One of the hottest trends in the e-commerce arena is the use of electronic checks (“eChecks”) via ACH to make payments over the Internet. Growing at 40% per year, ACH eCheck payments are the most common application on the Internet today.

The Automated Clearing House (ACH) network is a highly reliable and efficient nationwide batch-oriented electronic funds transfer system governed by the National Automated Clearing House Association (NACHA) Operating Rules which provide for the interbank clearing of electronic payments for participating depository financial institutions. The Federal Reserve and Electronic Payments Network act as ACH Operators, central clearing facilities through which financial institutions transmit or receive ACH entries.

ACH Payments include:

• Direct Deposit of payroll, Social Security and other government benefits, and tax refunds
• Direct Payment of consumer bills such as mortgages, loans, utility bills and insurance premiums
• Business-to-business payments
• E-checks
• E-commerce payments
• Federal, state and local tax payments

According to NACHA (the organization that governs ACH in the U.S. ), nearly one billion ACH debit payments totaling over $300 billion were initiated over the Internet in 2004. 

"Executing ACH payments is cheaper and faster than processing paper checks, both business-to-business and business-to-consumer e-commerce activities are becoming ever more dependent on the ACH system, thus forcing it to evolve."
From Automated Clearing House, Computerworld.

The ACH was conceived in the early 1970s, when it seemed that the increasing volume of paper checks used by businesses and consumers to pay their bills would eventually exceed the ability of the existing computer systems to process and sort the checks efficiently. The Federal Reserve participated in the early discussions and offered to provide the computer systems necessary to process and settle the ACH items between the depository institutions. In 1974, the regional ACH associations formed NACHA to coordinate the establishment of rules to facilitate the nationwide clearing of ACH payments.

The National Automated Clearing House Association (NACHA) develops the rule and the standards about ACH transactions. www.nacha.org

An ACH entry starts with a Receiver (the entity receiving a credit or debit) authorizing an Originator (the entity initiating a credit or debit) to issue an ACH credit or debit to an account. An Originator can be a person, the gas company, your local cable company, or your employer. Depending on the ACH transaction, the Originator must receive written (ARC, POP, PPD), verbal (TEL), or electronic (WEB) authorization from the Receiver. Once authorization is acquired, the Originator then creates an ACH entry to be given to an Originating Depository Financial Institution (ODFI) or Third Party Service Provider (TPSP), which can be any financial institution or provider who is capable of ACH origination. This ACH entry is then sent to an ACH Operator (usually the FED) and is passed on to the Receiving Depository Financial Institution (RDFI), where the Receiver's account is issued either a credit or debit depending on the ACH transaction.

Processing ACH payments is relatively simple. It is the business needs in support of processing ACH payments that are much more difficult and expensive to maintain. When you process ACH payments, especially ones in which the payor is not physically present, you are obligated to verify the identity of the payor and obtain an electronic authorization. You also must make commercially reasonable attempts to prevent fraud, such as verifying the routing number of the bank, checking negative history databases, scrubbing the account number structure, etc. Lastly, you must also be diligent in processing Notifications of Change and returned items. Management of these supporting activities can be a headache for businesses or individuals with no professional payments experience. It is much less expensive and much more productive for an individual or business to outsource these payments to a firm whose core competence is payments processing, allowing them to maintain focus on their core business.