The Automated Clearinghouse

The automated clearinghouse (ACH) is an electronic payment system, developed jointly by the private sector and the Federal Reserve in the early 1970s as a more efficient alternative to checks. Since then, the ACH has evolved into a nationwide mechanism that processes credit and debit transfers electronically. ACH credit transfers are used to make direct deposit payroll payments and corporate payments to vendors. ACH debit transfers are used by consumers to authorize the payment of insurance premiums, mortgages, loans, and other bills from their account. The ACH is also used by businesses to concentrate funds at a primary bank and to make payments to other businesses. In 2003, the Reserve Banks processed 6.5 billion ACH payments with a value of $16.8 trillion.

The use of the ACH has evolved over time. The ACH is now used to make certain payments initiated by telephone or over the Internet. In ad­dition, merchants that receive checks at the point of sale and banks that receive bill payment checks in the mail are increasingly converting those checks into ACH payments.

In 2001, the Reserve Banks began a cross border ACH service. Legal and operational differences between countries have presented challenges to the rapid growth of the cross border service; however, the Reserve Banks are continuing to work with financial institutions and ACH operators in other nations to address these challenges.

Depository institutions transmit ACH payments to the Reserve Banks in batches, rather than individually. ACH funds transfers are generally processed within one to two days, according to designated schedules, and are delivered to receiving institutions several times a day, as they are processed. The Reserve Banks offer ACH operator services to all depository institutions. A private sector processor also provides ACH operator services in competition with the Reserve Banks. The Reserve Banks and the private sector operator deliver ACH payments to participants in each other’s system in order to maintain a national ACH payment system.

Both the government and the commercial sectors use ACH payments. Compared with checks, ACH transfers are less costly to process and provide greater certainty of payment to the receiver. Initially, the federal government was the dominant user of the ACH and promoted its use for Social Security and payroll payments. Since the early 1980s, commercial ACH volume has grown rapidly, and in 2003 it accounted for 86 percent of total ACH volume.

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