What is ACH Debit?

Developed in the 1970s to replace paper checks for transactions involving U.S. bank accounts, the ACH (Automated Clearing House) network is an interbank messaging system. The primary method financial institutions use to arrange the transfer of funds into and out of accounts is ACH. It’s usually an ACH debit transaction at work when money is transferred out for things like a purchase or bill payment. Let’s look in detail at what ACH debit is, how ACH debit works, types of ACH debit, etc.

What is ACH Debit?

ACH debit is an electronic payment system in which an ACH transaction is set up as an ACH debit that transfers funds by “pulling” money from one account to another, for example, from a customer’s personal account to a business or government organization. 

Money must always be withdrawn from someone’s account to complete a transfer, so a debit is always involved. The person who made the initial request determines whether or not it is classified as an ACH debit. In most consumer billing situations, the biller starts the ACH request (or “originating”). Furthermore, that request is regarded as an ACH debit since it asks the system to withdraw money. Instead, if customers use their online banking portal to send money once, they request that the network “push” money on their behalf. This indicates that, even though money was taken from their account, it wasn’t an ACH debit.

How Does ACH debit work?

One party consents to pay another in an ACH debit transaction. The party being debited must grant authorization to the party receiving payment for that to occur. It then requests that the ACH network pick up the payment and transfer it to their account. 

Regarding the mechanical operation of ACH debits:

• An Originating Depository Financial Institution (ODFI) receives the payer’s account information, the amount to be debited, a categorization code, and a target effective entry date from the payee, the originator, or their processing partner.
• The ODFI, or processing partner, then forwards these requests to the ACH network.
• The ACH network disassembles these incoming bundles six times daily into individual messages, each representing a transaction. Then, it reassembles the messages to ensure prompt delivery to every Receiving Depository Financial Institution (RDFI).
• The next regular batch of ACH transactions from each RDFI is sent back with any return codes after the transactions have been executed or queued in their system.
• The ODFI then gives the payee access to the funds for completed transactions.

Different Types of ACH debit

The ACH system accepts several debit formats, each distinguished by a unique Standard Entry Class (SEC) code corresponding to a particular use case.

Several frequently used SEC codes for ACH debit are as follows:

• ARC (Accounting Receivable Entry): Transforming physical checks received by mail or Dropbox into ACH debit transactions is known as ARC (Accounts Receivable Entry) (more on this later).
• BOC (Back Office Conversion): The process of converting physical checks received from the payer in person into ACH transactions during back-office processing is known as BOC (Back Office Conversion).
• CCD (Corporate Credit or Debit Entry): Debiting or crediting to or from one business bank account to another is known as CCD (Corporate Credit or Debit Entry).
• POP (Point-of-Purchase): Point-of-purchase entry, or POP, is the process of instantly turning in-person checks received from the payer into an ACH transaction in which the check is immediately voided and returned.
• POS (Point-of-sale): Point-of-sale entry, or POS, debits bank accounts when a customer pays with a card through an electronic terminal.
• PPD (Prearranged Payment & Deposit Entry): Directly debiting or crediting a customer account in accordance with the receiver’s (account holder’s) authorization is known as PPD (Prearranged Payment & Deposit Entry).
• TEL (Telephone-initiated Entry): This process debits customer bank accounts for phone-based transactions.
• WEB (Internet-initiated Entry): Crediting consumer bank accounts for peer-to-peer payments or debiting consumer bank accounts for transactions that started online or through a mobile app.

Is ACH debit suitable for your business?

You should weigh the benefits and drawbacks of ACH debit transactions before implementing them for your B2B payments to ensure they fit your company’s requirements.

The following are a few benefits and drawbacks of ACH Debit for business:

Advantages

• Comfort and ease of use: The main advantage of ACH is its convenience. You wouldn’t need to remember to mail payments once it was set up. Additionally, there won’t be any fees if you don’t miss any payments!
• There’s no need to write checks: You won’t need checks as frequently when using ACH.
• Save on postage: Using ACH payments, you can reduce the costs of stamps, paper, and postal fees for making physical payment transfers. There are no fees associated with ACH payments, and many banks and credit unions also offer free online bill-paying services.
• Simpler payment tracking: Keeping track of every transaction is simpler when you have your payee’s name on your bank statement. This lessens the chance that money will get lost in the mail.
• More favorable to the environment: By going digital, you can drastically reduce the amount of paper (checks, envelopes, and stamps) you use, which helps the environment.

Disadvantages

• Reduced authority over payments: You must make sure that you go online and stop the payment before the withdrawal date in order to withhold your automated payments. Occasionally, you might also need to take manual action to maintain control over automated payments.
• Danger of divulging personal data: Your bank account information, including your account number and SWIFT codes, is given to your clients. Such actions may jeopardize the confidentiality of your company’s data.
• Error risk: Large errors can empty your account, causing you to miss additional payments and accrued fees. Billing errors can also make you pay more than you should.
• Potential for an overdraft: Your account risks overdrawing and incurring interest penalties if you don’t keep enough money to cover your automatic payments.
• Forget to cancel services: You might pay for services you want to stop paying for if you can’t see the bills and lose track of what you’re paying for.

Who uses ACH debit transactions?

If their bank accounts permit this transaction, anybody can make ACH debits. Small business owners frequently use ACH debits to cover recurring expenses like utility bills. Additionally, users can utilize apps to enable an ACH payment method for transactions between users.

You can conduct business-to-business ACH debits if you own a business. However, ensure that your business bank account allows ACH debits, as not all banks will process them. If your bank doesn’t support ACH debits, you may need to consider opening an account with a different bank or find another way to pay. An ACH debit block is another tool you can use to stop illegal payments.

ACH debit fee transaction

ACH debit fees can vary depending on the provider. You can perform ACH transactions (debits and credits) with certain banks and providers without paying extra fees. If not, the service may be rendered at different prices. An ACH transaction can range from $0.29 to $10.00.

In addition to this fixed fee, users may also be responsible for the following charges:

• Percentage fees for transactions
• Monthly charges
• Fees for batches and ACH returns

Once more, these costs differ amongst providers, and some might not even apply to specific ACH debits. Speak with your provider about your costs and other financial commitments.

Make ACH Payments Effortlessly with Cheqly!

Businesses looking to streamline their payment processes and cut costs can significantly benefit from using Cheqly for ACH payments, especially for domestic transactions within the U.S. By leveraging Cheqly’s platform, companies can enjoy the perk of conducting ACH transactions free of charge. Cheqly offers an outstanding solution for businesses aiming to reduce expenses and simplify payment operations. It effectively eliminates the traditional hassle and overhead costs associated with payment processing, providing an efficient and secure solution. We encourage businesses to sign up for a Cheqly account today and simplify their domestic ACH payments in the U.S.