NACHA–The ElectronicPayments Associat ion

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13450 Sunrise Valley DriveSuite 100Herndon, Virginia 20171U.S.A.Telephone: (703) 561-1100Fax: (703) 787-0996Web site: http://www.nacha.org

Nonprofit OrganizationFounded: 1974 (as National Automated Clearing House

Association, a part of the American Bankers As-sociation)

Employees: 70 (est.)NAICS: 813910 Business Associations

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NACHA–The Electronic Payments Association waspreviously the National Automated Clearing HouseAssociation. NACHA is a nonprofit association thatadministers the Automated Clearing House (ACH)Network in the United States. The ACH Networkprovides a safe, secure environment for conductingelectronic payment transactions, including directdeposits into bank accounts and direct payments to vari-ous other parties. Under the ACH system, banks andother financial institutions accumulate transactions dur-ing the daytime. These transactions are processed in

overnight batches during the “nighttime window”through the ACH Network and routed to the appropri-ate bank accounts. The result is that most ACH debitsand credits typically are processed within one to twobusiness days. NACHA does not actually perform thetransactions, but rather it sets up the rules, procedures,and protocols governing the network. NACHA alsoserves as an industry trade association for its 11,000-plus member banks, credit unions, and other financialinstitutions.

The association was originally formed in 1974 asthe National Automated Clearing House Association bythe American Bankers Association (ABA). NACHAwas charged with establishing common rules andformats to be shared by the various regional and localACH associations that were springing up to betterautomate check processing. By 1978 NACHA had putinto place common rules used by financial institutionsacross the country to exchange ACH payments.NACHA was split off from the ABA as a separatenonprofit organization in 1985, owned and governed byits members.

While technology continually evolved throughoutits history, NACHA continued to play a lead role inestablishing a common platform for private and govern-ment payments. It also actively promoted the use ofelectronic payments by consumers and businesses. From1972 to 1988, the number of ACH payments in theUnited States exploded from virtually none to one bil-lion transactions. In 2012 the ACH Network processedmore than 21 billion payments with a total value of$36.9 trillion.

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AVOIDING AN AVALANCHE OFPAPER

The National Automated Clearing House Association(NACHA) grew out of several financial industry initia-tives in the 1960s to address the approaching crisis inhandling paper checks. With check volumes forecast toskyrocket in the coming decade, bankers in the UnitedStates believed existing systems for manually processing,transferring, and storing paper checks would becomeinadequate. “In the late 1960s, our nation’s paymentssystem was struggling to process the ever-increasing loadof paper-based transactions,” James P. Golson wrote inthe ABA Banking Journal. “To keep from being buriedunder literally mountains of paper, bankers began towork to make paper transactions as extinct asdinosaurs.”

At the same time, the federal government was seek-ing ways to streamline its processes and reduce costs.The U.S. Treasury generated millions of paper checksfor government employees, Social Security, and otherentitlement program recipients, contractors, and othervendors. Financial executives in the private and publicsectors seeking new technologies and new operatingsystems in order to develop a “paperless check” alterna-tive soon pooled their resources to address a commonneed.

“It would not be easy to make a shift to electronictransactions,” Golson wrote. “A nationwide processingand delivery facility would have to be developed. Oldservices would have to be modified and new onesdeveloped. And, most important, the financial habits ofboth consumers and corporations would have tochange.”

The Federal Reserve (which provided check-clearingservices to banks) promoted a strategy of organizing lo-cal and regional automated clearing houses. TheseACHs would process credit and debit transactionsthrough electronic means. Since most financial transac-tions took place within cities, states, and nearbygeographic regions, the early focus was on setting up

regional ACHs in high-volume, high-population areas.The first ACH was established in California in 1972,with several others forming soon afterwards.

FORMATION OF NACHA

However, the Federal Reserve also recognized the needfor a second tier of service to support the regionalACHs. This would be a nationwide network of ACHsto enable electronic debit and credit transactions to oc-cur among financial institutions across the country. In1974 the American Bankers Association established theNational Automated Clearing House Association to ad-dress that need. The association would “establish rulesand procedures for the interregional exchange of ACHtransactions on a national scale,” Golson wrote.

