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ACH 101: Intro to Payments & Transfers

Each year, more than 24 billion transactions take place using ACH, or the Automated Clearing House. These transactions cumulatively reflect over $40 trillion dollars in transfers, accounting for 90% of electronic payments. Despite the startling size of ACH, strikingly few people understand how it works or where it came from. This week we’ll take a look at the mechanics and benefits of ACH as we explore the infrastructure powering modern day payments and transfers.

Under the Hood of ACH

When the ACH system was consolidated and taken nationwide by NACHA in 1974, it set out common sense guidelines and rules that would allow for electronic bank-to-bank transfers to reduce the reliance on physical paper checks. These transfers include things like ATM withdrawals, external funds transfers, person-to-person payments, bill payments, and direct deposits. As parameters for these transactions, banks agreed on requiring just three inputs:

  • The dollar amount to be transferred
  • The bank’s routing number
  • The client’s bank account number

With these three ingredients, any financial institution can send or receive funds from any other financial institution. Given the simplicity of the model, however, it’s extremely important to ensure that accounts are authenticated before any potential transaction. Otherwise, a simple mistake when entering any of the three parameters would cause chaos as a result of erroneous transfers.

This is where bank authentication services like our Authentication API enter the picture. In preparing for ACH payments or transfers, bank authentication requires a user to log into their financial institution in order to pull account details like routing number and bank account number. Additionally, some authentication providers go a step further – confirming account balances before initiating any transfers, thus helping to reduce non-sufficient fund (“NSF”) fees.

ACH Benefits

The widespread adoption of ACH has been driven by a number of benefits and efficiencies, such as cost savings and ease-of-use, that it provides over the alternatives of physical check writing or using credit card networks. Here’s a breakdown of some of the key reasons that ACH continues to dominate transactional finance:

Cost savings: Arguably the most salient benefit of ACH is its cost effectiveness. According to the most recent Association for Finance Professionals “Payments Cost Benchmarking Survey”, the median cost of a check transaction is $3.00, while credit transactions cost $1.50. Meanwhile, transactions processed using ACH are just a fraction of the cost, coming in under $0.50.

Ease of use: ACH also provides a significantly easier way of transferring money compared with check writing. This is particularly true for routine payments such as direct deposits, rent payments, or recurring billing. Rather than regularly hunting for a checkbook, manually filling out the details, then mailing the check, ACH enables users to digitally transfer cash — no checks needed.

Security and peace of mind: Account information such as routing and account number are encrypted upon submission of an ACH payment, while checks, which display these account details and the payer’s address, can be lost in the mail, left out in open, or fall into any number of insecure situations.

As discussed, however, accessing these benefits first requires bank accounts to be authenticated. With the rise of APIs, Authentication can now be done at the click of a button, seamlessly verifying the accuracy of the submitted account information prior to the initiation of an ACH payment. This digital oversight reduces instances of fraud, while improving efficiency and cost-effectiveness, thereby making the ACH transaction process all the more robust and practical.


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