ACH Basics

The Automated Clearing House (ACH) Network is an electronic payments network used by individuals, businesses, financial institutions and government organizations. It allows funds to be electronically debited or credited to a checking account, savings account, financial institution general ledger account or credited to a loan account.
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The ACH Network is the backbone for the electronic movement of money and other related data, providing a safe, secure, reliable network for direct consumer, business and government payments. Large and small financial institutions of all kinds jointly govern and utilize the ACH Network, facilitating billions of payments such as Direct Deposit via ACH and Direct Payment via ACH.
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The ACH Network is a same day, batch processing, store-and- forward system. Transactions are stored by financial institutions throughout the day and processed at specified times in a batch mode.
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The ACH Network exchanges funds and payment-related information throughout the United States, its territories and internationally.
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There are five key participants that contribute to the successful completion of an ACH transaction. As each participant is discussed, the financial institution should better understand the role it plays in the system.
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The Originator is the company/business that has been authorized by the Receiver to either credit or debit an account. When a company initiates a credit transaction to their employee’s account for payroll or to a business customer’s account for payment of goods and services, it is considered the Originator. Originators may also initiate debit transactions to a consumer or business account for payment of goods or services.
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The Receiver can be either an individual or a company that has authorized the Originator (company) to credit or debit their account. The employee is the Receiver if his/her employer is initiating a Direct Deposit payroll credit. A business partner is the Receiver if the Originator is sending a credit to pay for goods or services. The Originator can also be a Receiver, in situations where another party is initiating credits or debits to their account.
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The authorization is a key component of an ACH transaction, as it gives the Originator the authority to send credit or debit transactions to the Receiver’s account. The manner in which the authorization may be obtained varies based on the type of transaction and is discussed in greater detail in the Authorization section of this Guide.
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The Originating Depository Financial Institution (ODFI) is the financial institution with which the Originator (company) has a contractual relationship for ACH services and is responsible for sending ACH entries into the ACH Network on behalf of the Originator. Through the warranties outlined in the ACH Rules, the ODFI has the greatest liability of all the participants in the ACH Network. The contractual relationship between the Originator and the ODFI outlines the rights and responsibilities of the two parties with respect to the ACH transactions being originated and provides the ODFI with a mechanism to pass some appropriate liabilities to the Originator (company).
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An example of this relates to authorizations. The ODFI warrants to all the other Network participants that transactions are properly authorized; and yet, the Originator obtains and maintains this authorization. Hence, the agreement between the Originator and ODFI must address the Originator’s responsibilities regarding authorizations.
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The ACH Operator is the central clearing facility for ACH transactions. The ACH Operator is responsible for accepting files of ACH entries from ODFIs, which are then sorted, batched and forwarded to the Receiver’s financial institution. The ACH Operator also performs some editing functions, ensuring that mandatory information required in ACH records is included. There are currently two ACH Operators, the Federal Reserve Bank and EPN (Electronic Payments Network).
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The Receiving Depository Financial Institution (RDFI) is a financial institution with which the Receiver has an account relationship. Credit or debit entries sent to a Receiver’s account will be received by the RDFI from the ACH Operator and then posted to the Receiver’s account.
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The RDFI’s primary responsibilities are to:

There are two other Network participants that may be involved in the flow of transactions, Third-Party Service Providers and Third-Party Senders.
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A Third-Party Service Provider is a party which performs an ACH processing function on behalf of the Originator, ODFI or RDFI. A payroll processor is a common example of a Third-Party Service Provider used by Originators.
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A Third-Party Sender (TPS) (Straddle) is an entity that has a contractual relationship with an ODFI to transmit debits or credits to the account of a Receiver on behalf of the Originator.
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More specifically, a Third-Party Service Provider is a Third-Party Sender when there is a contractual relationship between the Originator and the Third-Party and there is NOT an agreement between the Originator and the ODFI.
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Again, referencing the payroll processor example, if the Originator has an agreement with an ODFI for ACH origination and they use a payroll processor to create the ACH file on their behalf, the payroll processor is a Third-Party Service Provider. If the Originator has a contractual relationship with the payroll processor and the payroll processor sends the ACH file to the payroll processor’s financial institution for introduction into the ACH Network, the payroll processor is considered a Third-Party Sender.
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The Originator obtains authorization to initiate a transaction to the Receiver’s account or provides notice to the Receiver that a transaction will be initiated to the Receiver’s account.
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The Originator initiates a file of ACH transactions and presents the file to its ODFI.
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The ODFI collects ACH files from Originators with which it has contractual relationships, verifies the validity of these files and at specified times, transmits these files to the ACH Operator. The ODFI may consolidate these individual files as batches into a larger file that is then transmitted to the ACH Operator. The ODFI may retain entries within these files that are intended for account holders at its institution. These entries are known as on-us entries.
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The ACH Operator receives ACH files from the ODFI, edits the files to make sure they are formatted properly and distributes files of entries to the RDFI.
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The RDFI receives files of entries from the ACH Operator for its account holders. Entries are posted based upon the Settlement Date and account number. Periodic statements are provided to the Receiver with descriptive information about the ACH transaction, including the date of the transaction, dollar amount, Originator name and transaction description (e.g., payroll, water bill, internet purchase).
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Settlement is the actual transfer of funds between financial institutions to complete the payment instructions of an ACH entry. ACH settlement can only occur on banking days. The Federal Reserve Bank provides settlement services for ACH entries, for both the Federal Reserve ACH Operator and any private sector ACH Operator (currently only EPN). The Federal Reserve Bank calculates the net debit and credit positions of financial institutions and applies those debits or credits to the account of the financial institution or to the account of its correspondent financial institution.
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The timing of settlement is based upon the Effective Entry Date indicated by the Originator on the ACH file and the time of its delivery to the ACH Operator. The Effective Entry Date is the date the Originator intends for the entries to post to the accounts of the Receivers (employees or customers).
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When the ACH Operator processes an ACH file, the Effective Entry Date is read and a Settlement Date is assigned. Entries are settled by the ACH Operator on the Settlement Date.
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In most cases, the Settlement Date is the same as the Effective Entry Date, but it is possible that the Settlement Date could be after the Effective Entry Date. For example, if the ACH Operator cannot settle on the Effective Entry Date due to untimely file delivery, a stale date, weekend or holiday, the ACH Operator will apply the next possible Settlement Date.
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Since its inception, the ACH Network’s standard settlement period has been one to two business days after processing (i.e., debit entries are allowed to be sent one day in advance of the Effective Entry Date and credits up to two days in advance). While this processing environment will continue to be available, Originators now have same day processing and settlement of eligible ACH credit and debit payments.