What ACH Is and Who It Benefits

In today’s payment world, most people are using Automated Clearing House ACH and may not even realize it. ACH may be a familiar term for most people, but its meaning is often fuzzy at best. For those of you who would like some clarity on the topic, let’s break it down.

ACH is a network that provides a payment processing system. Financial institutions send electronic debit or credit transactions on behalf of businesses and consumers through the network with an effective date. The transactions are sorted into batches and sent to the institution that will be receiving the debit or credit. On the effective date, the transaction will post to the intended account.

There are two common types of payments that use ACH:

• Direct deposits (payroll, employee expense reimbursement, government benefits, taxes, refunds, annuities, interest payments, etc.) from business or government consumers
• Direct payments (bill payments and person-to-person payments) from individuals or organizations

What Happens During an ACH Transaction?

There are five players in an ACH network: the originator, the originating depository financial institution (ODFI), the ACH operator, the receiving depository financial institution (RDFI), and the receiver.

Let’s say you want to have your paycheck deposited directly to your checking account every pay period. Per your request, your Human Resources department sets up an automatic direct deposit transaction through their financial institution. Your employer is considered the originator and their bank is considered the ODFI.

Your employer (originator) sends a request to their financial institution (ODFI). The ODFI enters the ACH entry at the request of the originator and transmits the payment to an ACH operator. There are two central ACH facilities in the United States – The Federal Reserve and the Electronic Payments Network (EPN). The ACH operator sends it to your financial institution (RDFI). The RDFI receives the transaction and posts it to your account (receiver).

That Was Simple. How Can I Use ACH To Simplify My Financial Processes?

The above is a common example of an ACH transaction but it is only one of many types of ACH transactions you could set up. Theoretically, you could pay all of your bills with ACH payment processing using one of two direct payment scenarios:

• In the first scenario, you could opt to have your phone service provider automatically deduct your phone charges from your bank account each month. In this example, you would authorize your phone service provider (originator) to pull the funds from your account by giving them your account information. They would work with their financial institution (ODFI) to originate a debit request to send to the ACH operator. The ACH Operator would send the request to your financial institution (RDFI), who would debit your account (receiver).
• In the second scenario, you could set up an automatic transaction through an electronic bill payment system like Bill Pay, Popmoney or Account to Account transfer, within your own Online Banking account. In this scenario, you are the Originator, your financial institution is the ODFI, the institution where you are sending the funds is the RDFI and the person or business receiving the funds is the receiver.

The benefit to setting up transactions through Online Banking is that you can control the amount and timing of transactions. For those who do not like passing control over to vendors may find this option more appealing.

Okay, That Makes Sense. How Will I Benefit From Setting up ACH Transactions?

Setting up ACH transactions can provide a number of benefits beyond the ease of paying your monthly bills. Benefits include:

• The time you would have taken to write out a check, scribble out your return address, lick and place a stamp, and drive it to the post office before it closes is saved when you have ACH payments set up.
• You never have to wonder whether your check has made it to its destination. You can see for yourself in Online Banking, Mobile Banking or via automatic receipt.
• ACH is much speedier than USPS and you don’t have to worry about holidays or other events that could delay your payment.
• You may get a discount from your vendor if you pay by ACH because it reduces their risk. You will also save money on stamps, and envelopes. If you make fewer trips to the post office as a result, you may also save on gas.

Some Final Thoughts about ACH

Often, people resist setting up ACH transactions because they believe it will take too long to figure it out. The reality is that the process is easy and takes significantly less time than it does to write a check, sign it, seal it, and deliver it to the post office. With so many options for making payments, there are few reasons to write a check these days. There are many reasons to simplify the monthly task by relying on an automated system that reduces waste, frees up more time, and remembers to pay your bills for you!

If you are a VSECU member and are not enrolled in Online Banking, enroll now and simplify your banking with ACH.