What is ACH?
Automated Clearing House (ACH), also known as direct payments, is an automatic fund transfer method. A group of banks in the United States replaced payment of cheques with a centralized version. This gave way to the first clearing house in 1972. This was operated by the Federal Reserve Bank located in San Francisco.
The two components of ACH are Direct Debit and Direct Credit. The former is an automated withdrawal from one’s account whereas the latter facilitates an automated deposit. They are used respectively as a payout and pay-in device.
The working of ACH is quite simple. When a user subscribes to the autopay feature with a party, they send a request to their bank to deduct the amount owed from the user’s bank. The concerned parties are not burdened with this monthly transaction (say salary payment) as their bank settles it between them. If the user has the required amount in his bank, it gets debited.
This facility is an attractive choice for large businesses as they do not have to deal with huge transactions themselves for example paying their employees. As this is an electronic process, they are considered to be reliable.
ACH period may be long. They take a few business days for the completion of the transactions. The processing time is three to five working days.
What is Direct Debit?
Direct Debit, a direct withdrawal, is a fund payment technique. It is one of the two components of ACH. It facilitates automatic payment from one bank to another on the customer’s instructions.
It is a better alternative to cash, cheque, or card payments. The payer has only to give their bank details and the particulars of the transaction once. The same transaction gets repeated at intervals without the payer being concerned every time.
In the United States, direct debit is operated under the ACH network. This connects two or more financial institutions of various parties and helps them to coordinate financial transactions among themselves.
Unlike their credit counterpart, direct debit gets processed within the next business day. It is also fairly affordable which makes them more appealing than physical transfers.
They are not only used by business accounts but also by personal accounts. Some direct debit uses may include fixed subscriptions, memberships, and regular bill payments. The electronic feature makes it more suitable and convenient.
Difference Between ACH and Direct Debit
- ACH is a clearinghouse that settles the transactions on behalf of the customers. It handles both debit and credit accounts. On the other hand, direct debit settles only the payment side.
- The function of ACH is to either make payments or receive funds. Whereas, direct debit only makes payments for the users.
- ACH facility is undertaken by both the payee and payer while direct debit is only for the payers.
- The scope of ACH is wider as it includes both direct debit and direct credit. The scope of direct debit is narrower.
- ACH is a US-based facility that was first operated in San Francisco. Whereas, the feature of direct debit is used worldwide.
- The time taken to complete ACH may differ from three to five working days. On the other hand, direct debit is processed within one working day.
Comparison Between ACH and Direct Debit
| Parameters of Comparison | ACH | Direct Debit |
| Definition | It is a network that automatically transfers funds from one account to another. | It is a component of ACH that handles the payment transactions of accounts. |
| Function | It controls both the debit and credit accounts. | It only controls the debit accounts. |
| Used by | Both the payee and the payer use it. | It is used only by the payer. |
| Scope | It has a wide scope. | It has a comparatively narrower scope. |
| Availability | It is a network that is based in the United States. | This feature is used by all networks worldwide. |