ACH Debit vs. Direct Deposit

by Mack Mitzsheva

    ACH, or Automated Clearing House, is an electronic network that processes credit and debit transactions. These includes transactions in both the public and private sector. ACH facilitates the electronic transfer of funds, in the form of payments and deposits, from the account of one party to the other. Although ACH debits and direct deposit both occur electronically, they each serve different purposes.

    ACH Debit

    An ACH debit occurs when a creditor or merchant electronically removes funds from a bank account. It is a deduction of funds in a specific amount. ACH debits happen when a consumer makes a purchase or pays a bill using the routing number and account number from his bank account. ACH is a transfer conduit. The consumer gives the merchant or creditor his account information, who then uses that data to remove the funds. Those funds are then credited, or transferred into, the merchant or creditor's account.

    Direct Deposit

    A direct deposit occurs when an employer or other payer electronically deposits funds into a bank account using the ACH system. The deposit is for a specific sum of money. This is known as a credit to the account, as opposed to a debit, which is a removal of funds from the account. For employees, this can be a convenience. There isn't a paper check to cash. The funds are transferred from the account of the employer directly into the account of the employee.

    Considerations

    An ACH debit can be a quick way to pay a merchant but there are drawbacks. Debits remove funds from your bank account and errors do occur. If you give a creditor permission to electronically debit your account, the creditor may erroneously deduct more from your account than you expected. This could lead to an overdraft on your account if there aren't sufficient funds in the account to cover the payment. It could also lead to the imposition of an overdraft fee from your bank. If an error occurs, you must bring it to the attention of your bank within 60 days. It can then take the bank up to 45 days to investigate the error. The bank may give you a provisional, or temporary, credit of the missing funds while the issue is being investigated.

    Other Errors

    Direct deposits can have unforeseen consequences as well. When you sign up for direct deposit with a company, you give that company permission to electronically deposit funds into your bank account. You also give the company permission to electronically remove funds if the company believes that you were not authorized to receive those funds. This could occur if an employer pays you more than you were owed or if you receive monetary compensation for a benefit, such as vacation pay, that the company later determines you were not entitled to receive. The company does not have to notify you before removing the unauthorized funds, but it does have to remove them within five days of making the deposit.

    About the Author

    Mack Mitzsheva is a tax lawyer, personal finance expert and the author of the forthcoming ebook, "10 Best Places to Work Online." Mitzsheva is also a social media entrepreneur with five successful sites under her belt. Always innovative, Mitzsheva is currently developing a cutting-edge budgeting app for newlyweds.

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