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December 2007

The Evolution of the ACH

1

by Terri Bradford, Payments System Research Specialist

he Automated Clearinghouse (ACH) has become
one of the principal payment mechanisms in the
United States. According to the recently released
Federal Reserve Payments Study, ACH transactions now
account for more than 40 percent of the value of noncash
payments.2 This Briefing article summarizes the beginnings
of the ACH, exciting changes under way today, and possible
further changes in the future.

The ACH of Yesterday
In 1968, out of a desire to address the banking industry’s
concern that the increasing volume of paper checks would
eventually outpace the technology and equipment used to
clear them, check clearinghouse associations organized the
Special Committee on Paperless Entries (SCOPE). At about
the same time, the American Bankers Association sponsored
a Monetary and Payments System (MAPS) study to address
improving the overall payments system. The outcome of these
efforts was the determination that an electronic ACH should
be created as a payment mechanism alternative to primarily
small-value, recurring paper check payments. With this, the
groundwork was laid, and, in 1972, the first ACH association
was formed in California. Soon after, other ACH associations

were formed throughout the country, and agreements
were made between emerging regional associations and
Federal Reserve Banks to provide facilities, equipment,
and staff to operate regional ACH networks. In 1974, the
National Automated Clearinghouse Association (NACHA),
the industry association responsible for managing the
development, administration, and governance of the ACH
network, was formed to coordinate the ACH nationwide.
And, in 1978, jointly with the Federal Reserve System, local
ACH associations were linked at a nationwide level. By the
late 1980s there were four ACH operators that processed
payments among the financial institutions originating ACH
transactions and the financial institutions receiving them.
Three, the American Clearing House Association, the
Electronic Payments Network (EPN), and Visa were private
sector operators, and the fourth was the Federal Reserve.
Today, EPN and the Federal Reserve remain.
For the majority of their early existence, ACH services
were geared toward facilitating recurring consumer credit
disbursements, such as payroll, retirement benefits, dividends,
and annuity payments; recurring consumer debits, such
as payment of insurance premiums, utility bills, mortgage

payments, rent payments, contributions and dues, installment
loans, and retail bills; corporate cash concentration and
disbursement payments; corporate trade payments and the
financial information related to those payments and invoices;
and government payments, including electronic benefits
transfers, disbursement of benefits (for example, Social
Security), and collection of federal and state tax payments.
In 2000, after just more than a quarter-century in existence,
6.9 billion payments worth $20.3 trillion were processed
through the ACH system. Almost half of those payments
were the result of direct deposits and payments, 1.8 billion
and 1.6 billion, respectively.

The ACH of Today
The ACH has experienced dynamic change during the last
seven years. NACHA’s introduction of several electronic
check (e-check) applications in 2000 marked a new phase of
expanded use of the ACH. Applications were introduced that
allowed for the capture of check MICR line information to
create ACH transactions at the point of purchase (POP), at
drop and lock box locations (ARC), via the Internet (WEB),
and over the phone (TEL). In addition, an application that
provided for the elimination of those checks needing to be
re-presented (RCK) was introduced. As a result, in addition
to consumers, corporations, and government entities being
able to utilize the ACH, these new check applications enabled
retailers, operating both in physical and virtual spaces, to opt
to process payments via the ACH.
By 2006, the volume of ACH payments had more than
doubled from that processed in 2000, with nearly 15 billion
payments processed, worth $31 trillion. E-check applications
accounted for approximately 38 percent of that volume. And
NACHA continues to identify opportunities that will have the
impact of further reducing usage of paper checks. In March
of this year, NACHA introduced the back office conversion
(BOC) application. BOC enables retailers, financial
institutions, and others to make the decision to convert check
payments they have already accepted to ACH transactions
during the back office processing of those payments.

To date, innovations in the ACH have primarily been
associated with check payments. However, innovations
associated with traditional debit card payments are beginning
to be seen as well. Just as companies like PayPal developed
new ways of utilizing credit cards to initiate payments, other
companies are introducing innovations related to debit
cards. For example, Tempo Payments (formerly known as
Debitman Card), an operator of a proprietary ACH-based
PIN debit card network, has been working with merchants
to offer merchant-branded, ACH-based debit card products
for some time now. Tempo’s model attempts to appeal to
merchants by offering a less expensive card acceptance fee
structure as compared to traditional debit networks and to
assist those merchants in making their cards appealing to
customers by offering rewards and linking to existing loyalty
programs. To acquire such a card, consumers provide the
participating merchant with their demand deposit account
(DDA) information, which is then linked to the merchant’s
debit product. While having experienced some measure of
success with getting retailers to accept ACH-based debit
cards, success with acquiring issuers of the cards has been
more modest. To facilitate the issuing process, in May
2006, Tempo formed a strategic alliance with HSBC Retail
Services, an issuer of private-label retail cards.
Then, in June of this year, a variation of the ACH-based
debit card emerged. This new product, called decoupled
debit, not only removes the necessity for an individual to
have an account with the issuer to obtain a debit card, but
the debit card being issued is also network branded. Capital
One, in partnership with MasterCard, launched a decoupled
debit product. PayPal also offers a MasterCard-branded
decoupled debit product. For these cards, being network
branded brings with it acceptance everywhere the brand is
accepted, a hurdle that has thus far hindered the success of
the previous model. The result is the potential for debit cards
to be issued in a manner similar to credit cards, with the
issuer of the debit card not being the financial institution at
which the consumer’s DDA is held. To the consumer and
the merchant, the transaction appears to be no different than

December

2007

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a traditional debit payment. For the issuer, authorization
for the transaction is completed by the card network and

their customers and authorize purchase transactions. The benefit
to consumers is that payment information remains private.

settlement of the transaction occurs via the ACH. In July,
Tempo Payments announced that it would begin marketing
its payment platform technology to financial institutions
that may want to use it to issue their own decoupled debit
cards, which could run over any network where the financial
institution is a member.

