# ACH

*<mark style="color:purple;">Unlike the credit card network, the ACH network is unable to provide real time authorization of funds.</mark>*

<mark style="color:red;">ACH debit = pull</mark>\ <mark style="color:red;">ACH credit = push</mark>

<details>

<summary>ACH terms</summary>

**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.

</details>

<details>

<summary>ACH credit txn lifecycle</summary>

1. 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.
2. The ODFI debits the funds from the originator’s account.
3. The ODFI sends a Nacha file with the transaction request to the ACH operator.
4. The ACH operator processes the Nacha file and sends the transaction to the RDFI.
5. The RDFI receives the Nacha file.
6. The RDFI transfers funds to the receiver’s account according to instructions in the Nacha file.

</details>

<details>

<summary>ACH debit txn lifecycle</summary>

1. 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.
2. The ODFI generates a Nacha file with the transaction request and sends it to the ACH operator.
3. The ACH operator processes the Nacha file and sends the transaction to the RDFI.
4. The RDFI debits the receiver’s account according to instructions in the Nacha file.
5. The ODFI credits the originator account with the funds.

</details>

***

<mark style="color:purple;">COUNTERPARTIES</mark>&#x20;

Originator\
ODFI\
ACH operator (Federal Reserve or The Clearing House)\
RDFI\
Receiver

<mark style="color:purple;">REQUIREMENTS</mark>

All ODFIs must also be a receiving depository financial institution

<mark style="color:purple;">ACH DATA FLOW</mark>

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

<mark style="color:purple;">FLOW OF FUNDS</mark>

<figure><img src="/files/jQspNfCnm7EWOyjeC6Xz" alt=""><figcaption></figcaption></figure>

***Encumbering leg = counterparty risk?***

<mark style="color:purple;">ACH TRANSFER</mark>

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.

<figure><img src="/files/zmP0KyJnzTkrbpngK6Ve" alt=""><figcaption></figcaption></figure>

<mark style="color:purple;">ACH CREDIT TRANSFER</mark>

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.

<figure><img src="/files/PryVwQYfWcA21hCpoqyf" alt=""><figcaption></figcaption></figure>

<mark style="color:purple;">USE CASES</mark>

* Payroll&#x20;
* Paying bills online&#x20;
* Unemployment payments&#x20;
* Social security benefits&#x20;
* Tax refunds or payments

***

<mark style="color:purple;">RESOURCES</mark>

[All about ACH bank transfers](https://plaid.com/resources/ach/how-does-an-ach-transfer-work/)\
[Fednow and Faster Payments in the US](https://xft.finance/downloads/fednow_bostonfed_20241108.pdf)\
[Automated clearing house](https://en.wikipedia.org/wiki/Automated_clearing_house)\
[ACH counterparty roles and responsibilites, data flow](https://publishedguides.ncua.gov/examiner/Content/ExaminersGuide/ElectronicPaymentSystems/EPSTypes/ACH/ACH_Overview.htm)

```
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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