If you’ve ever received a direct deposit, paid a bill online through your bank account, or split a dinner bill using Venmo, while you may not know it, you’ve made a transaction through the ACH network. ACH, which stands for Automated Clearing House, is a payment system governed by Nacha to move money between the bank accounts of all U.S. banks and credit unions. And, for many FinTechs and financial service providers, ACH is the backbone of how they move money into and out of their banking product.

Billions of dollars travel through this network every day, making it an integral part of the money movement system in the U.S.. So for FinTechs, or really anyone building a financial product, it’s important to understand not only what an ACH transaction is, but also how it works, and, most importantly, how to comply with the rules and regulations set by Nacha. 

That’s why we thought we’d break down the anatomy of an ACH payment, including the different kinds of ACH payments and use cases. If you’re considering adding ACH payments to your FinTech app or embedded banking product, this is what you need to know.

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Common uses for ACH

The number of ACH transactions that are conducted on a daily basis can be a little hard to wrap your head around. According to Nacha, in 2022, 30 billion transactions flowed through the ACH network with a total of $73 trillion being transferred. That is a mind-boggling $200 billion per day.  

Let’s go through some of the common uses of ACH:

1. Account funding and external account transfers. When a customer opens a new bank account, and wants to move money into that account from another bank account, ACH is the most common way to conduct that transfer. 
2. Peer-to-peer payments, such as Venmo. Venmo runs on ACH, so anytime you pay your dog walker, or request money from a friend for last night’s bar tab, you’re using ACH. 
3. Payroll. Every pay day, you’re benefiting from ACH!
4. B2B payments. Most businesses transfer money between each other using ACH, helping them avoid costly fees associated with credit cards or wire transfers. 
5. Microdeposits. If you’ve ever had to validate a 78 cent transaction in order to verify your account details, that likely occurred via ACH. 
6. Crypto on-ramps and off-ramps. Systems that allow users to buy crypto assets using fiat currency (on-ramps) or sell crypto assets in exchange for fiat currency (off-ramps) use the ACH network to conduct those transactions.

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How does an ACH transaction work?

To explain what happens behind the scenes when someone initiates an ACH transaction, we’ll walk you through a common use case. 

Let’s say that you just opened a new bank account at Snazzy Bank and want to move $1,000 from your old bank account at Dull Bank into the new one at Snazzy. Once you initiate this transfer with Dull Bank, they will first run the standard ACH payments validation, such as verifying that you have enough money in your account to fulfill the transaction and running fraud checks.

Once these checks are complete, Dull Bank then creates an ACH file that contains all of the information associated with the transaction, including the receiving account number, date, transaction codes, and more. Nacha has very strict rules for how these files must be structured. They must be fixed-width, ASCII files with each line containing exactly 94 characters. Each line is called a “record,” and the records must follow specific orders and rules in order to be properly formatted.

Dull Bank then puts this file into the batch of all of the other ACH transactions it needs to conduct at that time and sends that batch of files off to the Federal Reserve, commonly called the Fed. Once the files are received by the Fed, they put them under the microscope, making sure they are all formatted according to Nacha standards.   

Since tens of millions of these files are sent to the Fed every day, the Fed aggregates and sorts them all based on which bank they need to be routed to in a process called consolidation. The Fed then sends the file to Snazzy Bank, who reviews and accepts it. 

In the final step of the process, the money is settled by the Fed, debiting Dull Bank for $1,000 and crediting Snazzy Bank for the same amount. Congratulations, your new account at Snazzy Bank is now funded! 

The timing of this process is all done according to the FedACH processing schedule, which sets deadlines each day for the transmission, distribution, and settlement of these files and funds. 

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Types of ACH transactions

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• Standard vs. Same Day. The vast majority of ACH transactions – think 98 to 99 percent – take two days to complete. These are called “Standard” ACH transactions, and while Same Day ACH is possible, it is also more expensive. Even with the additional cost, Same Day ACH continues to grow in popularity year after year. 

