Is ACH an EFT? Understanding the Key Differences
Unravel the core relationship between ACH and EFT. Understand how these key electronic payment methods are classified and interconnected.
Electronic methods have largely replaced traditional paper-based transactions, making digital money transfers commonplace. Among these, Electronic Funds Transfer (EFT) and Automated Clearing House (ACH) are frequently discussed. ACH is a specific type of EFT, representing a widely used and reliable system for electronic payments.
Understanding Electronic Funds Transfers
An Electronic Funds Transfer (EFT) broadly refers to any money transfer initiated electronically, such as through a terminal, computer, or phone. This encompasses digital payment methods that eliminate the need for physical cash or paper checks. The Electronic Fund Transfer Act of 1978 provides a legal framework for these transactions, defining the rights and liabilities of all parties involved.
EFTs include various common financial activities. Examples are withdrawing cash from an Automated Teller Machine (ATM), using a debit card for purchases, and direct deposit of paychecks. Wire transfers, online bill payments, and person-to-person (P2P) payments through mobile applications are also EFTs. While some EFTs, like domestic wire transfers, can be nearly instantaneous, others, such as ACH transfers, may take one to three business days to settle.
Understanding the Automated Clearing House
The Automated Clearing House (ACH) network is a centralized electronic funds transfer system designed for processing large volumes of credit and debit transactions in batches. This network facilitates efficient electronic payments between bank accounts across the United States, connecting all U.S. bank and credit union accounts.
Nacha, a non-profit organization, manages and governs the ACH Network. Nacha writes, maintains, and enforces the rules and standards for all participants, including financial institutions, businesses, and consumers. These rules ensure the security and efficiency of payments processed daily. The ACH Network is operated by two central clearing facilities: the Federal Reserve and The Clearing House, both adhering to Nacha’s guidelines.
The Mechanics of ACH Transactions
An ACH transaction begins with an “Originator” initiating a payment request, such as a business paying an employee or a consumer paying a bill. The Originator sends this instruction to their bank, the “Originating Depository Financial Institution” (ODFI). The ODFI then batches this transaction with other payments.
These batches are sent to an “ACH Operator,” either the Federal Reserve or The Clearing House, at specific times. The ACH Operator sorts these payments and sends them to the “Receiving Depository Financial Institution” (RDFI), the bank of the “Receiver.” The RDFI then processes the transaction, crediting the Receiver’s account for a direct deposit or debiting the payer’s account for a bill payment. ACH debit transactions typically settle within one business day, while ACH credit transactions usually settle within one to two business days. Same-day ACH options are available for an additional fee.
Everyday Uses of ACH
ACH transactions are integrated into the daily financial lives of most Americans due to their cost-effectiveness and reliability. A common application is the direct deposit of paychecks, with approximately 92% of American workers receiving wages this way. This method ensures funds are available in employee accounts.
Automatic bill payments for services like utilities, mortgages, and loan repayments frequently utilize ACH debits, where the payee is authorized to pull funds from a customer’s account. Person-to-person (P2P) payments through mobile apps also leverage the ACH network. Businesses commonly use ACH for business-to-business (B2B) payments to vendors and suppliers, appreciating the lower fees. The Internal Revenue Service (IRS) also allows taxpayers to pay federal taxes via ACH debit.