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What Is ACH Debit and How Does It Work?

10 May, 2022
4min read
Rachelle Fisher, AVP, Digital Transformation
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What you'll learn

  • ACH payment is a better alternative to paper checks and credit cards
  • ACH method provides you with better visibility over payments
  • ACH is a powerful instrument that can be used in various business scenarios
CONTENT
What is an ACH debit?
How does ACH debit work?
What are the types of ACH debit?
Should you use ACH debit transactions for your business?
To Sum It Up
FAQs
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The automated clearing house (ACH) is a financial network that facilitates electronic payments and money transfers. ACH payments also referred to as “direct payments,” are a method of transferring funds from one bank account to another without the need for paper checks, credit card networks, and wire transfers.

ACH network payment volume rose 17.4% in 2021

ACH payments are a good alternative to paper checks and credit cards for businesses. They are faster and more trustworthy than checks since they are electronic, which also helps to automate and streamline accounting. Even if you are not acquainted with the term ‘automated clearing house,’ chances are you’re already familiar with ACH payments as a consumer. The ACH network is widely used while paying online bills (instead of writing a check or inputting a credit card number) and receiving direct deposits from your workplace.

In general, an ACH transfer is an affordable means of online transfer of funds. If your business accepts recurring payments, you can save a lot of money through ACH.

What is an ACH debit?

An ACH debit transaction “pulls” money from one account and moves it to another—for example, from a consumer’s personal account to a business or government agency’s account or vice-versa.

The ACH network regularly receives batches of push and pull requests from banks and their counterparts. The network then organizes them into bundles and delivers them five times every business day. When there is a request for a specific account to be debited for a specific amount of money— that bundle, is called an ACH debit request.

Every transfer requires the withdrawal of funds from some account, implying that debit will always occur on one side. Whether or not it is classified as an ACH debit is determined by the initiator of the transaction request.

How does ACH debit work?

To pay via ACH, you must give your client permission to withdraw funds from your account. This usually occurs when you supply your bank account and routing details of your checking account, and authorize your biller by signing a contract.

Let’s learn more about the ACH debit process.

  • The payee (the person or business that receives the amount) gives the required information such as the payer’s (the person or business that’s paying the amount) account details, the amount to be debited, and the due date to the Originating Depository Financial Institution (ODFI).
  • Payment requests are subsequently forwarded to the ACH network by the processing partner.
  • The ACH network separates these incoming bundles into individual transactions and sends them out five times each business day. It then re-bundles them for rapid delivery to each Receiving Depository Financial Institution(RDFI).
  • Each RDFI imports mail sent by the ACH network into their system, runs or queues all transactions, and sends any error codes back with their next batch of mail.
  • The ODFI and RDFI settle the transaction using their Fed balances if no error/return code is received within the required settlement time.
  • The ODFI then finally releases funds to the payee for the settled transactions.

What are the types of ACH debit?

The ACH system supports different types of debit. Each transaction is identified by its own Standard Entry Class (SEC) code representing a specific use case.
Some of the most common SEC codes for ACH debit are:

Different types of ACH debit

  • Accounts Receivable Entry(ARC): Accounts Receivable Entry occurs when an ACH debit transaction is created by electronically processing physical checks received by mail or dropbox.
  • Back Office Conversion(BOC): It is the process of converting physical cheques received in person from the payer into ACH transactions.
  • Machine Transfer Entry(MTE): It relates to debiting bank accounts to settle ATM withdrawals.
  • Point-of-Purchase Entry(POP): Here, the physical checks received in person from the payer are canceled and refunded after being instantly converted into an ACH transaction.
  • Point-of-Sale Entry(POS): A place where a consumer makes a payment for goods or services, as well as pays sales taxes were due.
  • Prearranged Payment & Deposit Entry(PPD): It refers to pre-authorized bill payments that are debited directly from bank accounts.
  • Shared Network Transaction(SHR): It is a one-time debit entry to a receiver’s account initiated by an electronic terminal.
  • Telephone-Initiated Entry(TEL): Here, bank accounts are debited for transactions that were initiated over the phone.
  • Internet-Initiated Entry(WEB): Here, the bank accounts are debited for internet transactions.

