What Is an ACH File and How Does It Work?

An ACH file is a standardized digital file for electronic funds transfers through the Automated Clearing House (ACH) network in the United States. This format allows businesses and financial institutions to process large volumes of transactions efficiently. It serves as the digital instruction set for moving money between bank accounts. ACH files automate and streamline payment processes, replacing paper-based methods.

The Structure of an ACH File

An ACH file is a text-based file with a fixed-width format; each “record” is exactly 94 characters long. These records are organized hierarchically to ensure accurate processing. The file begins with a File Header Record, which identifies the file and contains general information like its origin, destination, creation date, and a unique identification.

One or more batches follow, each starting with a Company/Batch Header Record. This record groups transactions by common attributes, such as the originator’s details, transaction type (debits or credits), and effective date. It specifies the company name, service class code, and desired settlement date.

Entry Detail Records within each batch detail individual transactions. Each record provides specific information: the recipient’s account number, routing number, transaction amount, and the individual’s name. It also includes a unique trace number. An optional Addenda Record may follow, providing additional payment-related information or descriptive details.

Each batch concludes with a Company/Batch Control Record, which summarizes the transactions within that specific batch. This includes totals like the entry count, total debit amount, and total credit amount, plus a hash total for validation. The entire ACH file ends with a File Control Record, providing overall totals for the file, including total batches, entry counts, and debit/credit totals, serving as a final checksum to ensure file integrity.

Creating and Validating ACH Files

Generating an ACH file begins with data collection. This includes recipient bank account numbers, routing numbers, transaction amounts, payee names, and specific transaction types (e.g., payroll direct deposit or bill payment).

Businesses typically use various software tools to compile this information into the standardized ACH file format. This can involve accounting software, specialized payment processing platforms, or online banking portals. Larger organizations might also employ direct programming for high transaction volumes.

The software organizes and formats data into the required hierarchical structure, populating each record type. Before transmission, the generated ACH file undergoes a crucial validation process. This validation checks the file’s format, data integrity, and compliance with Nacha (National Automated Clearing House Association) rules. Validation helps identify and correct errors, minimizing rejections during processing.

The ACH File Transmission Process

After an ACH file is created and validated, it is ready for transmission. The first step involves submitting the file to an Originating Depository Financial Institution (ODFI), typically the originator’s bank. This submission often occurs through secure online portals or via secure file transfer protocols (SFTP), ensuring data protection.

The ODFI performs final compliance checks. It then batches multiple originators’ files and forwards them to an ACH Network operator: either the Federal Reserve or The Clearing House’s Electronic Payments Network (EPN). These operators route transactions to the appropriate receiving banks.

ACH operators sort and send transactions to Receiving Depository Financial Institutions (RDFIs), the recipients’ banks. The RDFI processes the incoming file, crediting or debiting accounts as instructed by Entry Detail Records. Settlement occurs as funds are exchanged between the ODFI and RDFI through their Federal Reserve accounts, typically within one to three business days.

Common Applications of ACH Files

ACH files are used for many routine financial transactions due to their efficiency and cost-effectiveness. A prevalent use is direct deposit, where employers transfer payroll directly into employee bank accounts. This method replaces physical checks, giving employees timely access to wages.

Direct payment, or online bill pay, is another widespread application. Consumers and businesses use ACH files for recurring payments like utilities, loan installments, rent, and subscriptions. This automates payments, reducing missed payments and late fees.

For businesses, ACH files are fundamental for Business-to-Business (B2B) payments. Companies use them to pay suppliers, vendors, and manage inter-company transfers, often integrated with electronic invoicing systems. This streamlines accounts payable and reduces reliance on slower, error-prone paper checks. Consumers also make Consumer-to-Business (C2B) payments via ACH, such as online purchases directly debited from their bank accounts. ACH transactions offer convenience, lower processing fees than credit cards, and enhanced security.