What Does Same-Day ACH Really Mean?
The backbone of the US payment system is about to get faster. In March 2018, the Automated Clearing House (ACH) network will be able to support same-day credit settlement between any two financial institutions in the United States for the first time. Since this system processes 90% of all funds transferred in the US, it’s important for finance teams to understand.
Here’s a beginner-level explanation of ACH and what exactly is about to change.
How ACH works
The Automated Clearing House network is the principal system of electronic funds transfer in the United States. It was created in the 1970s to allow regular, predictable payments to be transferred without paper checks. Stability, not speed, was the founding principle.
An ACH transaction starts out as an instruction sent from an originating bank to a recipient bank. The instruction is sent as a digital file through the Federal Reserve, which acts as a clearing house. The recipient bank must process their backlog of instructions by 8:30AM every day, which is a deadline known as the “settlement window.” Because ACH uses a pre-email system of electronic file transfer, there’s no other contact between the two banks; the settlement window is the only time by which the originating financial institution can be sure that the recipient bank has processed their ACH instructions. (To see a technical breakdown of the ACH process, read this excellent blog series from Gusto.)
Traditionally, ACH rules (which are set by a nonprofit governing body called NACHA) required only one settlement window every day. If you initiated an ACH credit at 9:00AM on Monday (meaning you told your bank to push money into another bank account) you wouldn’t know that the recipient bank had processed it until 8:30 Tuesday morning. Therefore, it would only be then that you could consider the transaction official and complete.
How Same-Day ACH works
In 2015, NACHA decided to speed things up. After years of lobbying from customers and industry experts, the governing body voted to move forward with a campaign they dubbed “Same-Day ACH.” They approved a plan to implement two new settlement windows every business day—one at 1:00PM EST and another at 5:00PM. With three system-wide processing deadlines every day, you could send a Same-Day ACH transaction at 9:30AM and be sure the request would be processed by 1:00PM the same day.
The project of getting every bank in the US aligned on a three-times-a-day settlement schedule transpired in three phases. All of these rules only apply to domestic transactions under $25,000:
- Starting September 23, 2016, financial institutions were required to be able to process ACH credit requests in all three settlement windows. (That means simply being able to process requests to add funds to an account.)
- On September 15, 2017, banks additionally needed to accept debit requests in the same three settlement windows.
- On March 16, 2018, banks were required to make funds available by 5:00PM local time for ACH credit transactions processed in the day’s first two settlement windows. (That means not just appearing as “Pending” on your bank ledger, but being fully settled as a completed transaction.)
It’s important to note that while this new settlement schedule made funds available for same day credit transactions, same-day debit settlement is still not possible. That’s because ACH debit transactions require a mandatory waiting period: since the originating bank is requesting to pull money out of another bank, NACHA rules give the party losing funds two days to stop the transaction before it is considered settled. Same-Day ACH does, however, start the mandatory waiting period more than a half-day earlier than it did before.
The impact of Same-Day ACH
Same-Day ACH doesn’t make available instant payments or even same-day funds, necessarily. It means that every bank in the US supports the ability to process outstanding requests three times a day instead of once. Not all transactions are eligible to settle same-day, but virtually everything processes faster.
This was an important step forward for the US payments system. ACH is a heavy-duty set of rails that is stable and secure enough to handle institutional funds transfers of all sizes. Thrice-daily processing means business-to-business payments will speed up, bill payment will become more flexible, and some companies will even choose to alter their payroll processing.
Prior to the project’s launch NACHA’s research identified 63 potential use cases for Same-Day ACH. Some of the most prominent were:
- Payroll. Same-day credit settlement helps companies pay hourly or temp workers faster, and even have funds available by the end of the day the payroll is initiated.
- Urgent funds transfer. Extremely time-sensitive payments are possible—everything from medical insurance disbursements to paying a bill before it’s overdue.
- B2B payments. Trading partners are able to settle invoice payments faster, and include remittance information amongst themselves.
Same-Day ACH is a choice
The last critical thing to know about Same-Day ACH is that it is an elective option that originators can make. Not all ACH transfers adhere to the Same-Day schedule. It’s like choosing next-day delivery from a parcel carrier instead of the regular ground shipping option. In fact, part of the Same-Day ACH rule was the creation of a new 5.2¢ fee to be remitted to the recipient bank to subsidize the added cost of meeting three processing deadlines a day.
The ACH network still supports the traditional next-day transactions. But for the first time, the originating bank, for a small fee, can opt to have their transaction request processed in just a few hours.