What is Automated Clearing House in Banking?

In the banking sector, the automated clearing house has its place of importance which, if attempted, cannot be underestimated nor undervalued. The use of the automated clearing house is a result of industrialization which is pushed forward by the many technological innovations and the rising need for it. The question then arises on what is automated clearing house in banking?

This article will then dwell so much on bringing to you some basic information about the subject; this includes the role, benefit, and function of it in modern period. The advent of this great improvement in the banking sector has imparted just enough changes such as never expected before now. The first automated clearing house was BACS in the United Kingdom, which started processing payments in April 1968. In the U.S. in the late 1960s, a group of banks in California sought a replacement for check payments

What is Automated Clearing House in Banking?

Answers to the question (about what is automated clearing house in banking?) will be related to so many of its functions and responsibilities in the modern society. As the saying goes that subtle situations require subtle response, this is why we’ll be putting out in explainable terms what is automated clearing house in banking?


Automated Clearing House, also known as ACH, is a computer-based electronic network for processing transactions, usually domestic low value payments, between participating financial institutions. It may support both credit transfers and direct debits. The ACH system is designed to process batches of payments containing numerous transactions, and it charges fees low enough to encourage its use for low value payments.

The clearing house is a network that coordinates electronic payments and automated money transfers. ACH is a way to move money between financial institutions without using paper checks, wire transfers, credit card networks, or cash. The bank gathers all transaction initiations for an ACH that arrive from different customers, combining manual and file-based. The operator combines the information submitted by the banks within each cycle.

This great innovation can also automate regular payments, such as bills or employee wages. On statements or in your transaction history, ACH means that an electronic payment has been made to or from your account using your checking account information. Common examples of ACH transfers appear below. For an ACH transfer to move funds to or from your account, you must authorize those transfers and provide your bank account and routing numbers.

Functions of the ACH in Banking

There are two basic functions of Automated Clearing House

  • Credit Transfer: non-immediate transfer of funds between accounts at different financial institutions for payments by retail customers and non-urgent business-to-business payments.
  • Direct debit payment of consumer bills such as mortgages, loans, utilities, insurance premiums, rents, and any other regular or membership style payment. These type of payments are usually used by businesses that collect ongoing payments from the same customer.

Other functions of ACH to the people

  • Get paid by your employer quickly, safely, and reliably. You avoid the hassle of waiting for your paycheck to arrive or depositing the check at your bank.
  • Automate your payments, so you never forget to pay (and your payments arrive on time).
  • Make purchases online without using a check or credit card. You pay quickly and avoid credit card processing fees.
  • Minimize the number of pieces of paper floating around with your bank account information. This helps reduce the chances of fraud in your accounts.
  • The originator (employer/business) begins the direct deposit or payment using an ACH network. ACH portals generally allow you to set up one-time and recurring payments.
  • The payment amounts are entered electronically into the automated clearing house network.
  • The ACH network makes a connection with the employer’s bank, or Originating Depository Financial Institution (ODFI).
  • The ODFI aggregates payments and transmits them in batches to an ACH operator.
  • ACH operator pushes funds to employees’ banks, or Receiving Depository Financial Institutions (RDFIs). RDFIs then post the payments into employees’ bank accounts.

These allow for efficient matching and processing among numerous financial institutions.

Advantages of the Automated Clearing House in Banking

  • A low-cost, non-labor-intensive way to transfer money
  • Funds are transferred from one bank account to another. If you are an employer and need to conduct payroll, you would initiate a transfer from your organization’s bank account to your employee’s bank account.
  • Paying employees without the need to print checks or pay postage
  • Receiving customer payments easily, quickly, and regularly—no more cash
  • Processing fees that are lower than credit card swipe fees
  • Getting paid by vendors—or paying suppliers—in a way that’s safe and easy to track (there’s an instant electronic record of every transaction)

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