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When an ACH debit takes place, funds are withdrawn, or “pulled,” from a bank account using ACH, an electronic payment processing network. For an ACH debit to be processed, the owner of the account being debited (the “payer”) must opt-in and provide account details to the “payee.”
ACH debit provides a convenient, inexpensive way for one party to collect funds from another. For this reason, businesses that collect recurring payments from consumers have widely adopted ACH debit—customers also appreciate the added convenience. And compared to checks sent through the mail, ACH debit is generally faster and more secure for both parties. On average, an ACH bank debit can be issued, processed, and reconciled within 3-5 business days (unless Same Day ACH is used).
How does an ACH debit work?
Online bill pay is a great example of ACH debit in action. Let’s say you’ve just moved into a new apartment and want your monthly bill for electricity automatically deducted from your checking account. Once your electricity provider, PowerTower, has your permission to initiate a recurring ACH debit, here’s how the process works:
- First, PowerTower will confirm your checking account, either using a popular verification method like a microdeposit or through their integration with a service like Plaid.
- Once a month, PowerTower will request payment using ACH files that include your account and routing number, as well as the amount you owe for electricity. These files will be sent to PowerTower’s partner bank. This bank is known as the Originating Depository Financial Institution (or ODFI) because PowerTower was the originator of the payment request.
- Next, the ODFI will batch process the ACH files, which means they’ll compile all ACH files received that day. These files are then sent to a clearinghouse, either the Federal Reserve or EPN (the Electronic Payments Network).
- On the following business day, the clearinghouse will sort ACH transactions and send them to the correct bank. This is when your bank will receive PowerTower’s ACH debit request. In this scenario, your bank is referred to as the Receiving Depository Financial Institution, or RDFI, because they are receiving ACH files from the ODFI on behalf of PowerTower.
- Once it has the ACH files, your bank will debit your account for the total bill and place the money into a “Settlement Account.” At this point, you will be able to see that PowerTower has deducted funds from your checking account.
- Once the ACH debit is cleared by the clearinghouse, the payment is settled and the funds become available to PowerTower at its bank.
Dig deeper into the meaning of ACH debit by downloading this comprehensive free eBook on ACH.
What is the fee for an ACH debit?
The fee for an ACH debit is usually between $0.20 - $1.50 per payment—the same fees apply to an ACH credit. Same Day ACH ranges between $1 - $5 per payment and generally clears the same business day. Other methods for moving money over bank rails (and skipping interchange fees) include wire transfers and RTP, with different fees tied to each.
What is the difference between an ACH debit and an ACH credit?
The difference between an ACH debit and an ACH credit is determined by the direction money is moving. For an ACH debit, funds are withdrawn (or pulled) from a bank account. For an ACH credit, funds are paid out (or pushed) to a bank account.
Because consumers may have only encountered the terms debit and credit in reference to cards they use for the same purpose (to make a payment), the meaning of ACH debit can be confusing. Bottom line—understanding ACH debit vs. ACH credit is all about the direction funds flow.
To learn more about ACH debit and the ACH network, check out the following resources:
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