On any given day, the ACH Network is busy working in the background. It’s making sure your mortgage and utility payments get paid by Direct Payment (ACH debits), and your pay and tax refunds arrive by Direct Deposit (ACH credits). But did you ever wonder how it all works?
For ACH debits, let’s use the example of paying your electric bill. You might have a standing authorization for the utility to withdraw the payment each month from your bank or credit union account. Or you might go to the utility’s website each month and authorize a single payment. Either way, the utility will follow your instructions, and when time comes for them to collect the money, they become the “Originator,” because they are originating an ACH payment.
The electric company continues the process by sending your payment, along with payments from other customers, to its bank. The utility’s bank is the “ODFI” (Originating Depository Financial Institution). The ODFI most likely combines the payments from the utility with similar payments from other companies and then sends that combined file to an “ACH Operator.” There are two ACH Operators: the Federal Reserve and The Clearing House.
The job of the ACH Operator is to sort all those payments so that each one gets sent to the correct destination. In the case of your payment, the ACH Operator sends your payment to your bank or credit union, which is known as the “RDFI” (Receiving Depository Financial Institution), because it is receiving the payment from the ACH Operator.
Your bank (the RDFI) then withdraws the money from your account to complete the payment of the bill, making you the “Receiver.”
For ACH credits, let’s use Direct Deposit as an example. When you started work you provided your employer with your banking information. Before each payday, the employer sends that information, along with the amount you’re owed and your pay date, to its bank. It does this not only for you, but for all of your co-workers using Direct Deposit. Your employer is the “Originator” and its bank is the “ODFI” (Originating Depository Financial Institution).
The ODFI receives all these payment files from many employers, and then sends them to an ACH Operator. There are two ACH Operators: the Federal Reserve and The Clearing House.
The ACH Operator sorts all those payments, making sure each goes to the correct place. In the case of your payment, the ACH Operator sends a file to your bank or credit union, instructing it to credit the funds to your account on payday. Your bank or credit union is the “RDFI” (Receiving Depository Financial Institution). The RDFI places the money in your account, making you the “Receiver.”
Nacha estimates 80% of ACH payments settle in one banking day—or less (by regular and Same Day ACH).
Debits typically comprise just over 50% of ACH payments are settled either the same day or the next banking day. By Nacha Rule and enforced by ACH Operator edits, ACH debits cannot have a settlement date that is more than one banking day into the future.
ACH credits comprise just under 50% of ACH payments and can settle the same day, the next banking day, or in two banking days; but the substantial majority of ACH credits also settle in one banking day (note, the U.S. Treasury is the only entity that has the ability to initiate ACH credits with a settlement date of more than two banking days in the future).
When combining all types of ACH payments—debits, which all settle in one banking day or less; and credits, the majority of which settle in one banking day or less—Nacha estimates 80% of all ACH payment volume settles in one banking day or less.
Where does Nacha fit into all of this? Nacha governs the ACH Network, which is the way ACH payments travel. While Nacha doesn’t actually process the ACH payments, payments on the ACH Network are handled according to the Nacha Operating Rules and Guidelines. All participants in the ACH Network must follow the Nacha Rules.