An ACH (Automated Clearing House) debit is a type of electronic funds transfer that allows a payee to withdraw funds directly from a payer’s bank account. The ACH network is a secure, centralized system in the United States that processes large volumes of electronic financial transactions between banks and other financial institutions.
In an ACH debit transaction, the payer (the individual or entity sending the funds) authorizes the payee (the individual or entity receiving the funds) to initiate a withdrawal from the payer’s bank account. This can be done for one-time transactions or set up as recurring payments, such as for utility bills, loan payments, or subscription services.
Some examples of ACH debit transactions include:
- A customer authorizing their utility provider to automatically deduct monthly bill payments from their bank account.
- A borrower authorizing their mortgage lender to automatically withdraw monthly loan payments from their bank account.
- A business authorizing its payroll provider to withdraw funds from its account to process payroll payments to employees.
ACH debits offer several advantages, including cost savings, efficiency, and convenience compared to paper checks and other forms of payment. However, they also require a high level of trust between the payer and payee since the payer is granting access to their bank account for the withdrawal.
Example of an ACH Debit
Here’s an example of an ACH debit transaction:
John is a subscriber to an online streaming service. The streaming service charges a monthly subscription fee of $15. To simplify the payment process, John provides his bank account information to the streaming service and authorizes them to automatically withdraw the subscription fee each month.
So, each month, the streaming service initiates an ACH debit transaction to collect the $15 payment from John’s bank account. John’s bank then transfers the $15 to the streaming service’s bank account through the ACH network. This process allows John to enjoy uninterrupted access to the streaming service without having to manually make the payment each month, and it also ensures that the streaming service receives the payment in a timely manner.