What Is the Automated Clearing House (ACH)? How It Works

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

• send or receive money
• move money between your bank accounts
• pay bills
• receive the direct deposit of your paycheck
• pay your taxes

Financial technology apps like Chime^® also use ACH and can speed up how quickly you can pay anyone with no-fee transfers on eligible accounts.

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 35 billion transactions per year with a total value of over $93 trillion.

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 of 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 one to three business days if you go bank to bank. However, with P2P options like Pay Anyone, you can make transfers to friends and family instantly.¹

You can set up ACH transfers as one-time or recurring transactions to automatically pay your bills and receive your paycheck.

Standard ACH transfers typically take one to three business days to complete. The exact timing depends on when you initiate the transfer and your financial institution’s processing schedule. Whether the receiving bank processes ACH transactions daily also affects the timeline.

Same-day ACH is also available for faster processing. NACHA introduced same-day ACH in 2016, allowing certain transfers to clear within the same business day. Many banks now offer this option, though some may charge a small fee for the faster service.

Fintech apps can often speed up the process even more. Some apps process transfers instantly between users. Others can make your direct deposit available up to two days early by advancing funds before the ACH transaction officially settles.

Pros:

• Easy system: The ACH system makes it easy to send and receive money online. ACH also helps prevent mistakes because you aren’t manually filling out the details of every transaction. You won’t misspell someone’s name like you might when writing a check.
• Quick transfers: ACH transfers typically process within a few business days
• Security: The ACH system keeps your account details secure and gives you a way to reverse incorrect or fraudulent transactions.

Cons:

• Limited to the U.S.: ACH is only available in the United States. You must use another system, like an international money transfer service, to send funds abroad.
• Transfer limits may be capped: 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. If you want to send more, you’d need to create multiple transactions and pay any applicable fees each time.
• Not instant: ACH transfers are faster than paper checks but can still take a few business days to process. If you’re looking for an instant transfer of a small amount, consider using a peer-to-peer (P2P) payment service.

ACH transfers are generally affordable compared to other payment methods. The median cost is about $0.29 per transaction. Fees vary depending on your financial institution — some banks charge nothing, while others may charge a few dollars.

Business accounts often see different pricing than personal accounts. Companies that process high volumes of ACH payments may pay a flat monthly fee or a small per-transaction charge. For individuals, many banks include a certain number of ACH transfers at no additional cost each month.Compared to wire transfers that often cost $25 or more, ACH can be a much more budget-friendly option.

Both ACH and wire transfers move money electronically between banks, but they work differently. ACH payments are processed in batches through the Automated Clearing House network. Wire transfers are processed individually and sent directly from one bank to another.

Wire transfers are typically faster, often completing within hours or even minutes. They’re commonly used for large purchases like real estate transactions or urgent international payments. But this speed may come at a cost – wire transfers usually cost $25 to $50 for domestic transfers and even more for international ones.

ACH transfers are better suited for routine payments where speed isn’t critical. They’re ideal for recurring bills, payroll, and person-to-person payments. Unlike wire transfers, ACH transactions can often be reversed if there’s an error or fraud, giving you an extra layer of protection.

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 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.

Here’s how you can get direct deposit set up with Chime and get paid up to two days early.¹

The Automated Clearing House system is a key 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.