• Credits and Debits. Because the data contained in an ACH file is always one-sided (i.e., the files only show one side of the payments equation) they are split between credit and debit ACH transactions. Credit transactions instruct the bank to put money in a given account, while debits instruct them to take money out. 

• ACH Returns. Returns come in with a return reason, or why they are returning the funds and not completing the transaction. The most common reason for an ACH Return is “NSF” or “not sufficient funds.” Oops, someone didn’t have enough money in their account to make the payment. 

• Dishonored Return. If one bank feels that the other bank is in the wrong in returning the transaction, the bank can also dispute return transactions and send a “Dishonored Return”. For example, a bank may send a return outside of the acceptable time frame, prompting the other bank to send a Dishonored Return. If the bank who receives the Dishonored Return feels they really are in the right, they can send back a “Contested Dishonored Return.”

Sound complicated? That’s because it is. To add to the complexity, at no point in the process is there any confirmation that the transaction is correct and appropriate. When it comes to ACH, no news is good news, and both banks and consumers just have to hope their payments go through without anyone voicing any issues. 

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ACH transaction compliance

For every part of an ACH transaction, from the file formatting to the processing schedules to the way returns are conducted, there are strict rules set by Nacha. Any participants in the ACH network that are found in violation of these rules can receive warnings, fines, and, as a worst-case scenario, be kicked off the network entirely.

For FinTechs looking to offer ACH through their FinTech app or embedded banking product, there are a few key things to keep in mind. 

First, you must make sure that the Nacha file you send to the Fed is formatted correctly and that all of the information it contains is accurate. Even though your sponsor bank is responsible for sending the file to the Fed, FinTechs are the ones who generate the ACH file and make sure it is formatted according to Nacha standards. Things like names, account numbers, and routing numbers should all match so that the receiving bank can quickly identify and route the transaction. 

Also, while crediting an external account through an ACH transaction does not require any additional verification of the account, debiting someone’s account at a different bank requires validation that they have permission to do so. This helps protect consumers or businesses from unwanted debits to their account.

Personal accounts can be verified by micro-deposits or by account verification providers, like Plaid. For business transactions, the user must upload documentation showing they have an agreement in place in order to debit someone’s account. For example, your gym can validate that they have permission to debit your account by uploading your gym membership payment agreement.  

Maybe most importantly, you must also keep track of all of your ACH transactions. If you participate in the ACH network, you are responsible for making sure that for all of the transactions you send through to the Fed, there is a record of the transaction in your system and a matching transaction in your sponsor bank’s system. This process of matching the transactions between the different systems is known as “reconciliation”. If you lose track of the payments running through your platform, you’ll probably scare a few auditors or the Fed. No one wants that.

In addition to these ACH specific rules, you must also make sure you’re performing the standard compliance checks and balances that are required of any company involved in the payments ecosystem. This includes KYC, validating transactions and external accounts, account balance checks, and more. 

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Synctera and ACH

If you’re like many FinTechs, this might sound a bit daunting. And it is. But thankfully, at Synctera, our APIs handle all of the complexity of ACH for you. 

When you initiate an ACH API call, Synctera’s platform creates Nacha compliant files using the information sent in the API call. This file is then automatically sent to the Fed via your sponsor bank. For incoming ACH transactions, Synctera receives these files from the external banks and processes the credit, debit, or return, taking money out or putting money into the applicable account.

What about that all important reconciliation process? Don’t worry we’ve got you covered there, too. On a daily basis, Synctera reconciles ACH transactions with our sponsor banks and matches these transactions to the Fed Settlement. 

If ACH is something you’re considering offering to your FinTech’s customers, Synctera provides all of the technology and compliance services associated with ACH, allowing you to focus on your company’s competitive differentiators and specific capabilities. If you’re interested in finding out more, reach out to our team at the link below!

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