The acronym ACH stands for Automated Clearing House. The ACH handles electronic cash transactions. The ACH is used by everyone, including individuals, businesses and the government.

In simpler terms, the ACH processes your financial transactions to and from your checking and/or savings account. If you are a business owner, the ACH is the one that processes the electronic transactions of your customer. The processing of transactions may appear complicated but they are easy to understand.

First, the receiver is the person that authorizes the transaction. If you are making a purchase with your debit card, you are the receiver. The originator is the person or business that initiates the transaction with your authorization. These two terms, receiver and originator, might seem backwards but that is how the ACH defines each entity involved in a transaction.

Next, the originator’s financial institution, known as the Originating Depository Financial Institution, or ODFI, puts a claim on the needed funds in your account. Your financial institution is known as the Receiving Depository Financial Institution, or RDFI. Think of it as the ODFI telling the RDFI, “Hey, this account holder owes us this amount of money for a purchase.” The RDFI debits your account for the amount and the ODFI credits the account of the originator. The ACH is the “middle man”, handling all of the transactions between the ODFI and the RDFI.

Finally, once all is said and done, you have the item you purchased, your account balance is lowered by the purchase price and the retailer gains the amount of your purchase. The ACH takes care of all of the essential components that take place in your electronic purchase. As complicated as the process sounds, the ACH makes it possible for you to purchase items without actual cash. Without the ACH, you and everyone else would not be able to use plastic in place of paper money.

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