Automated Clearing Houses (ACHs)

  • The Automated Clearing House, which processes payments electronically, was designed to reduce the use of paper checks for routine payments.
  • In 2000, over 4.8 billion payments with a total value of more than $12 trillion were processed by ACHs through the Federal Reserve System.
  • Typical ACH payments include salaries, recurring bill payments, and Social Security benefits.

The Automated Clearing House (ACH) payments system was designed to allow corporations and consumers to reduce or eliminate the use of paper checks to make routine payments. The ACH system can process large volumes of individual payments electronically, and it has become the largest payments system in the country; in 2000, it processed over 4.8 billion items with a total value of more than $12 trillion. To date, most of the payments transferred over the ACH have represented recurring credit payments intended for the accounts of the receivers. Typical payments are salaries, consumer and corporate bill payments, interest and dividends, and Social Security and other entitlement programs originated by the U.S. Treasury. However, because of the ACH's ability to process large volumes of payments efficiently and its ability to allow an originator to debit the banking account of the payer, it increasingly is used for other types of payments, such as insurance premiums, purchases of stock, and consolidation of corporate cash balances

NACHA
Commercial ACH payments are governed by rules promulgated by the National Automated Clearing House Association (NACHA), while the Treasury's payments are governed by Federal regulations that are generally consistent with NACHA's rules. NACHA's membership is composed of representatives of the 40 regional ACH associations in the United States. All of the institutions in the ACH associations must be depository institutions—commercial banks, savings banks, savings and loan associations, U.S. branches of foreign banks, Edge Act corporations, and credit unions. Today, there are over 25,000 depository institutions participating in the ACH system.

Role of Federal Reserve and Private Sector ACH Operators
The Federal Reserve Banks have been authorized by the regional ACH associations and the respective depository institutions to operate automated clearing house facilities to settle for items they process. In addition, the Federal Reserve, as fiscal agent of the U.S. Treasury, processes all ACH payments on behalf of the U.S. Government. The Federal Reserve processes approximately 75 percent of all the items handled by ACH clearing houses in the United States. In 1996, the Federal Reserve completed the transfer of ACH data processing operations to a central site in East Rutherford, N.J., with a back-up site in Dallas.

Some ACH associations have designated private sector operators to process the items exchanged between their members. There are three major private sector ACH operators; the largest is the New York ACH Association (NYACH), which serves almost all of the depository institutions in New York and northern New Jersey. NYACH processes all the ACH items exchanged between its participants and sends the Federal Reserve those items that are intended for depository institutions that are not members of NYACH. Items processed by the Federal Reserve Banks intended for a NYACH participant are sent to NYACH for delivery to its member.

Processing an ACH Payment
Many corporations have been able to realize significant savings by collecting recurring consumer payment obligations by debiting consumers' bank accounts electronically after obtaining approval of the bill payer to debit his or her bank account periodically for the amount owed. This application has been successfully used by insurance companies, securities dealers, loan processors, and others.

A consumer or a corporation can make an electronic credit payment instead of issuing a paper check. Using either a telephone service, a personal computer interface, or written authorization, the consumer instructs a bank to debit his or her account and to issue a credit to the bank account of the payee. A corporation typically creates a computer file of payment instructions and delivers the file to its servicing bank. The servicing bank will debit its customers' accounts and deliver to the ACH an electronic file of all the payment instructions it has received from all of its customers.

The ACH processor receives the payment file from the depository institution serving the consumer or corporation. The individual debit and credit items are sorted to create a separate output file for each depository institution, and are delivered to the depository institution electronically. The ACH processor then posts the net amount for each of the depository institutions to its account. The depository institution processes the file and posts the individual entries to the accounts of its customers.

History of the ACH
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. Initially, the ACH system relied on magnetic tapes and diskettes to exchange ACH files. Their use required physical transport of tapes between the participants in the ACH system. In 1994, the Federal Reserve mandated that all ACH payment files would have to be deposited electronically and all output files would be delivered electronically. That is, all institutions dealing with the Federal Reserve directly were required to have an electronic link to a mainframe computer or personal computer to participate in the ACH.

Volumes of ACH Items Processed by the Federal Reserve

Year

Number of Items

$ Value

2000

4.8 billion

12 trillion

1999

4.3 billion

13 trillion

1998

3.7 billion

12.3 trillion

1997

3.4 billion

10.7 trillion

1996

3.1 billion

9.9 trillion

1995

2.7 billion

9.2 trillion

1994

2.4 billion

8.3 trillion

1993

2.1 billion

7.6 trillion

May 2000