What Is Ach Credit And Debit And How Do They Work

Understanding ACH credit payments means understanding the way in which different types of payments are processed in the US banking system. ACH credit payments differ from ACH debit payments and both are distinct from credit and debit card payments. In this article, we will explore the differences between each type of payment along with their key features and benefits.

TL;DR

  • ACH payments are a popular way for individuals and businesses to transact with each other because they are easy and quick to send. 
  • ACH credit payments are best for sending one-time payments whereas ACH debit payments are more suited for making regular payments, such as for monthly utility bills.
  • All ACH payments are secure and reliable, available 24 hours a day, 7 days a week, and 365 days a year. Making a payment via the ACH network differs from making a payment with a credit card in that you are sending the money directly from one account to another, instead of charging it to a card you would later be liable to repay.

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What are ACH Credit Payments?

An ACH credit payment is a type of payment processed through the Automated Clearing House (ACH) network. It is a one-to-one payment where a customer makes a payment to another person or company by submitting the details of the transaction via their bank’s online account.

The receiving bank then credits the money to the account of the receiving customer. ACH credit payments are often used for business-to-business payments and end-of-the-month payroll payments. They are also used for person-to-person payments or community crowdfunding campaigns.

Effectively, these are payments that the customer initiates and pushes their funds to the intended recipient. It’s like a direct deposit from one account to another, but unlike wire transfers, they are not subject to a fee by the processing banks.

The ACH network is governed by Nacha an organization that administers risk management and rule enforcement for all ACH transfers.

What are ACH Debit Payments?

An ACH debit payment is another form of payment processed by the ACH network. With an ACH debit payment, a customer requests their bank to withdraw money from their account and then deliver it to the receiving party’s bank account. The receiving bank then credits the money to the account of the receiving customer. These payments are often used to make person-to-person transfers or to withdraw funds from a Line of Credit (LOC).

With ACH debit payments, the recipient is in control, so these payments are pulled, rather than pushed. A customer authorizes these electronic payments by indicating it’s their preferred payment method for recurring bill payments or other essential funds transfers such as an annual tax payment. Of the two types of ACH transfers, an ACH debit tends to be favored by firms expecting regular ongoing payments. It allows for simpler payment processing over having to request credit card payments on a monthly or irregular basis.

The payer gets the benefit of the ACH system guaranteeing their direct payment, so there is minimal risk and ACH debit transactions are usually completed within two days of initiation.

ACH Credit Key Features & Benefits

ACH credits are immediate – Bank-to-bank ACH payments are processed and delivered on the same day. Customers can initiate an ACH credit payment online or by phone.

Low cost – The ACH network is an open system that is accessible to banks and financial institutions. The process of sending payments through the system is free for most customers.

Easy and fast – ACH credit payments are simple and quick to process. Customers can send payments directly from their bank account through online banking or by contacting their bank.

Visibility – Customers can track the progress of their ACH credit payments online. The details of the transaction are available for the customer and the receiver to view and follow.

Guaranteed – Unlike paper checks, ACH credit payments are guaranteed by the customer’s bank account. If the payment is not received by the other party, the bank that holds the account re-credits the money back to the customer.

No fraud risk – ACH credit payments are not processed via the Internet. Customers can choose to certify their payment and send it to the other person’s bank account. This is a safer and more secure option than sending a credit payment via the Internet, where liabilities cannot be safeguarded against.

Hard to lose – ACH credits are hard to lose and difficult for fraudsters to steal.

No chargeback risk – Unlike debit card payments, customers do not risk a chargeback when making an ACH credit payment.

No interest or fees – Unlike with a credit card, there are no fees or interest charged on ACH credit transfers. Some payments require a fee, however.

ACH Debit Key Features and Benefits

Immediate availability – Customers can access the money immediately once it is received by the bank.

No risk of bounced checks – Customers do not run the risk of a bounced check preventing them from receiving their funds.

Security – ACH debit payments are processed via secure electronic funds transfer with minimal risk of outside interference.

