What you Need To Know about Same Day ACH
In March 2018, the Automated Clearing House started supporting same-day credit settlement between two financial institutions in the US. That was a landmark improvement since 90% of all funds transferred in the country are processed through this system.
How ACH works
The Automated Clearing House network is the main system of electronic funds transfer in the US. Since the 1970s, it aimed to allow the transfer of predictable and regular payments without the need of paper checks. The main principle of the network was stability, not speed.
An ACH instruction begins as an instruction from an originating bank to a recipient bank. The instruction is sent in the form of a digital file through the Federal Reserve, which acts as the clearinghouse. The recipient bank is required to process their backlog of instructions by 8:30 AM every day, called the settlement window. The ACH uses a pre-email system of electronic file transfer where there is no contact between the two banks. The settlement windows are the only time when the originating financial institution will be informed that the recipient bank has processed the originating bank’s ACH instructions.
The players involved
Before delving into the mechanics of Same-Day ACH, it is necessary to be familiar with the players involved in the ACH system.
- First is the NACHA, or the National Automated Clearing House Association, which managers the development, governance, and administration of the ACH Network. The NACHA is funded by the financial institutions under its wings.
- Second, are the ODFIs and RDFIs. The ODFI or originating depository financial institution is the financial institution in which the ACH transaction originated from. The RDFI or receiving depository financial institution is the one receiving the ACH transaction. Both the ODFI and RDFI are financial or banking institutions.
- Last is the third-party platforms that make use of the ACH network for simpler and straightforward transactions. The third-party platforms are an easy on-ramp to the ACH network, providing a few API endpoints that can be integrated inside of your platform to facilitate ACH transactions.
After many years of constant lobbying from experts and customers in the financial industry, the governing body decided to move ahead with “Same-Day ACH.” The approved plan includes implementing two new settlement windows every business day – one at 1:00 PM EST and another at 5:00 PM. – which means there are now 3 settlement windows every day. Because of the system-wide three processing deadlines, any bank will be able to send a Same-Day ACH transaction at 9:30 AM, which will be processed by 1:00 PM the same day.
The project of having all banks in the US aligned on a three-times-a-day settlement scheduled passed through three phases. These rules apply only to domestic transactions under $25,000:
- From September 23, 2016, all financial institutions were required to process ACH credit requests in all three settlement windows, which means processing requests and adding funds to an account.
- On September 15, 2017, banks need to accept debit requests in the same three settlement windows.
- Beginning March 16, 2018, banks can have funds available by 5:00 PM local time for ACH credit transactions that were processed in the first two settlement windows of the day. This means that amount should not appear as “Pending” on the bank ledger but as a fully completed transaction.
While the new settlement schedule made possible the same-day credit transactions of funds, same-day debit settlement is not yet possible. The reason is that ACH debit transactions need a mandatory waiting period. Since the originating bank made the request to pull money from another bank, NACHA rules allow the party to lose funds two days to stop the transaction before settlement. Same-Day ACH, however, moves the mandatory waiting period half-day earlier than what was the practice before.
The effects of Same-Day ACH
Same-Day ACH cannot make available instant payments or even same-day funds. Every US bank can now process outstanding requests three times a day rather than once under the old practice. Not all financial transactions are eligible to be completed the same day, but almost everything can be processed faster.
Same-Day ACH is an important development for the US payment system. ACH is a strong safeguard to handle institutional funds transfer of all sizes. The three times a day processing allows business-to-business payments to speed up, bill payment becoming more flexible, and many companies will be able to change their payroll processing.
Before the launching of the Same-Day ACH project, NACHA’s research identified more than 60 potential use cases for Same-Day ACH, some of the most prominent include:
- B2B payments – Trading partners are able to settle their invoice payments faster, including remittance information amongst the parties.
- Payroll – Credit settlement on the same day allows companies to pay temp workers or hourly employees faster. The companies can have the funds ready by the end of the day once the payroll is initiated.
- Urgent funds transfer – It is now possible to make extremely time-sensitive payments, such as medical insurance disbursement or paying a bill before it becomes overdue. This will be helpful to people who forgot that bills are due and who remember only at the last minute. These people will have to pay late penalties under the next-day ACH payments.
Benefits of Same-Day ACH
Everything is faster in the US today, and payments are no exception. Same-Day ACH payments benefitted three sectors:
- Businesses – Same-Day ACH allows treasurers and people managing the books to pay attention to the certainty of efficiency savings and payments with faster accounts payable and accounts receivable. A business will have improved flexibility and control over its payroll. If there is a payroll mistake, it can be corrected more efficiently instead than waiting for the transactions to clear first. It will be easier and faster also to make payouts to workers who are operating within the gig economy. Payment will be faster and all businesses will enjoy the benefits of improved and consistent fund flow.
- ·Consumers – The main concern of an average consumer is to get paid on time. Same-Day ACH will eliminate the headache of waiting to get paid. Emergency payments will be quicker and you can pay your bill at the last minute in case you forget or you were still scrounging for funds.
- Financial Institutions – Same-Day ACH will allow banks to acquire new devices or improve existing ones to bolster revenue opportunities for the originating financial institutions to be compensated. Their customers will be happier as sending faster payments and getting access to their money faster will make people happier.
ACH is an elective option
Same-Day ACH is an elective option that payment originators can make. Not all ACH transfers follow the Same-Day schedule. It is similar to choosing the next-day delivery of your parcel instead of the regular ground shipping option. The Same-Day ACH rule included the new $0.052 fee that must be remitted to the recipient bank as a subsidy for the added cost of meeting the three processing deadlines a day.
The ACH network continues to support the traditional next-day transaction, but for a small fee, the originating bank can choose to have the transaction request immediately processed in the matter of a few hours.
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Learn to say “no” to bad prospects, customers or opportunities
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Through these methods, you can effectively gain revenue enhancement at a fast rate and always remember to prioritize your customers and give them a genuine concern.