Why Do We Need Automated Clearing House and How Does It Work?

Sep 25, 2022 By Triston Martin

To facilitate the movement of payments electronically, Nacha operates the Automated Clearing House. The origins of the Automated Clearing House may be found in the late 1960s, while the company itself wasn't formally founded until the mid-1970s.

ACH services the payment system by direct deposits to a bank account and direct payments to a payroll account. Each party involved must make a corresponding debit or credit entry: the sender and the receiver.

How The ACH System Operates

U.S. financial transactions can be made more accessible using the ACH Network, an electronic technology that banks primarily use. In 2021, it enabled more than 29 billion electronic financial transactions on its member institutions' behalf, numbering over 10,000 in total. 1

The network facilitates the transfer of funds from one bank account to another, serving as a central location for financial transactions. The following are examples of ACH transactions:

  • B2B transactions
  • Government deals
  • Consumer transactions

The procedure is as follows. One initiates a debit and credit ACH network direct deposit or direct payment transaction is called an originator. The originating depository financial institution, often known as the "originator's bank," collects the ACH transaction and queues it up to be processed at a specific time.

The Pros and Cons of the ACH System


The ACH Network simplifies and speeds up online banking by grouping financial transactions and processing them at set times throughout the day. According to NACHA guidelines, the typical clearing time for an ACH debit transaction is one business day. In contrast, the usual clearing time for an ACH credit transaction is between one and two business days.

Government and commercial transactions are now more streamlined and timely, thanks to the ACH network, which enables electronic money transfers. More recently, ACH transfers have simplified and reduced the cost of sending money between bank accounts through direct deposit transfers and electronic checks.


There may be limits on the total amount of money you move between accounts at some banks. A significant transfer may need more than one transaction. Sometimes, you may only be able to send $1,000 at a time to your child who is away at college.

You may need to make many transfers if you anticipate a more significant expense, such as tuition or rent. However, some financial institutions will charge you a fee to make an ACH transfer.

Further, this might be a flat rate or a percentage of each sale. Especially if you often make purchases, this can hurt your bottom line. You'll have to use the ACH network if you want to transfer money between two American bank accounts. Unfortunately, this implies that you cannot use this payment method to make overseas money transfers.

How Does The Automatic Clearing House Work?

The initiator initiates an ACH transaction by submitting a request to the relevant ACH network. The bank processes the payment with the rest of the day's batch. A clearinghouse takes in the collection, sorts it, and then distributes the individual transactions to the recipient banks.

What's An ACH Transfer?

Payment through the Automated Clearing House (ACH) system involves a debit from the bank making the initial transfer and a credit to the bank receiving the funds. A clearinghouse processes the transactions and distributes them in bulk to the receiving bank. If a deal is made before 5 p.m., it will likely be finalized the same day.

Is There a Downside To Using an ACH for Financial Deals?

Your financial institution may assess fees for electronic funds transfers (ACH). So, the more work you put in, the more money you'll have to pay in payments.

If you wish to send a significant sum of money to someone, you may need to split it up into many transactions since some banks have limits on how much money you transmit via the system at once.

The system can only handle domestic transfers, which is a significant limitation. As a result, sending money worldwide using the ACH network is impossible.

The Verdict

It used to be quite inconvenient to transfer money to another person. However, advancements in electronics have made formerly complex tasks more straightforward. The ACH, or Automated Clearing House, allows easy money transfers between financial institutions. This avoids the hassle of moving money physically between accounts.

Thanks to the network upgrade, business, and personal transactions can now be completed on the same day. However, there are limitations, the most notable being the inability to make international money transfers. You may be charged a fee and have your transfer amount capped. Find out from your bank how ACH transactions are handled.

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