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If you want to send or receive money, you don’t need to wait in a long line at your local bank. The Automated Clearing House (ACH) system offers a convenient way to set up electronic transfers between banks. While ACH transactions have been around for decades, it has become commonplace today.

Here’s how the Automated Clearing House system works and its pros and cons compared to other payment options.

What is the Automated Clearing House?

The Automated Clearing House is a system to process electronic transfers between banks and credit unions. You can use ACH to:

Mobile banking apps like Chime also use ACH and speed up how quickly you can pay anyone with fee-free transfers.

The ACH system started in the 1970s when a group of bankers in California worried about the growing volume and cost of transactions made by paper checks.Soon, other regions got on board, and they formed the National Automated Clearing House Association (NACHA), which administers the ACH system today. The ACH network processes roughly 30 billion per year transactions with a total value of over $76 trillion.2

How does ACH work?

You can use the ACH system to make a direct payment, which is when you send money to another person or company, or to receive a direct deposit, where you get money from someone, like your employer. The transaction is processed through the ACH network instead a card network like Visa® or MasterCard.

For example, say you want to use ACH to pay your electric bill. First, you submit a request to your bank to electronically transfer money to your utility company. You’d enter the utility company’s banking information and how much you want to pay.

Your bank then submits your ACH transaction to a clearinghouse, a financial institution that processes these transactions. The ACH clearinghouse then contacts the bank of your utility company to give notice of the transaction and your Automated Clearing House payment.

The process works in reverse when you receive money, like with a direct deposit. In this case, your employer would initiate the transaction with their bank, which the clearinghouse would process, before finally sending the money to your account. How long direct deposit takes depends on a few factors.

What is an example of an ACH payment?

Paying your bills online is an example of an ACH payment. You set up the electronic transfer of payments between your bank and the bank of the company you need to pay. The ACH system then handles transferring your money for the bill.

ACH processing requirements

To set up an ACH transfer, you need to provide the following information:

  • The name of the bank or credit union receiving the money
  • The ABA routing number of the bank or credit union
  • The person or company’s account number
  • The type of account (checking or savings)

ACH transfers typically take around three business days if you go bank to bank.3 However, with P2P options like Pay Anyone, you can make transfers to friends and family instantly.4 You can set up ACH transfers as one-time transactions. You can also set up recurring transactions to automatically pay your bills and receive your paycheck.

ACH pros and cons

Pros:

  • The ACH system makes it much easier to send and receive money online. ACH also prevents mistakes because you aren’t manually filling out the details of every transaction – for example, you misspell someone’s name while writing a check.
  • ACH transfers are quick, and process within several business days. Digital payment apps are even faster than traditional banks. The median cost is $0.29 per transaction with banks5 and some companies like Chime offer fee-free transfers. In comparison, wire transfers, another way to send money between banks, costs around $25 each.5
  • The ACH system keeps your account details secure and gives you a way to reverse incorrect or fraudulent transactions.

Cons:

  • While ACH transfers are faster than paper checks in the mail, they can still take a few business days to process. In comparison, a wire transfer is nearly instant. ACH transfers can charge a fee ranging from a few cents to several dollars depending on the bank.
  • Banks can set limits on how much you can send by ACH transfer. For example, your bank may say you can only send $3,000 per day.5 If you want to send more, you’d need to create multiple transactions and pay any applicable fees each time.
  • ACH is only available in the United States. You must use another system, like an international money transfer service, to send funds abroad.
ProsCons
Convenient, safe system to receive and send moneyOnly available for U.S. accounts; no international transfers
Relatively quick payments, especially with payment appsLimits on maximum ACH transactions
Affordable, median cost 29 cents per transaction5Some banks take up to three business days to process
Secured through clearinghousesACH transactions may come with a fee

ACH vs. EFT vs. direct deposit

An ACH transaction, an Electronic Funds Transfer (EFT), and a direct deposit are all electronic payments, but they are not identical.

An EFT is the broadest category. It includes any transaction moving funds electronically between banks and other financial institutions. This includes ACH transfers, as well as wire transfers, ATM transactions, debit card transactions, and peer-to-peer payments. In other words, an ACH is always an EFT, but an EFT could be something different than an ACH.

Direct deposit is when an employer uses the ACH system to deposit money in your bank account electronically. So, a direct deposit is a type of ACH transfer, but not all ACH transfers are direct deposits. A direct deposit is also a type of EFT.

Set up direct deposit with Chime to get paid up to two days early.*

The modern way to transfer money

The Automated Clearing House System is a vital part of managing money today. As banks and online financial apps bring down costs and speed up transactions, ACH helps make online banking more convenient, especially compared to the hassle of using cash and paper checks.

With digital transfers and options like direct deposit, there are many easy ways to move money into Chime.

FAQs

What is a FedACH payment?

The Federal Reserve also operates as a clearinghouse to process electronic payments. It uses the FedACH system to handle ACH transfers for government payments, such as Social Security. Banks can use the FedACH system instead of using a clearinghouse.

Why is ACH charging me?

The ACH system charges processing fees to cover the costs of handling transactions and sending money from one financial institution to the other. The ACH fees are usually low, less than $1 per transaction depending on the bank.5 Chime does not charge a fee.

Is it safe to give out my ACH number?

Giving your ACH number to people or companies you trust is safe, but you shouldn’t give it to anyone. While challenging, someone can make fraudulent withdrawals from your bank account if they have the ACH number and other personal information, like your address and driver’s license. You should be careful about leaving your checkbook around since criminals can pull your account numbers from a check.

Chime® is a financial technology company, not a bank. Banking services are provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC. The Chime Visa® Debit Card and the Chime Credit Builder Visa® Credit Card are issued by The Bancorp Bank, N.A. or Stride Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit and credit cards are accepted. Please see the back of your Card for its issuing bank.

While Chime doesn’t issue personal checkbooks to write checks, Chime Checkbook gives you the freedom to send checks to anyone, anytime, from anywhere. See your issuing bank’s Deposit Account Agreement for full Chime Checkbook details.

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Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank, N.A. and Stride Bank, N.A. (“Banks”). Banks are not responsible for the accuracy of any content provided by author(s) or contributor(s).

*Early access to direct deposit funds depends on the timing of the submission of the payment file from the payer. We generally make these funds available on the day the payment file is received, which may be up to 2 days earlier than the scheduled payment date.

1 Information from NACHA's "History of Nacha and the ACH Network" as of August 2, 2023: https://www.nacha.org/content/history-nacha-and-ach-network

2 Information from "ACH Network Moves 30 Billion Payments, $77 Trillion in 2022 Led by Growth in Same Day ACH and B2B" as of August 2, 2023: https://www.nacha.org/news/ach-network-moves-30-billion-payments-77-trillion-2022-led-growth-same-day-ach-and-b2b

3 Information from Integrated Research's "The Complete Guide to Understanding ACH Payments" as of August 2, 2023: https://www.ir.com/guides/ach-payments

4 Funds are automatically debited from your Checking Account and typically deposited into the recipient's Checking Account within seconds. Pay Anyone transactions will be monitored and may be held, delayed or blocked if the transfer could result in fraud or another form of financial harm. Sometimes instant transfers can be delayed.

5 Information from GoCardless's "The Pros and Cons of ACH Payment Processing" as of August 2, 2023: https://gocardless.com/en-us/guides/posts/pros-and-cons-ach-payment-processing/

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