5 Essential Facts About the Automated Clearing House (ACH) Network
Although most consumers either are aware of direct deposits or have used direct deposits at least a few times in their lives, there is a surprisingly low level of familiarity with the Automated Clearing House (ACH) Network which is the primary system that is used in the United States for all types of electronic funds transfers, including direct deposits. Without the ACH Network, sending and receiving money in the United States would be less efficient and more costly. In this article we’ll discuss 5 interesting facts about the critical ACH Network to get you up to speed.
- The ACH Network in the United States is Operated by a Non-Profit
In the United States, the National Automated Clearing House Association (Nacha) is the organization that is responsible for managing the ACH Network. Nacha is a not-for-profit organization that was founded in 1974 and today represents more than 11,000 financial institutions in the United States. In addition to managing the network, Nacha is also responsible for improving the underlying technology and implementing initiatives that make the ACH Network better for participating financial institutions and United States consumers. As an example, in March 2020, the daily limit for ACH transfer was increased from $25,000 to $100,000 after years of improvements to the network. As a result, this enabled the total volume of transactions that used the ACH Network to increase given the added flexibility.
- Financial Institutions Pay Two Fees for Using the ACH Network
Although Nacha is a not-for-profit organization, they still require financial funding to pay for their initiatives and technological investments. The ACH Network is funded through the assessment of two fees. The first is an annual fee which all depository financial institutions that use the ACH Network must pay. Nacha describes this fee as being required to maintain the Nacha Operating Rules and it is currently set at $264 for 2022. The second fee is a per use fee, which is a fee that is assessed each time a financial institution uses the ACH Network, either to send or receive a transaction. This fee is currently set at a tiny fraction of a penny (it is approximately 1/5000th of a penny). Based on submitted tax reforms from Nacha, we learned that the organization made $18.8 million in 2016.
- There Are Two Main Types of ACH Transfers
Currently the ACH Network supports two kinds of transactions:
- Direct Deposits: this includes any payments from a government entity or a business to the consumer that is electronically linked to the consumer’s bank account. It includes payroll checks, tax refunds, and interest payments.
- Direct Payments: this is the opposite of a direct deposit and refers to the process of an individual making payments to another person, business, or governmental institution directly to the institution’s accounts. Examples of this includes bill payments and the payment of tax bills.
For every ACH Network transfer, there are going to be two parties involved. The Originating Depository Financial Institution (ODFI) which is the sender or sending party, and the Receiving Depository Financial Institution (RDFI) which is the recipient or receiving party. Prior to every transaction, the parties must enter pre-requisite details to use the ACH Network. For example, the sender needs the name and type of the receiver’s bank account, their routing number, bank account number and other details.
- ACH Processed More Than $70 trillion of Payments in 2021
If you didn’t appreciate the scale and prevalence of the ACH Network, this statistic should be illuminating: in 2021, the ACH Network processed $72.6 trillion of payments. This represented more than 29 billion transactions, or 80 million transactions every single day. As Nacha pointed out, this also represents approximately 87 payments per American in 2021. Same day transfers that were facilitated by the ACH Network alone drove $944 billion of transactions in 2021.
- Direct Deposit and Internet Transfers Represent the Majority of ACH Network Traffic
In 2021, of the 29 billion transactions that were processing using the ACH Network, 8.4 billion were for direct deposits and 8.7 billion were for internet-based transfers. These two activities represented a combined 59% of all the ACH Network volume in 2021. Other use cases that are showing notable growth include person to person (p2p) transfers which only represented 271 million of transactions but grew by 25%, and business to business transactions, which represented 5.3 billion transactions and increased by 20% in 2021. Several of the most popular payment applications use the ACH Network for back end processing including Venmo, Apple Pay and even Zelle, which is the youngest of the three and one of the fastest growing forms of sending and receiving payments. If you examine the list of banks that use Zelle you’ll find that there’s a large overlap between those banks and those that are represented by Nacha and the ACH Network.
ACH Network is the Backbone for Electronic Payments
Hopefully after reading this article you have a better idea of the essential role the ACH Network and its administrator, Nacha, play in enabling financial transactions in the United States.