The Automated Clearing House (ACH) is an electronic network for financial transactions in the United States.
The ACH network processes large volumes of credit and debit transactions in batches. These batches are used for all kinds of funds transfer transactions, including direct deposit of paychecks and monthly debits for routine payments, such as insurance payments or subscriptions.
Created in the 1970s to introduce electronic payments and reduce the overwhelming number of check payments, the ACH network now serves every bank in the United States and reliably provides cost-effective payments for consumers and businesses.
Rules and regulations that govern the ACH network are established by Nacha for commercial sector payments and the U.S. Treasury for federal payments.
The Federal Reserve Banks and the Electronic Payments Network (EPN) are collectively the nation's ACH operators and rely on each other for the processing of some transactions when either party to the transaction is not their customer. These inter-operator transactions are settled by the Federal Reserve
The ACH Network: The Workhorse of American Payments
Although new technologies, such as cryptocurrencies, have captured the imaginations of some policymakers and business leaders, the workhouse of the U.S. payment system is still the ACH network.
The ACH network is well-established as one of the most critical payment systems in the country. ACH provides services to every American almost every single day. There are always credits, like payroll, or debits, like rent payments, flowing to and from consumer and business accounts.
Last year, the ACH network processed a combined 26.8 billion debits and credits worth an estimated $61.9 trillion. ACH credits added up to $40.2 trillion, reflecting the critical role fulfilled by the ACH network in distributing Economic Impact Payments to help Americans impacted by the COVID-19 pandemic. Compared to 2019, the volume of transactions increased 8.2 percent and total value climbed almost 11 percent.
To put all these numbers another way: the total number of ACH payments average out to about 81 payments per person in 2020. Additionally, 2020 marked the first year that transaction volume surged more than 1 billion payments over the previous year.
However, the ACH Network delivered much more than government payments. COVID-19 forced many businesses and consumers to change their payment preferences and processes seemingly overnight.
Concerns about exposure to the virus and social-distancing procedures limited in-person transactions, such as check payments at the grocery store, and strained back-office processing of payments received in the mail. In response, the ACH Network witnessed tremendous growth with particular use cases.
For example, there were 4.4 billion more business-to-business (B2B) payments. This spike likely reflects the diminished ability for businesses to accept and process checks due to employees working from home instead of the regular office. The ACH Network offered businesses a tried-and-true way to conduct their normal business, and today more businesses realize the benefits of efficient electronic payments.
Other categories that increased because of the pandemic also include internet payments and person-to-person payments. Internet payments jumped by 15 percent, or 7.7 billion—a sign of the vital and growing role of e-commerce. P2P payments soared 42.2 percent as Americans exchanged an additional 217.6 million payments with friends and family.
The burst in P2P payments on the ACH Network likely resulted largely from fewer in-person interactions, fewer opportunities to pay in cash, and an accelerated proliferation of digital banking and payment options.
Faster Payments and the ACH Network
The ACH Network is a dynamic payment system with a long history of adapting to new technologies and payment needs, such as internet payments. More recently, the ACH Network has spearheaded efforts to improve the U.S. payment system by delivering faster payments.
In fact, the ACH Network was the first major payment system to offer faster payments to businesses and consumers nationwide. The first phase of Same Day ACH launched on Sept. 16, 2016, more than a year before The Clearing House’s RTP Network tested its first transaction.
Since its debut, Same Day ACH has continued to evolve and enhance the capabilities for banks and their customers. Last year, an industry-led rule change introduced a higher dollar limit for individual transactions—the ACH Network now permits $100,000 Same Day ACH payments. By increasing the dollar limits, banks now have more flexibility to partner with their customers to identify how electronic payments can improve inefficient processes that may rely on checks.
Nacha recently sought industry feedback on a proposed rule change to increase the individual transaction limit to $1 million. ICBA supports the effort to increase the transaction limit to $1 million, but it encourages Nacha to study the impacts of the higher limit before proceeding to implement any additional increases.
The future looks bright for Same Day ACH as banks and their customers continue to find new ways to integrate faster payments. In 2020, Same Day ACH volume swelled 38.6 percent to 347.2 million transactions, and the total value rose 86.1 percent to $460.1 billion. On average, businesses and consumers sent 1.4 million Same Day ACH payments each day with a daily total value of $1.8 billion.
Another recent enhancement will undoubtedly provide access to faster payments to more Americans: a third window for Same Day ACH transactions. Starting on March 19, 2021, banks and their customers have an additional opportunity to send Same Day ACH transactions. The new 4:45 p.m. ET window can be used by banks nationwide, but it will likely attract interest from banks and customers located in Mountain and Pacific time zones.
Only time will tell what is next for the ACH Network, but its history demonstrates a commitment by Nacha, the payments industry, and community banks to find new ways to grow and innovate.
Given that private-sector rules govern the ACH, community banks should participate in the rulemaking, operations, and governance of these organizations, particularly at the regional level through regional payments associations.
At the national level, ICBA actively represents the community bank perspective before Nacha as new ACH rules and innovative products are vetted and implemented.