The charter members of NACHA were theCalifornia ACH Association, the Georgia Association,the New England ACH Association, and the UpperMidwest ACH Association, according to the NACHAwebsite, with other members following in the next fewyears. “By 1978, it was possible for two financial institu-tions located anywhere in the United States to exchangeACH payments under a common set of rules andprocedures,” the association stated.

As dozens more local and regional ACH formed,most of them obtained operational services from theFederal Reserve. (The exceptions were in New York andChicago, where the ACH associations set up privateclearinghouses.) In the early years, technology was themain obstacle to rapid processing, as there were few datanetworks in place to connect banks. “Back then,electronic ACH transactions required human transportof magnetic computer tapes between financial institu-tions,” according to a 2006 report in Cards andPayments.

In 1982 the 32 ACH associations across thecountry reported their volume of transactions was grow-ing by more than 90 percent each year. “Yet bankers nolonger fear the collapse of the check-processing system,”James Lordan, a State Street Bank executive andNACHA vice president, wrote in ABA Banking Journal.“We have learned that technology will continue to stepup to the challenge and provide the capacity to processany future increases in check volume.” Costs were com-ing down while transaction activity increased, Lordanadded. Higher volumes were being driven by new bank-ing products, direct deposits of employee paychecks, andpreauthorized debits of regular payments (such asmortgages and utility bills) that provided more efficiencyfor consumers and businesses.

C O M PA N Y P E R S P E C T I V E S�

NACHA manages the development, administrationand governance of the ACH Network, the backbonefor the electronic movement of money and data. TheACH Network provides a safe, secure, and reliablenetwork for direct account-to-account consumer, busi-ness, and government payments.

NACHA–The Electronic Payments Association

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SKYROCKETING ELECTRONICPAYCHECKS, BILL PAYMENTS

“In less than a decade, it [the ACH Network] has linkedthe entire nation,” Lordan reported in 1982. During itsfirst eight years of operation, the ACH system grew toinclude some 75 percent of commercial banks, 10percent of thrift banks, and more than 15,000 privatecompanies, as well as the federal government.

While volume was rising, financial and governmentofficials realized even further growth was necessary tomake the ACH Network more cost efficient. TheFederal Reserve initially did not charge financial institu-tions for ACH transactions as it encouraged moreinstitutions to use the relatively new system, Lordanstated. But Congress passed laws that required theFederal Reserve to end its subsidies by 1985 and moveto an “incentive pricing” model that reflected its truecosts. While the result was higher fees for banks, thosecosts were still well below that of paper checks.

Encouraging wider adoption of ACH and embrac-ing new technologies was a major part of the NACHAmission. In 1985 NACHA spun off from the AmericanBanking Association to become an independentnonprofit organization. It changed its name from theNational Automated Clearing House Association toNACHA–The Electronic Payments Association. In 1988ACH payments exceeded one billion transactions. In1994 U.S. Banker reported, ACH payments totaled 2.5billion, with direct payroll deposits accounting for ap-proximately half of that amount. While 15 percent ofprivate sector employees had received their paychecksthrough direct deposit in 1990, that total had grown to42 percent by 1994, the report added. According to

NACHA marketing executive Linda Garvelink in thesame report, paper checks cost $1.11 per paycheck atthat time, versus nine cents each for direct deposit.

While banks, the Federal Reserve, and NACHAheavily promoted payroll deposits in the 1990s, theyalso focused on encouraging electronic services throughwhich consumers could pay their bills. Steven Marjan-ovic reported in 1995 for American Banker that only asmall portion of the 20 billion in consumer bill pay-ments was being handled by the ACH Network. Busi-nesses had already chosen the lower costs and improvedefficiency of electronic billing, so supporters begantargeting consumers. Paul Connolly of the FederalReserve Bank of Boston told Marjanovic that theexpenses associated with using paper check to pay billswas $30 billion to $60 billion annually. “The printing,mailing and delivery of well over 60 billion checks eachyear cost the equivalent of about 0.5 percent of the U.S.gross domestic product,” the article quoted Connolly assaying.

However, Karen Gullo reported for Datamation thatdisputes over software standards, communications,protocols, and other issues had delayed broader ac-ceptance of electronic payments among corporations. In1995, Gullo wrote, many companies were using ANXIX12 formats for electronic business data exchange(EBDI) transactions, while the banks used the differentNACHA format. It would take several years before allthe parties could agree on common protocols forelectronic billing.