For the merchants, the service provides an alternative to card
acceptance. And for financial institutions, instead of charging
ACH origination fees, a structure of fees more like those levied on
card payments will apply.

The ACH of the Future
In addition to the existing activity in the ACH, there are
a number of NACHA pilots either in progress or on the
horizon. These pilots include efforts to enhance electronic
billing and payment, to expand the use of ACH for online
consumer payments, and to capitalize on opportunities
associated with utilizing the ACH to facilitate electronic
processing of low-value check payments. These pilot
initiatives are the Electronic Billing Information Delivery
System (EBIDS), Secure Vault Payments, and Deposited
Check Truncation (DCT), respectively.
Currently under way, the EBIDS pilot presents an alternative
format for electronic bill presentment and payment. The intent of
this pilot is to make electronic billing, and subsequent payment,
as easy for consumers and corporations as utilizing direct deposit.
Using EBIDS standards, billers present e-bills to consumers’
financial institutions via the ACH, providing consumers the
benefit of receiving their billing information in the same location
at which they ultimately pay their bills. When consumers make
those payments, the billers not only receive a credit, which is
a guaranteed payment, but also the corresponding payment
remittance information. The EBIDS service also offers new
revenue opportunities for financial institutions.
The Secure Vault Payments pilot is scheduled to begin in early
2008. For this pilot, payments will flow as Web-based ACH
transactions between consumers’ and merchants’ financial
institutions. On the merchant side, to accept Secure Vault
Payments, merchants must be sponsored into the network by
their financial institution. On the consumer side, when purchases
are initiated, participating financial institutions will authenticate

The DCT pilot also is scheduled to launch in early 2008.
The intent of this check truncation service is to provide a
means for collecting banks to electronically present check
information from low-value consumer checks to paying banks
that are as yet unable to accept a check image. Though Check
21 volume continues to experience fairly rapid growth, it is
anticipated that a significant number of paper checks will
remain into 2009. The DCT service is expected to provide
an alternative means of electronic presentment that will
minimize the need for presentment of paper checks or image
replacement documents. This will be an 18-month, opt-in
pilot. And, because check information is being captured
but checks are not being converted, transactions processed
utilizing the DCT standard entry class code will be covered
by the Uniform Commercial Code Articles 3 and 4 and
by Regulation CC, not the Electronic Funds Transfer Act/
Regulation E. This is relevant in terms of the handling of
return items and consumer protection issues.
Beyond the above mentioned pilots, in March 2009, a new
standard entry class code for international ACH transactions
(IAT), will go into effect, taking the place of the existing
CBR and PBR codes used for corporate and consumer crossborder payments, respectively. Today it is estimated that
international transactions make up 1 to 2 percent of U.S.
ACH volume, with the Federal Reserve processing payments
to participating countries, which include Canada, Mexico,
the United Kingdom, the Netherlands, Switzerland, Austria,
and Germany. This new rule will result in the Federal Reserve
processing incoming credits from these countries as well.
Finally, while not a formal initiative, consideration is being
given to making the ACH system more real time. While ACH
transaction processing is done in batches twice a day, ATM,

December

2007

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credit, and increasingly debit card transactions post in real
time. Though there may be a desire and/or need for real-time
ACH processing, the costs associated with updating batch
systems to real-time systems are rather substantial. Further,
achieving real-time processing in the ACH would require the
buy-in and participation of the financial community at large to
achieve the desired results. In the interim, to simulate a more
real-time environment, some financial institutions are running
ACH batches more frequently than the ACH’s established
twice-daily processing cycles and showing the amount of

anticipated ACH transactions in their customers’ account
balances even though the transactions have yet to settle.

Conclusion
What began as a way to replace small-value, recurring paper
check payments has evolved into much more. Thirty-five
years after its introduction, the ACH of today has become
a principal payments mechanism. And innovations and
initiatives under way may make the ACH even more
prominent in the future.

Endnotes
1 Revised
2

January 2008.
The 2007 Federal Reserve Payments Study, Noncash Payment Trends in the United States: 2003-2006.

payments system research

Web site: www.KansasCityFed.org/home/subwebs.cfm?subweb=9

The Payments System Research function of the Federal Reserve Bank of Kansas City is responsible for
monitoring and analyzing payments system developments. Staff includes:

Terri Bradford

Christian Hung

Zhu Wang

Payments System Research Specialist
Terri.R.Bradford@kc.frb.org
816-881-2001

Research Associate
Christian.Hung@kc.frb.org
816-881-4721

Senior Economist
Zhu.Wang@kc.frb.org
816-881-4742

Fumiko Hayashi

Rick Sullivan

Stuart E. Weiner

Senior Economist
Fumiko.Hayashi@kc.frb.org
816-881-6851

Senior Economist
Rick.J.Sullivan@kc.frb.org
816-881-2372

Vice President and Director
Stuart.E.Weiner@kc.frb.org
816-881-2201

The views expressed in this newsletter are those of the author and do not necessarily reflect those of the Federal Reserve Bank of
Kansas City or the Federal Reserve System.

December

2007

• PAGE 4