Even some bankers would be hard-pressed to describe exactly what the automated clearing house is or does, but now, a few banks are attempting to introduce consumers to the network known as the ACH.
At least three Internet banks are letting consumers fund their accounts through the ACH rather than a mailed check, and two of them are labeling it ACH up front.
The method is not without its risks, as some Internet banks and the person-to-person payments service provider PayPal Inc. have learned the hard way. Without proper safeguards, it is easy for the bank that issues the ACH debit to find itself burned, if a consumer claims the transaction was unauthorized or if there are insufficient funds in the account being debited.
Nacha, the electronic payments association, is promoting an initiative called Project Action to try to change the system so that this doesn't happen, but until then, Nacha does not believe that the ACH account funding being conducted by the three Internet banks will catch on more widely.
The latest institution to adopt it, American Bank of Allentown, Pa., announced Thursday that it had introduced a free service this month called ACH Direct, which it describes as a "checkless transfer" and promotes as a faster, cheaper way to get money to the bank than a wire transfer, credit card charge, or paper check.
"The idea really was generated from our customers, their interest in seeing us have that product," said Mark W. Jaindl, the president and chief executive officer of the bank, which has one branch and about 30,000 deposit customers around the world. American Bank's chief attraction is its 2.8% interest rate on checking accounts, one of the highest around.
Mr. Jaindl said that numerous safeguards are built into its ACH deposit-taking system: American Bank sends a few pennies to a prospective customer's existing account, and the prospect must confirm the amount to prove ownership of the account. Then the prospect must send a voided check bearing his or her name and account number. Only then will American Bank order the ACH debit.
Nacha has done heavy promotion for direct deposit, which means that "more people are becoming knowledgeable about this," said Mr. Jaindl, a turkey farmer in Lehigh Valley and bank investor who opened American Bank with his father, Frederick, a former chairman of Sovereign Bancorp, in 1997. "If you talked about it two or three years ago, nobody knew what it was."
ING Direct of Wilmington, Del., and First Internet Bank of Indiana, of Indianapolis, already let their customers link to accounts at other banks for one-time or recurring ACH transactions. And Dollar Bank of Pittsburgh and the Federal Reserve Bank of Cleveland plan to do a test this fall using the ACH for electronic bill payment.
At ING Direct, people can authorize an ACH payment by phone or Internet. "We tell them it's the least expensive way to move their money" and takes only two to three days, said an ING Direct spokeswoman, Laura Lubin Rossi. "We can do wire transfers, they just come with a fee, and we prefer our customers not to incur a fee."
ING Direct doesn't use the ACH name or acronym, "but we explain it and we say it works the same way as a direct deposit," Ms. Rossi said.
First Internet Bank of Indiana does use the name with customers, and says that roughly a third of its deposits come in that way ($18 million of the $38 million in deposits received in May, for example). ACH is listed on the bank's Web site as one of several ways to fund an account.
When people ask about the term, "Our layman's description" is that it's kind of a consumer-directed wire," said David B. Becker, First Internet's chairman and CEO.
"Consumers are so inundated with three-letter acronyms these days, another one is not a big deal."
Elliott McEntee, the president and chief executive of Nacha, in Herndon, Va., said that brokerages have been using the ACH to fund accounts for years, since Merrill Lynch & Co. created its flagship cash management account and did so. But, outside of a sector of the Internet banking world, "the financial institutions have concerns from a risk management standpoint," he said. "Any time you're using an ACH debit to fund an account, you have that risk."