GOVERNMENT ELECTRONICFUND TRANSFERS

The major driver for electronic payment adoption sooncame from the federal government, Forbes reported in1996. “A quarter-century ago, digital visionaries werepredicting the checkless society,” Janet Novack wrote.“The number of checks written in the U.S. has tripledsince then, to 61 billion in 1995.” However, a new lawby Congress required the federal government to stop us-ing paper checks by 1999 and shift some one billion an-nual payments to electronic fund transfers. In 1996 thecost for issuing and mailing a paper check was 42 cents,while the cost of electronic payments had fallen to twocents.

“Yet, as things stand, 90 percent of U.S. banks andsome federal agencies aren’t capable of electronicallytransmitting and receiving key information that ac-companies vendor payments,” Novack continued. “Thenew law will force them to get moving.” Once some300,000 federal contractors and their financial institu-tions comply, NACHA president Elliott McEntee told

K E Y D AT E S�

1974: NACHA is established by four regional pay-ment associations.

1985: NACHA becomes an independentorganization.

1988: ACH payments exceed one billiontransactions.

1998: First electronic check application takes effect,soon followed by point-of-purchase, Internet-initiated, and telephone-initiated transactions.

2003: ACH payments exceed 10 billion transac-tions; e-checks pass the one billion mark.

2012: Total ACH Network transactions exceed$36.9 trillion.

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Novack, “There will be a spillover effect to the privatesector.”

Indeed, by 1998, ACH payments reached five bil-lion transactions. NACHA also introduced its firste-check application (another significant step towardeliminating paper checks). Also in 1998, the associationdeveloped electronic bill presentation guidelines thatbrought together information technology (IT) vendors,banks, telecoms, and other parties that eventuallyresolved the impasse over standards.

By 1999 a growing number of retailers had adoptedcheck conversion, another interim step toward paperlesspayments. “A consumer in a store writes a check andpresents it to the cashier,” Orla O’Sullivan wrote forU.S. Banker. “She runs the check through a reader andhands it back to the customer for keeps,” creating anACH transaction that is processed electronically. Checkconversion was “a hybrid approach that suits customersdetermined to write checks while conferring the benefitsof an electronic payment method on both merchantsand banks,” the article added. NACHA estimated some25,000 merchants (led most notably by Wal-MartStores, Inc.) and fewer than 100 banks were usingconversion at that time. However, expanded use of debitcards eventually replaced check conversion for retailers.

The Federal Reserve Bank of New York reportedthat the ACH Network had become the largest pay-ments system in the country. In 2000 more than 4.8billion payments with a total value of more than $12trillion were processed by ACHs through the FederalReserve System. The Federal Reserve processed about 75percent of all U.S. ACH items that year, with the bal-ance divided among three private sector operators,including the New York ACH Association.

ACH AND THE INTERNET

The beginning of the 21st century also saw explosivegrowth of the Internet, setting the stage for further pay-ment automation. In 2001 NACHA introduced ACHstandards for electronic transactions over the WorldWide Web and through telephone systems. Peter Lucasreported in Credit Card Management that the Internethad not yet attracted a significant volume of ACH pay-ments because there were few safeguards to preventfraud or to protect the privacy of consumer accounts.However, NACHA took several steps that year toestablish security standards that would protect financialinstitutions and their customers. “Early returns suggestthe new guidelines will enable Internet-based ACHvolume to mushroom,” Lucas added. “In June, NACHArecorded nearly six million Internet-based ACH transac-tions, up from 3.8 million a month earlier and 2.9 mil-lion for April.”

ACH volumes also continued to grow. NACHAreported that total ACH payments exceeded 10 billionin 2003, with e-checks surpassing one billiontransactions. Five years later, payments had almostdoubled to 18.2 billion. John Alarcon and RobertHansell reported for the Pennsylvania CPA Journal thatglobal use of electronic payments rather than checks hadgrown from 55 percent in 2000 to 80 percent in 2008.U.S. volumes had grown by 18 percent annually overthe preceding five years.

