LeoGlossary: Automated Clearing House (ACH)

A computer-based electronic network for processing transactions. It is the primary system that financial institutions such as banks and credit unions use for electronic funds transfers. Funds are deposited electronically and payments are made online.

The network batches together transactions, thus offering low fees to encourage usage.

Form of ACH transactions:

  • Payments to a service provider
  • Employer direct deposits money to employee’s checking account
  • Businesses paying suppliers via recurring payments
  • Transferring money from one account to another
  • Government deposits such as Social Security

The service is used by:

  • Individuals
  • Institutions
  • Governments

An entity makes a direct deposit or payment through the ACH network. The bank that handles the transaction takes it, along with others, and sends them to the Federal Reserve or clearing house at scheduled times throughout the day.

The batch of transactions is sorted through to determine if the bank was authorized and can complete the transactions. If so, the money is send to the recipient's account.

It is a system that handles both direct debits and credit transfers.

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