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How does an ACH deposit work? A behind the scenes look

A deeper look at ACH deposits, how they’re used, and how they compare with other types of payments

October 07, 2021

Tom Sullivan Pic
Tom Sullivan

Tom is a writer at Plaid. He's passionate about the freedom that the union between financial services and technology can create.

Roughly 94% of Americans receive their pay by what is commonly known as direct deposit—the informal name for ACH credit transactions. They’re an unsung part of the financial plumbing in the US, responsible, along with ACH debit transactions, for nearly $62 trillion in payments in 2020.

What is an ACH deposit?

ACH deposits are a means of sending money electronically using the Automated Clearing House (ACH) network—i.e., the inter-bank system used by 10,000+ member institutions to coordinate deposit and withdrawal requests involving bank accounts under their control. 

If an employer wants to pay a worker, an ACH deposit is their alternative to cash or a physical check. It moves money from their bank account to an employee’s in an easy and relatively inexpensive way. The employer simply asks their financial institution (or payroll company) to instruct the ACH network to pull money from their account and deposit it accordingly.

Likewise, ACH deposits allow individuals to initiate deposits elsewhere—be that a bill payment or a peer-to-peer transfer to a friend or landlord. Government agencies also rely on ACH deposits to send out pension and unemployment benefits.

What’s an ODFI or RDFI?

ODFIs, or Originating Depository Financial Institutions, are the entities legally responsible for all requests entered into the ACH network. RDFIs, or Receiving Depository Financial Institutions, are responsible to act on these requests. Both are typically banks that are members of the Federal Reserve System. 

It’s also common for third-party senders to operate between originators and ODFIs. A company wishing to pay their employees, for example, is an originator. In many cases, their payroll processor has an agreement with a bank (the ODFI) to transmit those files to the ACH network under the ODFI’s master contract with said network.

From the network’s perspective, ODFIs and their processing partners are the digital post offices through which bundles (or “batches”) of ACH transactions come in. These batches are then processed by one of the two ACH network operators, at whose clearinghouses the individual messages are rebundled according to their destination. While RDFIs sometimes send back error messages called return codes, the ODFI is always the first to start the exchange.

How do ACH deposits compare with checks?

Paper checks involve more processing steps, and therefore more administrative expense. They’re also just generally inconvenient: the payer needs their checkbook handy, the payee needs to accept the check, there is often mailing involved, and checkbooks can be lost, stolen, or otherwise depleted.

Informally, eChecks are paper checks that have been manually converted into ACH debit requests, where the information has been digitized and the check archived or destroyed. However, the term can also represent the idea of ACH transactions as "a digital replacement for the paper check", where no physical check is ever used.

Many mobile banking apps let customers capture paper checks via their phone’s camera. Those apps might then strip the relevant info and create ACH requests, or they might just forward the digital scans to a traditional check-clearing facility. 

Sometimes the words "do not convert to ACH" appear on a check. While virtually all checks are now converted electronically at some point in the processing journey, whether they end up as ACH requests is up to each individual financial institution. While ACH is often cheaper, institutions require the right infrastructure to take advantage of it. In some cases, they might also prefer paying more to retain check images long-term for the information they contain, like signatures and memos.

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How long does an ACH deposit take?

ACH deposits typically take anywhere from a few hours to a few days to be delivered to the RDFI. Their speed depends on when they were initiated, whether the originator paid for expedited service, and whether the transaction returned an error code. 

Since March 2021, ACH messages are being delivered 5x per business day, which allows for faster communication than was once possible. Same-day processing is also available for a small fee (typically about $0.05).

While error codes are less of an issue with credits/deposits than debits (where insufficient funds are more likely), credit transactions can still be returned for wrong account or routing numbers, mismatching names, and/or typos in the deposit amounts. These mistakes can lead to a delay of an extra day or two while the banks determine if the transaction can be salvaged.

Not factoring these errors/returns, a standard ACH transaction follows this timeline:

What’s the difference between ACH and EFT?

The Automated Clearing House (ACH) network is one specific protocol for moving funds between financial institutions. EFT, or Electronic Funds Transfer, is an umbrella term that includes ACH transactions, wire transfers, and all other types of digital payments.

While the most cost-effective, ACH is also the slowest EFT solution, as its messages are sent in batches to the network to be sorted and repackaged for delivery 5x per business day. Also, ACH can’t show whether a given transaction will clear in real-time, while others can.

This distinction is narrowing though, as new solutions built on top of ACH allow for features formerly available only through other EFT types. For example, Plaid enables businesses to carry out real-time balance checks before initiating an ACH transfer to help avoid non-sufficient funds returns; and has partnered with Vesta to guarantee funds in some ACH transactions.

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What’s the difference between ACH and direct deposit?

A “direct deposit” is a type of payment made via the ACH network. It’s an informal name for common ACH deposits where individuals receive payments directly into their bank accounts.

The ACH-based payouts popularly referred to as direct deposits include:

  • Salary and wages

  • Social Security and pension benefits

  • Tax refunds

However, not all ACH deposits are referred to as direct deposits. The term is generally not used when referring to transactions like peer-to-peer transfers and online bill payments made through banking portals, even though these deposit types use the same underlying ACH protocol.

What’s the future for ACH deposits?

While ACH deposits have already come to dominate payroll and government cash transfers, there’s still significant opportunity for them to both replace the remnants of the paper check industry and better compete with wire transfers.

The first will likely happen automatically as check-supporting infrastructure naturally winds down and as legacy institutions complete their digital transitions. The second will require banks and fintech companies to continue to make using ACH easier, less burdensome, and less likely to experience transaction failure.

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