By the end of the first decade of the 21st century,the major competition to the ACH Network was nolonger paper checks but direct payment processingservices such as PayPal that operated outside thetraditional financial industry. Credit and debit cardsheld the largest share of the online retail marketplace,but there was growing use of alternative paymentservices provided by such e-commerce vendors as eBay(PayPal and BillMeLater), Google (Google Checkout),and Western Union (eBillMe). Patti Murphy reported in2012 for the Green Sheet that PayPal processed some$118 billion in payments during 2011, with double-digit volume increases seen in the previous years.However, Murphy also noted that more than 30 percentof PayPal transactions were processed via the ACHNetwork, with an estimated $50 billion in ACHtransactions for 2012.

NACHA responded to the growing popularity ofPayPal and similar programs with its own service, SecureVault Payments (SVP). The system used the ACHNetwork to connect online payers with bank websites toauthorize transactions. However, the technology “facessome big hurdles,” Andrew Johnson reported in 2010for American Banker, as it needed more consumer aware-ness and more bank participation to become successful.

Meanwhile, another effort to bring the ACHNetwork in better alignment with real-time processingwas unsuccessful in 2012. Although approved by amajority of NACHA members, the initiative fell shortof the 75 percent vote margin needed to implement itsExpedited Processing and Settlement (EPS). The EPSinitiative would basically have been a “same day ACH”process. EPS “would have enabled the ACH to becomea much more viable payment option in today’s rapidlyevolving payments arena,” Beth Robertson wrote forJavelin Strategy. “In particular, same day payment settle-ment would support the needs of the high-speed Inter-net and mobile commerce environments.” However,Robertson noted, the Federal Reserve has its own same-day ACH solution that could provide a platform forthat service.

Despite those challenges, NACHA continued togrow as the new century progressed. In 2012 ACH pay-

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ment volume exceeded 21 billion transactions with atotal of $36.9 trillion transferred over the ACHNetwork. Check transactions initiated via paper declinedby 7.75 percent from 2011 to 2012, while pureelectronic payments rose almost 6.4 percent and ac-counted for 85 percent of the network’s total traffic.Web transactions also rose 10.2 percent in 2012 and ac-counted for 17.6 percent of the total ACH Networkvolume. In 2013 NACHA represented more than10,000 financial institutions and 17 regional paymentassociations.

Bobby L. Hickman

PRINCIPAL DIVISIONS

ACH Network

PRINCIPAL COMPETITORS

Google Inc.; PayPal, Inc.; The Western UnionCompany.

FURTHER READING

“ACH Volume Soars.” U.S. Banker, May 1995.

“ACH: What It Is and How It Developed.” Cards and Pay-ments, March 2006. http://www.paymentssource.com.

Alarcon, John, and Robert Hansell. “The Check Is (NOT) inthe Mail.” Pennsylvania CPA Journal, Summer 2008.

Dougherty, Carter. “Payment Group Says U.S. Banks CanWork with Legal Online Lenders.” Bloomberg, August 24,2013.

Golson, James P. “Evolution of the ACH.” ABA BankingJournal, March 1980.

Gullo, Karen. “Chicken and Egg: Disagreement Over SoftwareStandards and Communications Protocols Slows Down theAcceptance of Electronic Corporate Trade Payments.” Data-mation, December 1, 1985.

Lordan, James F. “A Fresh Approach to the Potential of ACH.”ABA Banking Journal, March 1982.

Lucas, Peter. “ACH Payments Hit the Web.” Credit CardManagement, September 2001.

Marjanovic, Steven. “NACHA Teams with Fed to EncourageConsumers to Pay Bills Electronically.” American Banker,March 27, 1995.

Murphy, Patti. “ACH and the POS: Not Necessarily Made forEach Other.” The Green Sheet, May 28, 2012.

NACHA. “ACH Payment Volume Exceeds 21 Billion in 2012.”Press release, Herndon, VA, April 9, 2013.

Novack, Janet. “The Check Is Not in the Mail.” Forbes,September 9, 1996.

O’Sullivan, Orla. “When a Check Is Not a Check.” U.S.Banker, July 1999.

Robertson, Beth. “NACHA’s EPS—Gone But Not Forgotten?”Javelin Strategy & Research, August 13, 2012.

Salmon, Felix. “The Stranglehold of Payments Networks.” Reu-ters, March 29, 2012.

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