About ACH

ACH is an electronic funds transfer system that enables the bulk transfer of funds between banks, usually within the U.S. An ACH transaction can move funds into the receiver’s account or move funds out of the receiver’s account at the request of the originator and at the authorization of the receiver. ACH transactions are batch-processed and are usually less costly for a bank than paper checks or real-time card transactions. Because processing happens at designated times in batches, an ACH transaction usually takes a few days to settle.

This guide is an overview of general ACH use cases, terminology, standards, and the movement of funds in a typical ACH transaction.

ACH use cases

You can use ACH to transfer funds electronically between banks. Some common use cases are:

• Direct deposit — An employer obtains account information from an employee and when a paycheck is scheduled, funds move out of the employer’s account and are credited to the employee’s account via ACH.
• Electronic payment — Instead of mailing a paper check, a customer provides account information to a business and, when the customer makes a payment, funds for the payment move out of the customer’s account and into the business’s account via ACH. This is a common payment method for things like gym memberships or mortgage payments.
• Transfer between personal accounts — Your customer has an account at an external bank and wants to transfer funds between the account on your system and the external account. The customer provides you with the external account and routing numbers so that when the customer makes a transfer, funds move out of one account and into the other via ACH.
• Tax refunds and federal benefits — The U.S. government often pays tax refunds and federal benefits via ACH. The governmental entity obtains account information from the payee and can make a direct deposit into the account.

ACH terminology

Galileo uses the following industry terminology to describe ACH transactions.

• Originator — Entity that initiates the ACH request. The originator can be a bank, business, government institution, or individual account holder.
• Receiver — Entity that receives the ACH request. The receiver can be a bank, business, government institution, or individual account holder.
• ODFI — Originating depository financial institution. The originator’s financial institution.
• RDFI — Receiving depository financial institution. The receiver’s financial institution.
• ACH credit — ACH transaction that moves funds into the receiver’s account.
• ACH debit — ACH transaction that moves funds out of the receiver’s account.
• Incoming ACH transaction — ACH transaction that originates outside of Galileo.
• Outgoing ACH transaction — ACH transaction that originates inside of Galileo. Sometimes called ACH origination.
• ACH operator — The entity that routes ACH transactions between DFIs and facilitates settlement between them.
• Nacha file — A file containing bulk ACH transaction instructions in a standardized format. The file is transferred between banks by the ACH operator.

ACH transactions always happen between banks, but “originator” and “receiver” can refer to the account holders involved in the transaction.

ACH credit and ACH debit

An ACH transaction is classified as credit or debit depending on whether the originator moves funds into or out of the receiver’s account. This means that an ACH credit is a credit to the receiver and an ACH debit is a debit to the receiver. The receiver must authorize the request before funds are moved. The originator can make an ACH credit or debit request regardless of whether the transaction is incoming or outgoing.

ACH credit — The originator moves funds into the receiver’s account. For example:

• An employer makes a direct deposit to your customer’s account via ACH transaction.
• A cardholder cashes out their Venmo or Paypal account balance and opts to transfer the funds through the ACH network.

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Note

An incoming ACH credit is often called a direct deposit. Some examples of incoming ACH credit are: a payroll deposit from an employer, a tax refund, a government stimulus check, and an incoming transfer from the customer’s own external account. Galileo does not make a distinction between a direct deposit and any other incoming ACH credit.

ACH debit — The originator moves funds out of the receiver’s account. For example:

• Your customer has an external account at another bank and posts an outgoing ACH debit that moves funds out of the external account and into the account under your product.
• A business bills your consumer customer and removes funds from your customer’s account via ACH transaction (commonly used for utility bills, mortgage payments, other loan payments, etc).
• Your business customer bills an external business and draws funds from the external business’s account via ACH transaction.

Nacha file

Nacha (National Automated Clearing House Association) is the organization that oversees the ACH system and sets the standards for ACH transactions. A Nacha file contains bulk ACH transaction instructions in a standardized format. The ODFI sends the transaction in one Nacha file and the RDFI sends the settlement decision in a separate Nacha file. A clearing house in the ACH network transfers Nacha files between banks.

Galileo creates and sends one Nacha file per day for each bank that Galileo is integrated with. Galileo sends each Nacha file via SFTP.

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Note

Galileo uses the Nacha file format to process ACH transactions. The Nacha file format is a standardized format that all banks in the ACH network are equipped to process. Nacha files are encrypted.

ACH transaction overview

The following steps outline the general process for an ACH credit.

1. The originator makes an ACH credit request to move funds into the receiver’s account and provides the receiver's bank account and routing numbers.
2. The ODFI debits the funds from the originator’s account.
3. The ODFI sends a Nacha file with the transaction request to the ACH operator.
4. The ACH operator processes the Nacha file and sends the transaction to the RDFI.
5. The RDFI receives the Nacha file.
6. The RDFI transfers funds to the receiver’s account according to instructions in the Nacha file.

An ACH debit is similar, but the funds move out of the receiver’s account.

1. The originator makes an ACH debit request to move funds out of the receiver’s account and provides the receiver’s bank account number and routing number.
2. The ODFI generates a Nacha file with the transaction request and sends it to the ACH operator.
3. The ACH operator processes the Nacha file and sends the transaction to the RDFI.
4. The RDFI debits the receiver’s account according to instructions in the Nacha file.
5. The ODFI credits the originator account with the funds.

Summary of ACH funds movement

This table summarizes the movement of funds in ACH transactions.