Automated Clearing House - ACH Process

ACH Process

An ACH transaction starts with a receiver authorizing an originator to issue ACH debit or credit to an account. A receiver is the account holder that grants the authorization. An originator can be a person or a company (such as the gas company, a local cable company, or one's employer). Accounts are identified by the bank's routing number and the account number within that bank.

Example 1: Alice buys a tee shirt at Bob's Gift Shop with a check for $15. Alice is the receiver; her bank account will eventually receive the order to take $15 out of her account. Bob's Gift Shop is the originator. The check, signed by Alice, authorizes Bob's Gift Shop, Inc. to originate the ACH transaction, code POP. The check has Alice's routing number and account number.

Example 2: Candice has her paycheck at Delirium Designs deposited directly to her checking account. Delirium Designs is the originator, but cannot begin until Candice, the receiver, fills out a form for direct deposits, including her bank routing number and account number.

In accordance with the rules and regulations of ACH, no financial institution may issue an ACH transaction (whether it be debit or credit) towards an account without prior authorization from the Receiver. Depending on the ACH transaction, the originator must receive written (SEC codes: ARC, POP, PPD), oral (TEL), or electronic (WEB) authorization from the receiver. Written authorization constitutes a signed form giving consent on the amount, date, and frequency (if applicable) of the transaction. If oral authorization is not audio-recorded, the originator must send a receipt of the transaction details before or on the transaction date. An electronic authorization must include a customer being presented the terms of the agreement and typing or selecting some form of an "I agree" statement.

Once authorization is acquired, the Originator then creates an ACH entry to be given to an Originating Depository Financial Institution (ODFI), which can be any financial institution that does ACH origination. This ACH entry is then sent to an ACH Operator that passes it on to the Receiving Depository Financial Institution (RDFI), where the Receiver's account is issued either a debit or credit.

Example 1: Bob's Gift Shop, in its central office, turns the check into an ACH transaction that it submits to its bank, in this case the ODFI. This transaction reaches Alice's bank, in this case the RDFI, who debits (takes the money out of) Alice's account.

Example 2: Delirium Designs submits an ACH transaction to its bank, acting as ODFI. It traverses through the system to Candice's bank, who credits (deposits the money into) Candice's bank account.

The RDFI may, however, reject the ACH transaction and return it to the ODFI if, for example, the account had insufficient funds or the account holder indicated that the transaction was unauthorized. An RDFI has a prescribed amount of time to perform returns, ranging from 2 to 60 days from the receipt of the ACH transaction. However, the majority of returned transactions are completed within 24 hours from midnight of the day the RDFI receives the transaction.

Example 1: Unfortunately, Alice has been living beyond her means, and her checking account is down to $3.44, causing the ACH transaction for $15 to bounce. The original transaction has been completed, so Alice's bank (the RDFI) now prepares a new ACH transaction, code RCK, to grab the $15 back through the ACH system. For this transaction, however, Alice's bank is the ODFI and the Gift Shop's bank is the RDFI.

An ODFI receiving a returned ACH entry may re-present the ACH entry two more times for settlement. Again, the RDFI may reject the transaction. After which, the ODFI may no longer represent the transaction via ACH.

Example 1: Bob's Gift Shop still needs their $15. The easiest way is to just submit the original transaction again, hoping that enough money shows up in Alice's bank account so that it clears. After two tries, they have to contact Alice themselves to get their money.

Time frame differences can cause loss towards an 'Receiving Depository Financial Institution' when returned ACH entries are subject to the Regulation E. An example is for the ARC and POP SEC Codes, where an RDFI has only 60 days from the date of settlement to return an unauthorized debit, and the consumer has 60 days upon notification to dispute a transaction in his statement under Regulation E. The consumer can receive notification via a statement 30 days after settlement. With these time frames, it is possible that the 60-day period allowed for ACH return would expire even before the consumer's 60-day protection (under Regulation E) would expire, leaving the RDFI open to loss.

An ACH settlement on day 1 allows the RDFI to return the entry until day 60. However when a consumer receives a statement on day 30, under Regulation E, the consumer can dispute the transaction until day 90. The RDFI is at risk from day 60 to 90 due to the different timelines.

Another problem deals with compliance where the merchant presented with a check issues an ACH entry with SEC Codes ARC or POP. However, the merchant then fails to comply with the handling of the physical check and presents the physical check for payment as well. This causes a double-debit against a consumer account.