ACH Direct Debit

ACH direct deposit is an electronic funds transfer from an employer or federal or state agency to a consumer's checking or savings account. The most common types of ACH direct deposits include payroll payments, tax returns, and government benefits.

ACH transfers have replaced paper checks. In fact, they are often the more expensive option. A direct deposit via ACH is a simple wire transfer that is typically received within 1-2 business days. This is a great option for small businesses to save money and pay their employees quickly.

It's a convenient alternative to other bill payment methods where payers have to remember to mail a paper check, deposit cash, or pay by card over the phone or online. With direct debit, payers only have to provide their bank details once. They then enter into a standing agreement to have their bank account debited once at regular intervals without any further action required.

Some common bills that can be paid with direct debit include software subscriptions, utility bills, and car loans. It's an easy way to pay any bill that is collected on a monthly, quarterly, semi-annual, or annual basis.

How ACH deposits work

1. The employer instructs its bank to pay its employee's bank
2. The bank transfers the funds electronically directly using the ACH network
3. The employee's bank receives the funds and deposits them into the employee's bank account.

What does direct deposit involve?

Direct deposit is a payment method where funds are transferred electronically into your savings or checking account. This helps the recipient receive the funds faster and avoids handling a physical check. In many cases, this entails automatically transferring payroll checks directly into your account.

93% of American workers receive their paychecks via direct deposit. It is a way to give consumers more control over their finances, where they can get their funds quickly without having to pay extra fees. In addition to payroll, it can also be used for bonuses, reimbursements, and other employee payments.

What is ACH?

When you wake up on payday, your money is automatically deposited into your bank account thanks to an ACH transaction. ACH is an acronym for the National Automated Clearing House Association. It is a computer-based electronic transaction processing network. It is typically used for small payments between two participating financial institutions.

Examples of ACH processing include:

• Direct deposits

• Remittances

• Auto loans

• Mortgages

• Recurring payments

• Online billing for anyone

Also known as direct payments or electronic checks, ACH is growing in popularity. In 2019, ACH processed 24.7 billion electronic payments, making the network one of the safest and most reliable payment systems in the world. Last year was the fifth consecutive year that the clearinghouse added more than 1 billion payments. These include:

• B2B and P2P payments

• Direct deposits

• Charitable donations

• Social Security and government benefits

• Tuition

• Subscription services

The total value of these payments exceeds $55.8 trillion.

How does ACH work?

Setting up ACH requires a savings or checking account, routing number, and bank account number. ACH direct deposits can only be made after this data is shared with the payee. The payee's account information is always required when setting up a direct deposit. Otherwise, how would a business know where to pay you?

What is an ODFI?

Originating Depository Financial Institution (ODFI) is a banking term related to ACH. In the financial workflow, an ODFI is the interface between the ACH network and the Federal Reserve. They act as the originator of transactions.

An ODFI enters into an agreement with an ACH operator (clearinghouse or Federal Reserve) to transmit entries to the ACH network on behalf of the originator. To become an ODFI, a depository financial institution must always obtain authorization before crediting or debiting an account.

Things they are responsible for include:

• Securing ACH data

• Contracting with each originator

• Keeping proceeds below agreed-upon thresholds

To reduce the risk of transfers being bounced, ODFIs are encouraged to work with originators to establish appropriate controls and oversight of debit transactions.

What is an RDFI?

An ODFI must also agree to act as a Receiving Depository Financial Institution (RDFI) to receive ACH payments and credit transactions. RDFIs may receive entries debited or credited to customer accounts, either indirectly or directly from their ACH operators.

All institutions must be RDFIs to allow members or customers to accept funds via ACH. To comply with the Nacha operating rules, RDFIs must accept all entries to customer accounts.

Receiving depository financial institutions receive entry information directly or indirectly from their ACH operators for debiting or crediting customer accounts. All financial institutions must be RDFIs to allow customers or members to accept funds via ACH.

Things they are responsible for include:

• Correct and timely postings to the recipient's account

• Timely receipt and verification of all ACH entries

• Proper notification of incorrect data in accepted entries to the originator

Any financial institution can choose to be an RDFI without being an ODFI.

Is ACH a direct deposit?

A direct deposit is a type of ACH payment - so yes, ACH is a direct deposit, but there are other types of ACH payments. On the other hand, all direct deposits are ACH transfers.

What are the similarities between ODFIs and RDFIs?

In addition to handling money, there are many similarities between RDFIs and ODFIs. Both institutions must establish a relationship with an ACH operator to access the ACH network. Both are required to pay fees to access these payment channels and face a rigorous audit process. Even if faster payments become an expectation, they still have to go through the operator.

The Automated Clearing House Network is a popular ACH operator that offers an instant payment option to participating members. The Federal Reserve has unveiled plans for a real-time payment option that will be available in 2024.

Both ODFIs and RDFIs must establish a relationship with an ACH operator to access the ACH network. Both ODFIs and RDFIs must pay fees to access these payment channels and face a rigorous audit process.

Even if faster payments become more popular, transactions still need to go through the operator.

The Clearing House is a popular ACH operator that offers an instant payment option through its payment channels, provided both financial institutions are participating members.

The Federal Reserve has announced plans for a real-time payment option that is expected to be available in 2023 or 2024.

What are the network administration fees?

The ACH network is maintained through network administration fees. Each depository financial institution charges these fees to maintain a healthy ACH network. Each depository financial institution that receives or sends ACH entries must pay Nacha an annual fee and a per-entry fee to cover the costs associated with administering the ACH network.

These fees are used to offset the costs associated with the ACH network administration functions that Nacha performs on a “cost” basis. These fees provide a stable and predictable source of funding for the parties that receive the benefit of the services. These amounts are approved annually by the Nacha Board of Directors and are subject to revision as the Board deems necessary.

Direct Deposit via ACH

When you receive a direct deposit via ACH, the funds are deposited into your checking or savings account within 1-2 business days. It is commonly used for the following:

• Government benefits
• Tax and other refunds
• Payroll
• Employee expense reimbursements
• Annuities and interest payments

It will include any ACH credit payments made directly from a business or government to a consumer. Direct deposit should not be confused with direct payment, which is the use of funds to make payments through ACH.

Advantages of direct deposit through ACH include convenience, low fees, no paper checks, and faster refunds

The ACH system is designed not only to speed up payments, but also to ensure that payments are secure. It enables more business activity in less time and promotes business development in all industries.