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Guide to ACH Deposits: How ACH Deposits Work

What is an ACH deposit?

Let’s say that you and your sibling are engaged in the time-honored task of sorting your Halloween candy. Unfortunately for you, your sibling has a keen memory and knows how to hold a grudge—and last year, you stole and consumed a full-size Twix from their allotment. 

You owe your sibling one full-sized Twix. To make good on your debt, you ask your dad (who is overseeing the operation) to move the required candy bar from your pile into theirs. 

This transfer is analogous to an ACH deposit. ACH deposits move money from one bank account (your candy pile) to another (your sibling’s candy pile) using a central clearing house (your dad) to facilitate the transaction. Secure, cost-effective, and easy to use, ACH deposits are a common way that businesses send money and settle debts (whether candy-related or not).

What is an automated clearing house (ACH) deposit?

An ACH deposit (also referred to as an ACH credit transaction or an electronic check) is any financial transaction that moves money from one bank account to another using the automated clearing house network. The ACH network is an electronic network that serves as an intermediary between financial institutions and is responsible for processing and organizing ACH transfers. 

In all ACH transfers, the initiating party’s bank is referred to as the originating depository financial institution (ODFI), while the receiving party’s bank is referred to as the receiving depository financial institution (RDFI). In an ACH deposit, the ODFI uses the ACH network to credit an account at the RDFI, resulting in a debit from the ODFI account. 

Common types of ACH deposits 

There’s more than one way to send money: wire transfers, paper checks, money orders, and ACH deposits are all common methods of transferring funds from one bank account to another. ACH deposits are often used by employers for salary payments and expense reimbursements and by the government for tax refunds and benefits disbursements. 

Any transfer that moves money from an originating account to a receiving account using the ACH network qualifies as an ACH deposit (even if both accounts are located at the same financial institution). Common types of ACH deposits include payroll direct deposit, tax return deposits, government benefits or payments, and interest payments.

Salary payments

Salary payments that come in the form of direct deposits are one common type of ACH deposit. In this type of transaction, employers set up recurring payments to credit employees according to their payroll schedule. Funds are pushed from an account at the employer’s financial institution (the ODFI) to an account at the employee’s financial institution (the RDFI). 

Tax refunds

Tax refunds are a government-issued refund for the overpayment of taxes—a calculation that is typically made at the end of the fiscal year when businesses and individuals submit their tax returns and claim available deductions. The government issues tax refunds through either ACH direct deposit or via mailed check. Many businesses and individuals submit their bank account numbers and routing numbers along with their tax returns to facilitate payment via ACH deposit, which is typically faster than payment by check. In a tax refundACH deposit, the IRS moves money from a government account into an account held by the business or individual to whom money is owed via the ACH network.

Government benefits and payments

The US government also distributes Social Security payments, welfare payments, and unemployment benefits via either ACH deposit or mailed check. Just like a tax refundACH deposit, this transaction involves pushing money from a government account into an individual’s account. These payments often recur on a government-established schedule. 

Interest payments

Savings accounts and investment accounts frequently earn interest, which is the charge a borrower agrees to pay to a lender in exchange for a loan. When you invest in a fund or place money in a savings account, you are essentially loaning money to the bank where your savings account is located or to the owner of the funds in which you are invested. In exchange for this loan, the bank or fund will pay you interest, which is calculated as an annual percentage rate (or APR). These payments are made through ACH deposit, even if the ODFI and RDFI happen to represent the same institution: the bank holding the investment fund (the ODFI) uses the ACH network to push funds into the investor’s bank accounts, which is located at the RDFI.

How does an ACH deposit work?

  1. Banking information gets exchanged. 
  2. The payment is initiated. 
  3. The payment is batched. 
  4. The payment is sorted.
  5. The payment is processed. 

ACH deposits involve communication between five separate parties: the paying individual or organization, the paying party’s financial institution, the ACH network, the payee’s financial institution, and the payee. Here’s an example of an ACH payroll direct deposit process. 

  1. Banking information gets exchanged. The employee provides their bank account number and routing number to their employer and authorizes payment via direct deposit. This typically happens during the onboarding process for new hires.
  2. The payment is initiated. The originating party (in this case, an employer) initiates a payment. 
  3. The payment is batched. The employer’s bank (the ODFI) batches the transaction along with other ACH transfers. These batched transactions are sent out at regular intervals during the business day.
  4. The payment is sorted. An ACH operator (either the federal reserve or the Electronic Payments Network) receives the batched transactions, sorts them, and submits the transaction to the employee’s bank accounts(the RDFI).
  5. The payment is processed. The RDFI processes the transaction and credits the employee’s account.

ACH deposits FAQ

What is an ACH transfer to a bank account?

An ACH transfer to a bank account is an electronic payment sent through the ACH network. ACH credit transfers (also known as ACH deposits) move money from the initiating party’s account through the ACH network to the receiving party’s account.

What is the difference between ACH and a bank transfer?

Bank transfers—also known as wire transfers—are a specific type of electronic funds transfer in which funds are moved directly from one account to another, without collection or processing, through a central clearing house. Bank transfers tend to have a higher per-transaction cost than ACH transactions and are processed within 24 hours, while ACH deposits can take one to three business days to complete.

What is an ACH debit?

ACH debit transactions (also known as ACH withdrawals) use the ACH network to pull funds from an account at the receiving financial depository institution (RDFI) into an account at the originating financial depository institution (ODFI). Think of ACH debits as “pull” transactions and ACH credits (or ACH deposits) as “push” transactions.

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