How ACH transfers are made?

ACH stands for Automated Clearing House. ACH transfers are electronic bank-to-bank money transfers using the ACH network.

ACH network

ACH transfers are anything from getting online payments to paying your bills.

ACH transfers are made with two types of transfers:

1. ACH Debit Transfers
   An ACH debit or “pull” transaction is initiated by the receiver of funds and pulls money from the paying party.
2. ACH Credit Transfer
   An ACH credit or “push” transaction is initiated by the payer of funds and pushes money to the receiving party.

Understanding How ACH Transfer is made (Image Credit: Cyvatar.ai)

Let’s take an example:

Elon gives his employer his bank account information for direct deposit of his paycheck. Here, the company is initiating an ACH transfer to send money to Elon.

The company sends the ACH entry to its bank, which debits its bank account and forwards the entry to its ACH operator. The ACH operator passes the entry onto Elon’s bank, which then after settlement by the Fed, credits Elon’s bank account.

This was an example of an ACH credit.

Moreover, Elon gave his utility company his banking information and has authorized the company to pull funds from his bank account for his electricity bill. The utility company sends the ACH entry to its bank, which forwards the entry to its ACH operator.

The ACH operator passes the entry onto Elon’s bank, which debits Elon’s bank account. After settlement by the Fed, the utility company credits its bank account.

This is an example of an ACH debit.

Advantages of Using ACH Transfers:

1. Convenience in the form of safer and quicker transactions
2. Saving money on online transfers as opposed to writing and mailing checks
3. They are cost-effective as compared to wire transfers
4. They have lesser processing fees compared to credit cards