ACH and wire have played important roles in the evolution and electronification of payments. Both are critical to today’s banking industry, and in fact to the entire economy, as they provide the plumbing for our financial system.

ACH: The Automated Clearing House Network

The ACH network was created in the 1970’s to provide a workable alternative to paper checks. This new network allowed banks to keep up with the increasing number of checks being written across the country by converting checks into paperless entries. Regional ACH exchanges emerged, and by 1978 The Clearing House, the Federal Reserve Banks, and NACHA, the national ACH rule‐making body, had collaborated to implement an interregional exchange system. The Clearing House was the first ACH association to offer services to thrifts and credit unions and today operates EPN, a national network that processes 48% of
commercial ACH volume in the U.S.

The ACH network operates through batch processing. By accumulating transactions into batches sorted by destination, ACH operators achieve significant economies of scale. ACH transactions can take the form of a credit or debit. A credit occurs when the originating party initiates a transaction to move funds into a receiving party’s account, such as when an employer initiates a direct deposit to move funds into an employee’s bank account. A debit occurs when the originating party initiates a transfer of funds from the receiving party’s account into his or her own account, such as when a cell phone provider collects funds
from a customer who has elected to pay his or her bill by linking to a bank account.

ACH transactions account for 9% of all U.S. payments but are often high value and account for 44% of U.S. dollar flows. ACH is especially popular for consumer bill payment (44% of US. payments and 58% of U.S. dollar flows) and for payments by businesses (33% of U.S. payments and 46% of U.S. dollar flows).

Wire: Large‐Value Interbank Settlements

Wire services are crucial for safe and timely high‐value interbank settlements. The basic model for today’s wire transfers emerged as early as the mid‐1800’s when telegraph operators introduced money transfer products. Beginning in 1853, The Clearing House (then the “New York Clearing House”) allowed banks to make interbank payments on a central system of books, which reduced banks’ reliance on the expensive and risky practice of transferring cash and gold for interbank settlements. In 1918, the Federal Reserve established a proprietary telegraph network to originate transfers among the regional reserve banks.

Today, The Clearing House and the Federal Reserve operate systems for the safe and timely transfer of interbank payments in the U.S. In 1970, The Clearing House created CHIPS, a wire service to replace high value checks with electronic entries for foreign exchange and securities settlement transactions. A decade ago, CHIPS introduced intra‐day settlements for banks by netting and offsetting various transactions between institutions. CHIPS and the Federal Reserve’s Fedwire system each process approximately half of all domestic large-value wire transactions between financial institutions. CHIPS, on an average day, will settle more than $1.5 trillion.

The Clearing House, established in 1853 to bring order to clearing and settlement between banks, is the
nation’s oldest banking association and payments company.