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Automated payments are sent through an electronic network for authorizations and funds transfer. Each transaction is sent to a clearing house which performs these processes. Processing transactions is the main purpose of an automated clearing house or ACH operator. Transactions are handled in batches and can be in the form of employee payroll, consumer purchases, bill payments, and check conversions. ACH has increasingly become the method of choice for online collection by businesses. The National Automated Clearing House Association or NACHA regulates these transactions along with the Federal Reserve. This network processes billions of payments a day.
E-Check Progression through Typical Financial Channels
E-check processing is essentially performed the same as any other ACH payment method. A transaction cannot be issued until it has been authorized by the actual account holder. The account holder is often referred to as the receiver. Authorization can be a signed document, verbal permission, or online acceptance. Your business is called the originator and can begin the transaction after this authorization has been received. The ACH transaction entry is saved in a batch file. At the end of the business day, the file is sent to the Originating Depository Financial Institution (ODFI) who then sends it to the ACH operator. In most cases the operator will be the Federal Reserve. After all information has been verified and cleared, the ACH entry is sent to the Receiving Depository Financial Institution (RDFI). The account is then credited or debited for the transaction amount. The RDFI can reject a transaction and send it back to the ODFI. This can be due to insufficient funds, an unauthorized transaction, or various other legitimate reasons. Returns can occur up to sixty days after the payment has been received by the RDFI. The transaction can be submitted an additional time to attempt settlement. A secondary rejection no longer allows the payment to be submitted as an ACH transaction.
The ACH network is primarily used to process pre-authorized payments for items such as utility bills, employee pay checks, insurance premiums, and vendor reimbursement. It has expanded recently to include online consumer transactions such as e-check payments. Electronic checks allow your business to remove the trouble of handling paper draft requests. Checks converted into electronic form provide more convenience. The intermediaries used to clear the two are different. A paper check gets processed by the Federal Reserve’s check collection service. All processing is done by paper and includes sending the actual checks to the Federal Reserve who then resends them to the paying bank. Electronic drafts get processed by their ACH network or one of four other private automated clearing house networks. Removing the sending of these paper documents greatly reduces the time required to process the payment as well as clerical errors. Electronic checks cannot be checked instantaneously like electronic funds transfers. This means they can be returned for reasons such as insufficient funds after being submitted to the appropriate financial institutions. However, with a dependable solution from AVPS, you can safely process electronics checks with far less complications than that of paper drafts.
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