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. In the Straddle API, ACH debits are processed as charges. 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.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.
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.1
Initial Request
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.
2
Network Submission
The ODFI (generally a bank) or the processing partner then passes these requests on to the ACH network.
3
Processing and Distribution
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).
4
Transaction Execution
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.
5
Settlement
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.
6
Fund Release
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.
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.ARC - Accounts Receivable Entry
ARC - Accounts Receivable Entry
Converting physical checks received by mail or drop-box into ACH debit transactions.
BOC - Back Office Conversion
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
MTE - Machine Transfer Entry
Debiting bank accounts to settle ATM withdrawals.
POP - Point-of-Purchase Entry
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
POS - Point-of-Sale Entry
Debiting bank accounts for card payments made via an electronic terminal.
PPD - Prearranged Payment & Deposit Entry
PPD - Prearranged Payment & Deposit Entry
Directly debiting bank accounts for pre-authorized bill payments. Requires proper authorization from the account holder.
SHR - Shared Network Transaction
SHR - Shared Network Transaction
TEL - Telephone-initiated Entry
TEL - Telephone-initiated Entry
Debiting bank accounts for transactions originated over the phone.
WEB - Internet-initiated Entry
WEB - Internet-initiated Entry
Debiting bank accounts for transactions originated online. See our guide on Internet vs Contract authorization for compliance requirements.
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.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.
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.
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.Primary challenges with traditional ACH debits
Solutions for enhanced ACH
Solutions that can help businesses alleviate these risks in real-time include:- Instant account verification to check that account information is valid for online debits
- Balance checks to ensure enough funds are available
- Transaction histories that enable them to look for patterns that could indicate fraud (see our Glossary for more about Straddle’s Watchtower fraud detection)
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.