ACH
Unlike the credit card network, the ACH network is unable to provide real time authorization of funds.
ACH debit = pull ACH credit = push
ACH terms
Originator — Entity that initiates the ACH request. The originator can be a bank, business, government institution, or individual account holder.
Receiver — Entity that receives the ACH request. The receiver can be a bank, business, government institution, or individual account holder.
ODFI — Originating depository financial institution. The originator’s financial institution.
RDFI — Receiving depository financial institution. The receiver’s financial institution.
ACH credit — ACH transaction that moves funds into the receiver’s account.
ACH debit — ACH transaction that moves funds out of the receiver’s account.
Incoming ACH transaction — ACH transaction that originates outside of DRS.
Outgoing ACH transaction — ACH transaction that originates inside of DRS. Sometimes called ACH origination.
ACH operator — The entity that routes ACH transactions between DFIs and facilitates settlement between them.
Nacha file — A file containing bulk ACH transaction instructions in a standardized format. The file is transferred between banks by the ACH operator.
ACH credit txn lifecycle
The originator makes an ACH credit request to move funds into the receiver’s account and provides the receiver's bank account and routing numbers.
The ODFI debits the funds from the originator’s account.
The ODFI sends a Nacha file with the transaction request to the ACH operator.
The ACH operator processes the Nacha file and sends the transaction to the RDFI.
The RDFI receives the Nacha file.
The RDFI transfers funds to the receiver’s account according to instructions in the Nacha file.
ACH debit txn lifecycle
The originator makes an ACH debit request to move funds out of the receiver’s account and provides the receiver’s bank account number and routing number.
The ODFI generates a Nacha file with the transaction request and sends it to the ACH operator.
The ACH operator processes the Nacha file and sends the transaction to the RDFI.
The RDFI debits the receiver’s account according to instructions in the Nacha file.
The ODFI credits the originator account with the funds.
COUNTERPARTIES
Originator ODFI ACH operator (Federal Reserve or The Clearing House) RDFI Receiver
REQUIREMENTS
All ODFIs must also be a receiving depository financial institution
ACH DATA FLOW
Originator initiates a debit or credit payment order to the ODFI
ODFI transmits the payment information to the ACH operator
ACH operator receives data from the ODFI and sorts the entries by routing number \
ACH operator transmits the entries to the RDFI
RDFI receives, processes, and posts the ACH data to the receiver account on settlement day
FLOW OF FUNDS
Encumbering leg = counterparty risk?
ACH TRANSFER
The merchant provides the amount due.
The customer provides authorization for the merchant to initiate payment.
The ODFI debits the customer's account and sends the ACH files to the ACH operator.
The ACH operator routes the ACH files to the receiving bank (RDFI).
The RDFI processes the payment.
The funds clear and are deposited into the merchant's account.
ACH CREDIT TRANSFER
Alice sends a request to Bank A “Pay Bank B $5 for the benefit of Bob”
Bank A verifies Alice’s identity and adequacy of Alice’s funds
Bank A notifies Bank B of the payment
Bank B verifies Bob has an account
Bank B sends confirmation to Bank A
Both banks send confirmation to their respective customers.
USE CASES
Payroll
Paying bills online
Unemployment payments
Social security benefits
Tax refunds or payments
RESOURCES
All about ACH bank transfers Fednow and Faster Payments in the US Automated clearing house ACH counterparty roles and responsibilites, data flow
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