ACH is an acronym for Automated Clearinghouse. ACH is essentially an electronic way of performing increments (credits) and decrements (debits) to financial accounts.
ACH can process any transaction so long as the bank or financial institutions in the transaction are ACH compliant. There exists a nationwide ACH network for the settlement of transactions betwen financial institutions. Beginning in the early 70's ACH emerged as the preffered payment method for transfering money- especially routine, scheduled payments- between banks without the need to be physically present,
During the 1970's in America, ACH organizations were created such as the long-standing NACHA, or National Clearinghouse Association. ACH files have standard "entry class codes" and "transaction codes" with standarized formatting for ACH transaction messaging. ACH files contain information to describe the ACH transaction such as:
- Debit or credit type of transaction type (+/-)
- Whether transaction is posting to deposit account, loan account or a corporate GL
- Customer Name
- Account
- Routing
- Customer ID
- Next day or same day settlement
- Settlement date
"Prenotifications" are test ACH transactions using zero dollar transactions to validate source or destination account numbers.
ACH operators are a centralized clearninghouses that settle the transaactions for paritipating financial institutions. The two ACH operators are the federal reserve bank and the electronic payment system.
Transaction types that do NOT use ACH and why:
Wire transfer - due to differing regulations, higher dollar amounts
Debit card - requires proprietary rules and a network
Credit card - because they are a line of credit only
ATM - card based with pin (differing rules)
ACH's relationship with cryptocurrency transfers is interesting (apparently wire transfers of monies in/out is far more expensive than ACH). See this recent NACHA article: https://www.nacha.org/news/crypto-and-ach-and-coming-pair
ACH is a vital component in the payments ecosystem, and though it is uniquely American, other countries have similiar clearinghouses with different transaction file/message formats. Knowing the ACH background and basic file structure is useful as you may need to understand how it works some day at some job.
Regardless of what happens with cryptocurrencies and the inevitable USD coin which will be backed by the full faith and credit of the US government, ACH technology- and technology built on top of it- is here to stay for a long, long time.