Less chargeback risk – ACH debit payments are not subject to chargebacks if a customer claims any problem with their purchase. Unlike with credit cards, the banks will not honor any request to charge back the transfer of funds for any reasons other than fraud or system failure.

Confirmed payment – Customers can track the progress of the transaction in their online account. They will be notified when the payment is confirmed.

No interest or fees – Unlike with a credit card, there are no interest or fees charged on an ACH debit payment. Though just like with ACH credit payments, some payments would be subject to a fee.

Periodic payments – ACH debit payments can be set up to make regular payments each month.

Payee control – Customers can set up ACH debit payments that are controlled by the payee. This is useful when making regular deductions from your account, such as health insurance premiums or utility bills.

No processing fees – Neither the payee nor the payer are liable to pay any fees for processing an ACH debit. Banks simply pay for the use of the network, but this fee does not vary by transaction volume.

Step-by-Step Guide to How ACH Credit Payments Work

Now that we’ve covered the fundamentals, let’s look at how ACH credit payments work.

Customer initiates the payment The customer initiates a new ACH credit payment through their online or mobile banking account. They will enter information about the payment, such as the name of the recipient, plus their account information—including the account number and amount due.

Customer’s bank sends the payment to the receiving bank – The customer’s bank will then send the payment details to the receiving bank through the ACH network.

Receiving bank credits the money to the receiving customer – The receiving bank will then credit the money to the account of the receiving customer.

Customer’s bank updates their account – The customer’s bank will then update their online banking information account to reflect the payment has been made.

Financial institutions, credit unions, or corporations processing a high volume of transactions can streamline their processing of ACH payments through the integration of an ACH API, which allows for greater efficiency of payment processing.

How Long Do ACH Payments Take to Process?

ACH payments take one to two business days for payment funds to be withdrawn from the customer’s account and delivered to the receiving bank. However, there are times when the payment is delayed and takes longer than usual. This can happen if there is a high volume of payments being processed by the ACH network. With over 29 billion payments made through the network in 2021, it is fairly robust but can still experience high volume peaks that can delay some payments.

How Much Do ACH Credit Transactions Cost?

The cost of each ACH credit transaction is determined by the amount of the payment but all ACH credit payments are free of charge for customers. Banks and financial institutions pay a fee to use the ACH network and there is a small fee charged if the customer chooses to certify the payment. This is a way of confirming the payment by sending a physical copy of the payment confirmation in the mail.

What are ACH Credit Refunds and How Do They Work?

ACH credit refunds are payments returned to a customer’s bank account. They are frequently used by government institutions in cases such as refunding a taxpayer who has overpaid their federal income tax. The customer’s bank transfers the refund money back to the customer, provided it is within 180 days of the original payment having been made. After this period, the original transaction, or any part of it, cannot be refunded.

Can ACH Payments be Reversed?

ACH payments are generally not reversible. However, there are occasions when a customer may receive a refund due to the receiving bank initiating a reversal. A bank may initiate a reversal if they suspect the customer or the receiving customer has been the victim of fraud. In some cases, a bank may also initiate a reversal if they believe the customer’s account does not have enough funds to cover the payment.

Are ACH Transactions Secure?

The Automated Clearing House network is a highly secure network used to process billions of payments every year. This network is designed to process large volumes of payments in a secure and efficient manner and has many safety measures in place to ensure its security.

When a customer initiates an ACH credit payment, they are routed through an encrypted network and all data sent via the network is protected by multiple levels of security. These include high-end encryption and security protocols to protect against hacking and data theft.

Conclusion

ACH payments are a popular way for individuals and businesses to transact with each other because they are easy and quick to send. ACH credit payments are best for sending one-time payments whereas ACH debit payments are more suited for making regular payments such as monthly utility bills.

All ACH payments are secure and reliable, available 24 hours a day, 7 days a week, and 365 days a year. Making a payment via the ACH network differs from making a payment with a credit card in that you are sending the money directly from one account to another, instead of charging it to a card you would later be liable to repay.

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