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What is an ACH debit? The complete rundown

A thorough guide to how ACH debit transactions work, what they’re used for, and how they differ from other types of debit transactions

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.

The ACH (Automated Clearing House) network is an interbank messaging system for transactions involving US bank accounts, built in the 1970s to negate the need for paper checks. ACH is the main way that financial institutions organize the movement of money in and out of personal accounts. When money is being moved out for things like a purchase or bill payment, it’s typically an ACH debit transaction at work.

What is ACH debit?

Any ACH transaction structured as an ACH debit "pulls" money from one account and moves it to another—such as from a consumer's personal account to that of a business or government agency. 

The ACH network constantly takes in batches of push and pull requests from banks and their intermediaries. Then, five times per business day, the network sorts them into new bundles and delivers them accordingly. When a given request in one of those new batches asks that an account be debited some amount of money, that's an ACH debit request.

Of course, every transfer requires pulling money from someone’s account, meaning a debit is always happening on one side or the other. Whether it gets categorized as an ACH debit depends on who initiated the request. For most consumer billing scenarios, the biller is the one initiating (or “originating”) the ACH request. And because that request is for the system to pull money, it's considered an ACH debit. If, instead, a consumer sends money as a one-off transfer from their online banking portal, they’re asking the network to "push" money for them. This means it’s not an ACH debit—despite money being debited from their account.

How does ACH debit work?

In an ACH debit transaction, one party agrees to pay another. To make that happen, the party receiving payment sends a message to the ACH network asking it to collect said payment and move the funds into their account. 

As for how ACH debits work mechanically:

  • The payee (aka the originator) or their processing partner gives an Originating Depository Financial Institution (ODFI) the payer’s account information along with the amount to be debited, a categorization code, and a target settlement date.

  • The ODFI (generally a bank) or the processing partner then passes these requests on to the ACH network.

  • 5x per business day, the ACH network breaks down these incoming bundles into individual messages (each representing a transaction) and rebundles them for quick delivery to each Receiving Depository Financial Institution (RDFI).

  • Each RDFI imports their mail into their system, executes or queues all the transactions, and sends back any error codes with their next regular batch of mail.

  • If no error/return code is received by the requested settlement time, the ODFI and RDFI settle the transaction using their balances at the Fed.

  • Funds for settled transactions are then released by the ODFI to the payee.

These debits can take just one business day, depending on when the first messages are sent and/or whether the ODFI pays for same-day processing. However, some error codes can require reversal, as the RDFI has two business days to inform the ODFI of certain problems. This is why ODFIs and originating processors often partner with technology companies to reduce the chances of an error or return.

For more on timelines, see our guide on how an ACH transfer works.

What are the main types of ACH debits?

The ACH system supports different types of debit. Each is identified by its own Standard Entry Class (SEC) code representing a specific use case.

Some of the most common SEC codes for ACH debit are:

  • ARC (Accounts Receivable Entry) - Converting physical checks received by mail or drop-box into ACH debit transactions (more on this later).

  • BOC (Back Office Conversion) - Converting physical checks received from the payer in person into ACH transactions some time after they’re received.

  • MTE (Machine Transfer Entry) - Debiting bank accounts to settle ATM withdrawals.

  • POP (Point-of-Purchase Entry) - Immediately converting physical checks received in person from the payer into an ACH transaction, where the check is voided and immediately returned.

  • POS (Point-of-Sale Entry) - Debiting bank accounts for card payments made via an electronic terminal.

  • PPD (Prearranged Payment & Deposit Entry) - Directly debiting bank accounts for pre-authorized bill payments.

  • SHR (Shared Network Transaction) - Electronic terminal payments (for ACH-linked debit cards) within a shared network.

  • TEL (Telephone-initiated Entry) - Debiting bank accounts for transactions originated over the phone.

  • WEB (Internet-initiated Entry) - Debiting bank accounts for transactions originated online.

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Is ACH debit related to debit cards?

While the ACH network can be used to settle transactions initiated by debit cards, its design doesn't allow for transactions to be authorized in real-time. Cases that require on-the-spot balance verification and debiting must happen by other means.

Debit cards use a separate real-time network for authorization, which ensures that funds are successfully decremented from the purchaser’s account before ATMs/merchants need to hand over cash or valuable products. ACH debit transactions are then often used to move those funds from bank to bank to finalize the transaction.

Though there are now also non-card-based solutions that can similarly get around ACH’s speed constraints. For example, users of Plaid-connected apps can choose to share their account balance information, which can confirm whether they have enough funds for an ACH debit transaction. With this information, initiators of ACH debit transactions can have higher confidence that it will clear without a non-sufficient funds issue—offering merchants similar upsides to a debit card transaction at a significantly lower cost.

How are eChecks different from ACH debit?

eChecks are generally paper checks that have been manually converted into ACH debit requests. 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.

Most mobile banking apps enable customers to capture paper checks via their phone’s camera. Those apps might then strip the relevant info and create ACH requests, or simply forward the digital scans to a traditional check-clearing facility. The words "do not convert to ACH" are written on some checks where preserving those scans is desired. 

Virtually all checks are now converted electronically at some point in the processing journey; whether they end up as ACH debit 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 prefer paying more to retain check images long-term for the information they contain, like signatures and memos.

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Learn why more consumers are choosing to pay with their banks.

Is there a better way to use ACH debit?

The ACH system, though quite safe, was built with classic tradeoffs in mind. It’s relatively slow, and there are certain downsides due to the lack of real-time data transmission.

Businesses face three primary challenges with traditional ACH debits:

  1. Invalid account information, whether because of a mistaken input or because of a fraud attempt.

  2. Debit request is returned due to insufficient funds.

  3. Fraudulent reversals of ACH debits by customers attempting to take back money paid for a good or service already received.

Plaid has solutions that can help businesses alleviate these risks in real-time, such as instant account verification to check that account information is valid for online debits, balance checks to ensure enough funds are available, and transaction histories that enable them to look for patterns that could indicate fraud. 

The ACH network is essentially the base option for money transfers in the US, on which other services can be layered to obtain the results and safety desired. ACH debit transactions in particular can be made substantially less risky with the help of enhanced ACH solutions, making them the rough equivalent to real-time products at significantly lower costs.

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