A deposit via the Automated Clearing House Network is an electronic, automatic transfer of funds between banks.
Learn how ACH deposits can work for your small business. Here’s what you need to know about what an ACH deposit is, the difference between ACH direct deposits and payments, how ACH transactions work and how long they take.
ACH Deposit: What Does It Mean?
The ACH network is a digital system used to process electronic payments for government agencies, businesses and consumers in the U.S.
Developed in the late 1960s and early 1970s, what is now the ACH network initially was used by the federal government to help U.S. Air Force personnel receive their paychecks promptly via direct deposit. Clearinghouse associations banded together to expand the concept to process private payroll checks and the service became more popular as digital technology advanced.
Today, the ACH network is widely used for all kinds of electronic transfers, including:
- Employer direct deposits of employee paychecks
- Business payments to other businesses
- Consumer online payments to credit-card companies and utilities
- Consumer and business transfers between their own bank accounts
- Individual payments to other individuals using platforms such as PayPal and Zelle
- Electronic tax refunds
The ACH network is administered by the National Automated Clearing House Association (NACHA), a trade association representing the financial services industry. It is operated by the Federal Reserve and by the Electronic Payments Network (EPN), a digital counterpart to the Federal Reserve that is owned by the Clearing House Payments Co., a consortium of about 20 major banks.
Direct Payment ACH vs. Direct Deposit ACH Transactions
While direct ACH payments and ACH deposit share similar names, these terms actually refer to 2 distinct types of electronic transfers that are both processed by the ACH network:
- A direct deposit via ACH deposits funds into accounts as credit and is used for purposes such as payroll and tax refunds
- A direct payment via ACH withdraws funds from accounts via either credit or debit and is used for purposes such as paying bills
These 2 types of ACH deposit transactions work in essentially the same way, but they have some important distinctions.
What Is an ACH Direct Deposit?
Direct deposit via ACH is a type of ACH transfer in which a business, government agency or consumer deposits money from one account into another, crediting the receiving account. It is familiar to consumers through direct deposit paychecks.
Uses include paying:
- Direct payroll deposits
- Benefit payments
- Employee expense reimbursements
- Tax refunds
- Government benefits
- Interest payments
For example, if the IRS deposits your tax return directly into your bank account, this is direct deposit via ACH in action.
What Is an ACH Direct Payment?
In contrast to direct deposit via ACH, which deposits money into an account, direct payment via ACH withdraws money from an account to make a payment.
For instance, if you make automated bill payments from your bank account to your telephone provider every month, this is withdrawing money from your account to pay your phone bill.
Direct payment via ACH includes 2 types of transactions: credit and debit transactions.
ACH Credit Direct Payments
A direct payment via ACH processed as a credit transaction “pushes” funds from one account into another, crediting the account receiving the funds.
For example, when you manually pay a bill online, you are authorizing a transfer that withdraws money from your account and credits it to your provider’s account.
Ways to use direct payment via ACH credit transactions include:
- Making business payments to contractors or suppliers
- Transferring money between a consumer’s own accounts
- Transferring money from one consumer to another
- Making an electronic consumer purchase from a business
You can think of a direct payment via ACH credit transactions as “sending” money digitally.
ACH Debit Direct Payments
In contrast to direct payment via ACH “push” payments, a direct payment via ACH processed as a debit transaction “pulls” funds out of one account to pay another. In other words, it authorizes the recipient of the funds to debit money from the account containing the funds.
For instance, if you set up recurring payment arrangements with your credit card provider, you are authorizing them to automatically debit your account each month.
Ways to use direct payment via ACH debit transactions include:
- Authorizing monthly recurring payments for mortgages
- Setting up automated utility payments
- Paying suppliers and contractors automatically every month
In contrast to the way direct payment via ACH credit transactions “send” money digitally, direct payment via ACH debit arrangements authorize a recipient to “receive” money digitally.
How ACH Transfers Work
No matter what type of ACH transaction is involved, ACH transfers unfold through a series of 7 steps, which begin with the money in one account and end with the money arriving in another account.
1. ACH Transaction Initiation
An ACH transfer begins when the originator of the transaction initiates the process by requesting the transaction. The originator may be a business, a government agency or a consumer. The transaction can be a deposit or a credit or debit payment.
2. Originating Financial Institution Submits Entry
Once a transaction is initiated, an entry is submitted by the bank or payment processor handling the first phase of the transaction. The bank or payment processor is known as the Originating Depository Financial Institution (ODFI).
3. Originating Financial Institution Sends ACH Entry Batch
For efficiency, financial institutions often send ACH entries in batches, typically 3 times a day during normal business hours. Batches are sent on a predetermined schedule to an ACH operator, which is an institution within the ACH network authorized to handle switching funds between originating and receiving accounts. ACH operators consist of Federal Reserve banks and the EPN.
4. ACH Operator Sorts Entries
Once an ACH operator receives a batch of entries, they must sort through them. Entries get sorted into deposits and payments, and payments get sorted into credit and debit payments. This ensures that money gets transferred in the right direction.
5. ACH Operator Sends Entries
After sorting entries, the ACH operator sends them to their destined financial institutions. A financial institution receiving an entry is known as a Receiving Depository Financial Institution (RDFI).
6. Receiving Financial Institution Verifies Sufficient Funds
If the transaction involves moving funds out of an ODFI’s account, the RDFI must first check to verify that sufficient funds are in the ODFI account to cover the transaction.
7. Receiving Financial Institution Debits or Credits Originating Institution
Finally, the receiving financial institution either credits or debits the receiving account, depending on the nature of the transaction.
How Long Does an ACH Deposit Take?
Since transactions are processed in batches and because some transactions require verification of funds, ACH deposit times can vary. NACHA’s operating rules stipulate that transactions should be handled as quickly as possible:
- ACH credits must settle within 1 to 2 business days
- ACH debits must settle by the next business day
Recent improvements now allow most ACH transactions to settle the same day.
ACH Deposits Make Processing Payments Convenient
Businesses prefer the convenience of ACH deposits for both sending and receiving payments because they’re fast, easy to accept and easy to track. They also cost less per transaction than credit card processing, especially if you handle ACH transactions in bulk and are eligible for a volume discount.
However, there are fees associated with ACH transactions. Investing in this fee can be worth your while if it makes it easier for your business to receive payments. If this applies to you, you might consider applying for a business line of credit or loan in order to finance your ACH fees. You can even automate your loan repayments over the ACH Network through an ACH loan.