Should you use ACH debit transactions for your business?

Before using ACH debit transactions for your B2B payments, you should evaluate its pros and cons and check whether ACH transactions are an appropriate fit for your business needs.

Some of the advantages and disadvantages of using ACH transactions are

List of advantages and disadvantages of ACH debit transactions

Advantages:

  • Ease and convenience: The convenience of ACH is its key benefit. Once you’ve set it up, you would not have to remember to mail payments. And if you don’t miss payments, you won’t be charged any fees!
  • No need to write checks: With ACH, you will need fewer checks, that too less frequently.
  • Save on postage: With ACH payments you can cut down on the expenses associated with physical payment transfers including the cost of stamps, paper, and postal fees. ACH payment, in general, does not incur any fees, and many banks and credit unions also provide free online bill-paying services.
  • Easier payment tracking: Your bank statement containing your payee’s name makes it easier to keep track of all the transactions. This also reduces the possibility of funds misplacement in the mail.
  • Better for the environment: Going digital reduces the use of paper(checks, stamps, and envelopes) significantly, thus decreasing the harmful impacts on the environment.

Disadvantages:

  • Less control over payments: To withhold your automated payments, you need to ensure that you go online to stop the payment before the withdrawal date. At times, you may also have to manually intervene to stay on top of automated payments.
  • Risk of exposing private information: You are providing your clients with your bank account details such as your account number, SWIFT codes, etc. Such practices can put your company’s private information at risk.
  • Risk of mistakes: A billing error could cause you to pay more than you should, and large errors can drain your account, forcing you to miss other payments and accrued fees.
  • Potential for an overdraft: If you don’t retain enough money in your checking account to cover your automatic payments, you put your account at the risk of overdrawing and its resulting interest penalties.
  • Forgetting to cancel services: If you don’t see the bills, you may lose track of what you’re paying for, resulting in you paying for services that you wish to discontinue.

Bank of America estimates it costs $4 to $20 to process  a single business check

To Sum It Up

Bank of America estimates it costs $4 to $20 to process  a single business check

NACHA reported that business-to-business (B2B) payments grew rapidly in 2021. The $50 trillion in B2B payments is a 20.4% increase from 2020, as the COVID-19 hastened firms’ use of ACH payments. ACH B2B payments have increased by 33.2% in the last two years.

Today, signing paper checks and preparing envelopes to pay a credit card bill or distribute bi-weekly salary is redundant.

ACH is a powerful instrument that can be used in various business scenarios. While it has been slow to catch on in some areas such as point-of-sale (POS) payments, it is the preferred mode of payment for others such as corporations paying their staff (according to NACHA, direct deposit via ACH is the way 93% of employees get paid). Other ACH use cases such as peer-to-peer (P2P) payments are also rising quickly with a 42.2% year-over-year volume increase from 2019 to 2020.

FAQs

1.Is ACH credit or debit?

ACH transfer requires the transfer of funds from one account to another. This implies that debit will always occur on one side and consequently, a credit will occur on the other side.

2.Is ACH debit safe?

ACH is a more secure method of payment than writing cheques. When you set up ACH payments, you only have to reveal your bank account information once. However, when you write a paper check, you have to reveal your information every time you write one.

Even though problems are unlikely, still you are covered by federal law if your account is subject to any ACH errors or fraud. The only catch is that you must act quickly and notify your bank within 60 days of discovering the error.

3.How long does it take for ACH to clear?

ACH payments generally take one to two business days to process (days when banks are open). Payments are processed in batches through the ACH network (as opposed to wire transfers, which are processed in real-time).

According to NACHA’s criteria, ACH debit transactions must be handled by the next business day.

4.Is an ACH debit a payment?

In an ACH debit, the payer (e.g. customer) gives the payee (e.g. merchant) permission to take payment from their account whenever it becomes due.

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