entities. These entities include the originator, the receiver, the originating depository financial institution (ODFI), the receiving depository financial institution (RDFI), an ACH operator and the National Automated Clearing House Association (NACHA).
Below, we define each entity involved and the technical steps to ACH payment processing.
ACH Payment Processor Entities
- Originator: An individual, corporation or other entity that initiates a transaction using the ACH network.
- Receiver: An individual, corporation or other entity that receives an ACH payment.
- ODFI: A financial institution that submits ACH entries to the network on behalf of the originator.
- ACH Operator: A clearing facility that receives ACH entries from the ODFI and distributes them to the appropriate FDFI.
- RDFI: A financial institution that receives ACH entries on behalf of the receiver, via the ACH operator.
- NACHA: An association that manages the ACH network and sets rules for ACH payment processing.
The Technical Steps to Processing an ACH Payment
- With the ACH information provided by the customer, a business initiates a transaction using the ACH Network. In this scenario, the customer is referred to as the originator.
- Upon initiation, the ODFI enters the ACH entry into the network.
- The ODFI collects and submits a batch of payments at a predetermined time to an ACH operator.
- An ACH operator (The Federal Reserve or The Clearing House) receives the batches of ACH entries from the ODFI.
- The ACH operator sorts the ACH transactions and makes them available to the RDFI.
- The business’s account is credited by the RDFI. The business is referred to as the receiver in this scenario.
- The ACH transaction settles one to two days later.
While these steps specify an ACH credit payment, the same steps occur for a debit payment and all the ACH payment processor entities are involved. It is also important to note that although NACHA is not explicitly noted in any of the steps above, it dictates the process and oversees each transaction in the ACH network.
What Are the Benefits of ACH Payment Processing?
Compared to traditional paper checks, ACH payment processing offers several benefits for both originators and receivers.
Because ACH is electronic, it’s a cheaper and more environmentally friendly option. These types of payments also offer faster deposit verification, meaning that as a receiver, you get paid faster. Instead of a seven-to-10 day waiting period for paper checks to clear, ACH transactions can be deposited as quickly as one day.
Lastly, because ACH processing is managed by NACHA, you receive alerts of rejects or notifications of change (NOCs) faster, which means less time between the initial payment and the notifications of delays.
Still accepting paper checks? What hesitations do you have about switching to ACH payment processing? Tell us below, we’re happy to address your concerns.
Editor's Note: This post was originally published in October 2018 and has been updated for comprehensiveness and accuracy.