ACH processing refers to the moving of money electronically using the Federal Government’s Automated Clearing house. This clearing house provides a centralized communication network that allows for both the electronic transfers of funds and the reporting of these transfers.
Essentially banks have a pipeline (usually called a Fed Line) that connects them directly into the ACH network. This pipeline allows information to be transmitted that instructs the clearing house to transfer funds to and from bank accounts. The banks typically receive raw data reporting bank from the Federal Reserve ACH system. (Note: There are private clearing houses as well).
Most banks possess at least the ability to use a Fed Line. Some make use of this and some don’t. Those that do typically have very limited front end tools. By front end we mean methods of getting transaction data to them. Their reporting systems tend to be even more primitive.
For these reasons third party processors (TPP’s) entered the ACH arena. The third party processor saw the myriad benefits and opportunities to provide businesses the ability to easily move money electronically. By developing user friendly front end tools and robust reporting the third party processor has been able to offer businesses tools they need. The vast majority of TPP’s have a partner bank(s) and they tie into that bank’s Fed Line.
If you are familiar with credit card processing you may assume ACH processing operates in a similar fashion. It doesn’t. Whereby a credit card transaction places a hold on available credit on the customer card an ACH transaction is quite different.
The ACH transaction proceeds as if the customer being debited has a valid bank account with the requisite funds available. The TPP typically receives provisional credit for the ACH transaction the day after the transaction is initiated. The two banks involved in the transaction (TPP bank and customer bank) have up to 4 days to “settle” the transaction. Settlement refers to the banks agreement that the money has been transferred.
Most of the time the transaction is “settled”. However there are a variety of reasons it may “reject” or become a “return”.
NSF, closed account, invalid account are some of the many reasons. You also have the potential (as in a credit card transaction) of a chargeback by the consumer.
For the reasons detailed above the TPP typically imposes a 4 day hold on funds to mitigate the risk they would be exposed to if they gave faster credit. Here is a risk scenario. A business is credited $10k on Wednesday for transactions performed on Monday. Return information comes form the customer bank and the bottom line is that $5k was “returned”. That $5k has to be debited from the business that initiated the transaction. If the TPP is unable to get that $5k they are on the hook. This goes to the heart of risk mitigation.
In summary ACH processing is not an instantaneous transfer of funds. Most of the time you will find out through your reporting within 48 hours if the transactions is going to result in a “return”. You can use our advanced verification products to reduce your exposure to potentially unsuccessful transactions. In conjunction with advanced recollection techniques you can enjoy efficient payment processing.
If your business possesses an IT staff and sufficient transaction we can in cases provide you a direct relationship with a bank with a Fed Line. Contact us for details.