Financial Management, Open Banking

Understanding ACH Debits and Credits

Editor
November 2, 2021

Finicity, a Mastercard company, makes the ACH transfer process more secure and more consumer-centric with our open banking platform. Automated Clearing House (ACH) payments are one of the most-used payment rails and are a streamlined form of Electronic Funds Transfer (EFT). In 2020 alone, ACH moved $61.9 trillion in transactions. Strictly for payments moved between US-based banks, these electronic payments operate as paperless checks. 

Payments are issued in two forms: ACH credits (push) and ACH debits (pull). Understanding the difference between the two can help you understand how to better leverage ACH credits and debits in your everyday business transactions. 

What Is an ACH Debit?

An ACH debit transfer “pulls” funds from the payer’s bank account. If you’ve ever set up a recurring bill payment online, this is an example of a pull. In order to initiate an ACH debit, the payer must give their account and routing numbers to the payment receiver (who requests the payment), and give them permission to access the funds. The Nacha Web Debit Account Validation Rule requires the account to be verified before the first payment can be issued from it. While various verification methods are available, verification can happen by confirming the account number, or by the account owner giving permissioned access to it through an open banking portal. 

What Is an ACH Credit?

An ACH credit transfer “pushes” funds to a bank account at the request of a payer. If you receive your paycheck through direct deposit, it comes through an ACH credit transfer, in which your employer is requesting that funds be moved directly from their bank account to yours. You can also make payments in the form of an ACH credit, but unlike an ACH debit, you would initiate the transfer. 

How Do ACH Transactions Work?

ACH transactions happen in two key steps:

1. Initiating the payment: Before a payment originator can initiate a transfer, they must receive permission to either push or pull funds to or from the account. Originators can receive permission by signing an ACH authorization form or through verbal agreement. This authorization phase is also when the transaction is marked as either a one-time or a recurring payment. 
2. Receiving the payment: Once the ACH transfer has been authorized, your bank account will either push or pull the funds, depending on whether it’s a credit or debit transfer. If there are insufficient funds to push or pull, the payment can fail. In some instances, this can result in overdraft fees for the account holder.

Direct Deposits and ACH Transactions

Direct deposits have become the preferred method for issuing paychecks, both for employees and employers. Depositing payment directly into an employee’s account via the ACH network is a streamlined option. It also removes the fraud risk and processing delays of paper checks. Direct deposits are a type of ACH credit transfer, where employers push funds to an employee once they’ve received and verified the employee’s account and routing numbers. 

What Are Nacha’s New ACH Debit Rules?

Nacha’s central role is to facilitate the ACH network. Their top priority is ensuring that funds transfers are secure. In order to better protect the network as a whole, as well as individual businesses and consumers, Nacha implemented a new rule that applies specifically to WEB (online-initiated) debit transactions. 

Under Nacha’s operating rules, originators of WEB debit entries are required to use a “commercially reasonable fraudulent transaction detection system” to mitigate fraud risk. As of March 19, 2021, Nacha added account validation as a central component of fraud prevention. Any WEB debit originator now has to validate an account before first use, or when an account number changes.

Common Questions About ACH Transfers

How Long Do ACH Debit or Credit Transfers Take to Clear?

Because they are processed in batches, ACH transactions can take longer than other forms of payment to clear at the receiving bank. Some banks may offer same-day ACH payments which adds an extra window for submitting transactions, but most financial institutions charge extra because they’re moving toward faster payment options. 

What Are the Security Risks of An ACH Transaction?

As with any form of payment, there are security risks associated with ACH transactions. For example, with access to routing and account numbers, criminals can authorize fraudulent ACH transfers. Nacha regularly updates this page with the most current ACH-related threats. 

Following Nacha’s guidelines and using secure ACH payment solutions will mitigate the security risks associated with ACH transactions. 

What Are the Benefits of ACH Transactions Over Other Types of Payments?

ACH transactions are the most widely-used payment rail because they’re simple and secure. This makes them the obvious choice for exchanging payments via the internet. Some advantages of ACH payments include:

• ACH is the backbone of every disbursement, bill payment, and P2P financial services app. It’s the universal standard for sending and receiving money.
• Lower fees than wire transfers and other EFT formats.
• ACH transfers are convenient, thanks to the ability to set up recurring payments, and you can make ACH payments from anywhere.

Are ACH Transfers Right for My Business?

Many businesses leverage ACH transfers to pay vendors and receive payments from customers, in addition to paying employee salaries. The speed, convenience, and security of ACH payments are behind today’s most successful businesses, assuring a positive impression of your brand. If your company is frequently moving money, making large payments or if it isn’t as important when the transactions goes through ACH transfers may be the right choice.

There are areas where ACH could be improved. It lacks a seamless returns process and there isn’t a dispute mechanism for consumers. It lacks transparency and immediacy in many ways, which is why when fraud occurs it can be costly for merchants and businesses.

Enabling ACH Transactions with Finicity

Finicity, a Mastercard company, can help you make the ACH transfer process more secure and more consumer-friendly with our open banking platform. Through our payment data solutions, we offer instant account verification. This enables originators of ACH transfers to verify crucial account information in real time, increasing the likelihood of successful payments and reducing friction like microdeposits or manual entry. Finicity’s products also offer balance checking to give confidence that funds will be available, reducing the potential for costly insufficient funds returns. However you’re interacting with the ACH network, Finicity’s products are here to enhance the experience.

ACH credit and debit transactions are driving the exponential growth of today’s financial services innovation. To find out how we’re taking ACH to the next level, request a demo today.