The digital network called the Automated Clearing House—commonly shortened to “ACH”— functions as a kind of “email for money.” It moves money quickly and affordably between banks and other financial institutions, businesses paying their employees, or even small merchants collecting payment for their goods and services.
The ACH network is a central piece of financial infrastructure that facilitates the movement of billions of dollars per year. It’s maintained by an organization called Nacha, which was founded as a nonprofit organization in 1974. It is responsible for the network’s development, administration, and governance. Simply put, it keeps things running smoothly as entities transact with each other.
There are two kinds of transactions on this network: the ACH debit and the ACH credit. Let’s go deep on what an ACH debit transaction is, and compare how it works against the ACH credit.
What is an ACH debit?
An ACH debit is a type of electronic transaction that pulls funds directly from a bank account. The payer authorizes a business or individual to debit funds from their account, often on a recurring basis, such as for monthly bills or subscription services.
Of course every transfer on this network calls for pulling money out of someone’s account before it goes to someone else’s. This means a debit is always happening on one side or the other. But it’s defined as an ACH debit based on who initiated the request. For most consumer applications, the biller originates the ACH request. And because that request is for the system to pull funds out of one account and into another, it's considered an ACH debit.
ACH debits can accommodate a wide variety of transactions, such as individuals paying their taxes to the government or covering their home utility bills directly from their checking accounts.
The construction of the ACH network sees it build up a queue of pending transactions (debits and credits alike) before it executes them in batches. This happens five times a day, with the network capturing transactions, sorting them, and delivering them.
The requests that ask for an account to be debited some amount of money are ACH debit transactions.
How do ACH debits work?
An ACH debit transaction begins when the transaction originator gives the payer’s account information to an “originating depository financial institution” (OFDI), which is the formal designation for banks that can interact with the ACH network. The originator will also provide the amount of money to be debited from the account, a category for the transaction, and a date to settle the transaction by.
The bank (or the bank’s processing partner) receives these details and passes the information on to the ACH network. The transaction goes into a queue, to be executed in the next batch. The network sorts incoming transactions and delivers each one to the receiving depository financial institution (RDFI), which is just the formal designation for a bank that can receive money via ACH.
Receiving banks execute every transaction they receive, and they take note if any of them trigger an error code or other irregularity. As long as that doesn’t happen, then the transaction executes as it needs to and the work is complete. At that point, the funds for the transaction are released to the recipient.
ACH credits follow a nearly identical process, with the exception of which party actually initiates the transaction. When the person paying money initiates, that’s an ACH credit. When the recipient initiates, that’s a debit.
Five common types of ACH debits
- Recurring fees/charges. Consider the kinds of services you pay a flat rate for on a recurring basis, like rent or home internet access. This is a kind of expense where all the details are known in advance, like the amount and the due date, so ACH debits are useful in automating them and making late fees a thing of the past.
- ARC (accounts receivable entry). Accounts receivable entries (ARC) are an ACH debit that takes place when a paper check is received in the mail or at a dropbox. That check gets processed as an e-check and the debit appears on the customer’s statement as an ACH transaction. Specialized scanners capture checking details like routing number and account number, and the originator must retain the paper document for two years afterward.
- MTE (machine transfer entry). “Machine transfer entry” specifically refers to a transaction that was initiated at an electronic terminal, particularly ATMs. This category of entry can either be a debit or a credit, so if you use it to “pull” money from someone’s account (as opposed to pushing your own money elsewhere), then you are using an MTE as an ACH debit transaction.
- POS (point-of-sale entry). POS entries as ACH debits are transactions that debit bank accounts for card payments made using an electronic terminal, particularly cash registers in a store.
- WE (web-initiated entry). This category of ACH debit can be either a single entry or a recurring transaction that takes place when someone uses the internet to authorize a transfer of funds. A wide variety of entities can use this, including credit card companies, utility companies, schools, government agencies, online retailers, and nonprofits. Web-initiated ACH debit transactions are significantly streamlined and lower cost compared to others.
It’s easy to forget that the ACH network is available to all kinds of businesses and individuals to use, from small merchants to large government organizations. You don’t necessarily need to be a large financial institution in order to take advantage of the network.
ACH debits come in a few different varieties, but they all hinge on the same premise: one party initiates a request that moves money from someone else’s account into their own account. When someone initiates a transaction that removes money from their account and sends it to someone else’s, that’s an ACH credit.
The volume of money moved on the ACH network has only grown, so it can pay to have a fuller understanding of this prime piece of financial infrastructure. As technology evolves to more effectively move money from one place to another, it’s nice to know that people and businesses have more options than ever before for transacting with each other.