ACH

Unlike the credit card network, the ACH network is unable to provide real time authorization of funds.

ACH debit = pull ACH credit = push

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

  1. Originator initiates a debit or credit payment order to the ODFI

  2. ODFI transmits the payment information to the ACH operator

  3. ACH operator receives data from the ODFI and sorts the entries by routing number \

  4. ACH operator transmits the entries to the RDFI

  5. RDFI receives, processes, and posts the ACH data to the receiver account on settlement day

FLOW OF FUNDS

Encumbering leg = counterparty risk?

ACH TRANSFER

  1. The merchant provides the amount due.

  2. The customer provides authorization for the merchant to initiate payment.

  3. The ODFI debits the customer's account and sends the ACH files to the ACH operator.

  4. The ACH operator routes the ACH files to the receiving bank (RDFI).

  5. The RDFI processes the payment.

  6. The funds clear and are deposited into the merchant's account.

ACH CREDIT TRANSFER

  1. Alice sends a request to Bank A “Pay Bank B $5 for the benefit of Bob”

  2. Bank A verifies Alice’s identity and adequacy of Alice’s funds

  3. Bank A notifies Bank B of the payment

  4. Bank B verifies Bob has an account

  5. Bank B sends confirmation to Bank A

  6. 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

ACH TRANSFER
1. The merchant provides the amount due.
2. The customer provides authorization for the merchant to initiate payment.
3. The ODFI debits the customer's account and sends the ACH files to the ACH operator.|
4. The ACH operator routes the ACH files to the receiving bank (RDFI).
5. The RDFI processes the payment.
6. The funds clear and are deposited into the merchant's account.
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