ACH Network: Net Settlement, Batching and the 1968 BACS Launch

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An automated clearing house, or ACH, is a computer-based electronic network that processes domestic, low-value payments between participating financial institutions. It replaced a paper system that by the 1960s moved millions of checks a day by armored car, with bank staff sorting paper late into the night. The first ACH was BACS in the United Kingdom, which began processing payments in April 1968. In the United States, California banks frustrated by the time it took to move checks from branches like San Diego to clearing centers in San Francisco built the first American ACH in 1972, operated by the Federal Reserve Bank of San Francisco.

The core idea was net settlement: if Bank A owes Bank B $1 million and Bank B owes Bank A $900,000, only the $100,000 difference moves, freeing capital banks would otherwise hold. Banks gather customer requests through the day, send them as a combined file to the ACH operator, and the operator groups files into cycles, calculates each bank's net position and confirms funds before crediting accounts. Settlement can take days, creating settlement risk if a bank defaults mid-cycle. Real-time gross settlement systems avoid that risk but require full liquidity for every payment, which is why wires cost more and ACH payments cost pennies.

• Credit transfers are pushes started by the payer, such as direct deposit payroll and vendor payments.
• Direct debits are pulls started by the payee with prior authorization, covering utilities, insurance, mortgages and subscriptions.
• World Bank surveys counted 87 ACH systems worldwide in 2010 and 98 by 2012.
• National systems include NACHA and FedACH in the US, STEP2 for the euro area, Zengin in Japan, COELSA in Argentina and EGACH in Egypt.
• Because national ACH systems were built in silos, international transfers usually route through correspondent banks, adding days and fees.