What is an ACH direct deposit?

Adam Rozsa
22.10.21
5 minute read

ACH direct deposits are electronic payments which are made directly to individual bank accounts through the National Automated Clearing House (NACHA) network.

Recurring payments like salary and government benefits are often scheduled using ACH direct deposit as a simple and cheap way to move money without relying on paper checks.

It’s worth noting that ACH direct deposit isn’t the same as ACH direct payments, which are often used when customers need to send money to cover bill payments.

In this guide, we’ll cover different types of ACH transactions, and how to receive a payment via ACH. We’ll also introduce the Wise as the smart way to cut the costs when sending or receiving international transfers. More on that later.

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📝 Table of contents

What is ACH?

ACH stands for Automated Clearing House¹ - the network behind many of the electronic payments you’ll send and receive on a daily basis. ACH transactions are usually split into direct deposits and direct payments. Although these transfer types are quite different, in both cases, the ACH network allows customers to send and receive money electronically - often for free.

ACH payments are popular because they’re cheap or free to arrange and receive, secure, fast, and can be scheduled ahead of time.

💡 Want to know more? We’ll cover how more on the different types of ACH transfer a little later. Read on - or checkout the full guide to ACH transactions here.

ach direct deposit

How does ACH work?

ACH payments move from one bank account to another electronically. If you’re expecting to receive an ACH direct deposit, you’ll need to give the payer your bank account number and routing information, and give permission for the payment to go ahead.

For most individuals getting paid through ACH direct deposits, the process is as simple as giving your employer or other payer a few details, and the money will then arrive in your account with no further action. However, as you may expect, there’s a bit more going on in the background to ensure your transfer is processed quickly and securely every time - read on for more detail about how ACH works in practice.

What is ODFI?

ODFI stands for Originating Depository Financial Institution.

ACH payments are made through strictly outlined, managed and audited processes to ensure they’re safe, fast and reliable - and the ODFI is an important part in each ACH transaction. An ODFI acts as the originator of an ACH transaction, and is also the interface between the ACH network and the Federal Reserve. These financial institutions are responsible for making sure that any ACH payment is authorized before being processed, and all data is held securely.

What is RDFI?

RDFI stands for Receiving Depository Financial Institution.

Financial institutions must be authorized as RDFIs in order to allow customers to receive payments through ACH transfers. RDFI institutions have their own responsibilities within the ACH payment workflow, including checking and posting all transfers received within agreed timelines.

ODFI vs RDFI: What is the similarity?

Financial institutions may be both ODFIs and RDFIs - or just one or the other. In either case, these financial institutions must work with ACH operators or the Federal Reserve to make sure that ACH transactions run smoothly and within the agreed processes for security and transaction speed.

ach direct deposit

Types of ACH transfers

We mentioned earlier that ACH transactions can be broadly split into 2 different types:

  • ACH direct deposit
  • ACH direct payment

Both types of payment are processed through the ACH network, but they’re actually distinctly different types of transactions with different advantages and disadvantages.

ACH direct deposits² are received into a checking or savings account as a credit. Your employer may use this to send out payroll payments, for example. You can usually set up a direct deposit easily by completing the payer’s direct deposit registration form - you can even ask for your money to be sent to more than one account as a split deposit. This is a good way to deposit some of your salary into a savings account, or to divide your income between different accounts used for different purposes.

ACH direct payments³ are usually used to pay bills, so you’ll see these as a deduction from your account instead of a credit. You can set up ACH direct payments in different ways depending on whether a recurring bill is always of the same value or variable, making this a good way to pay rent, subscriptions, utility bills and more.

ACH direct payments

ACH direct payments can be set up as ACH debit payments or ACH credit payments. ACH credit direct payments are useful for paying fixed bills, while ACH debit payments can be of varied amounts - handy for things like utility costs which may change month by month.

💡 Get an overview of ACH credit payments and how they’re used, here.

ACH direct deposits

ACH direct deposit payments are also known as push payments. That’s because the transfer is pushed out by a payer, into the recipient account.

The most common examples of ACH direct deposit payments are when employers send out employee salaries electronically, when government benefits are issued, or when the IRS passes out tax refunds. In each case the recipient will give their bank details to the institution sending the payment, and authorize them to set up the transfer electronically. The person or organization sending the payment is in control of the amount and the date of the transfer.

💡 Learn more about how to set up a direct deposit with this handy guide.

ach direct deposit

Advantages & disadvantages of ACH

Different ACH payment types have different advantages and disadvantages - check out this overview to help you decide if an ACH transfer is the best choice for your needs.

Pros

  • ACH payments are usually easy to set up, and once arranged can recur automatically, making them perfect for repeat payments
  • Electronic payments are more secure and convenient than older payment methods like paper checks or cash
  • ACH transfers are the preferred choice of many businesses because they’re cheap and fast to administer

Cons

  • ACH payments can be made in a few different ways, which means you’ll need to find the best option for your specific needs
  • Although electronic recurring payments are handy, you’ll still need to check your bank account to make sure transfers are working as you’d expect, and to check you have enough to cover any outgoing payments
  • ACH transfers may not be the cheapest option if you’re sending or receiving money internationally

ach direct deposit

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Sources

1] NACHA - what is ACH?
2] Direct deposit
3] NACHA - how direct payment works

All sources checked on 22 October 2021


This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.

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