Automated Clearing House

Computerworld - The Automated Clearing House (ACH) system is a secure, private network that connects banks to one another by way of the Federal Reserve Board or other ACH operators. This network enables electronic payments, such as automatic payroll deposits and debit card purchases, to be handled and processed.

Even though the ACH is privately configured, the Internet is fast becoming a critical component. Because executing ACH payments is cheaper and faster than processing paper checks, both business-to-business and business-to-consumer e-commerce activities are becoming ever more dependent on the ACH system, thus forcing it to evolve.

	Total ACH Volume (number of transactions) 1989 1.33B 1990 1.55B 1991 1.96B 1992 2.21B 1993 2.56B 1994 2.93B 1995 3.41B 1996 3.93B 1997 4.55B 1998 5.34B 1999 6.25B

For example, the National Automated Clearing House Association (NACHA) in Herndon, Va., which sets the rules and standards for ACH transactions, recently released a set of guidelines for e-commerce merchants that accept ACH payments on their Web sites.

Previously, there were no rules except those set by the merchants' banks. As of March 16, however, merchants were required to have an authentication system in place so they can identify their customers electronically, says NACHA spokesman Michael Herd.

In addition, merchants must now have systems in place to verify routing numbers, conduct annual security audits and have a security equivalent of 128-bit Secure Sockets Layer encryption or better.

In the future, NACHA may also be required to develop standards for wireless and person-to-person payments, said James VanDyke, an analyst at Jupiter Research in New York.

Pump It Up

Still, e-commerce isn't the only factor driving increased volume on the ACH network.

The total number of corporate ACH payments last year was more than 902 million, up from 818 million in 1999, according to NACHA Executive Vice President William Nelson.

This figure includes both business-to-business and government-to-business payments, as well as business-to-consumer payments such as payroll deposits. The dollar amount of these payments exceeded $11.6 trillion last year, according to Nelson.

Some of the biggest growth occurred through financial electronic data interchange (EDI) networks, where businesses exchange payment information with established partners.

"B2B on the Internet is contributing to the growth of financial EDI because payments still need to be made, no matter how the transaction is originated," Nelson says.

One of the reasons why ACH has become such a popular payment mechanism on the Web is that it's less expensive than most alternatives.

For example, the cost of receiving a credit card payment over the Internet averages approximately 2.5% of the total transaction cost plus a flat fee ranging from 15 to 30 cents per transaction, compared with a fee of just 2.5 to 25 cents per ACH transaction.