ACH Direct Deposit | How Does It Work?

Over 90% of Americans receive their pay by what is commonly known as direct deposit – a payment method that runs off the Automated Clearing House (ACH) network. The ACH system has become a vital component of the modern financial landscape.

ACH direct deposits are convenient, and many banks provide additional benefits to customers who are paid this way, which may help you save money and get paid sooner!

What is an ACH Direct Deposit?

An ACH direct deposit refers to the deposit of funds electronically into a bank account rather than through a physical, paper check. The most common types of ACH direct deposits include salary payment, tax returns, and government benefits. Direct deposit via ACH is a simple wire transfer that is typically received in 1-2 business days. It is an ideal option for a small business who wants to save money and pay employees expeditiously!

If you’re a small business owner who is juggling several forms of payments throughout the year, setting up direct deposits through ACH makes the process much simpler!

How Direct Deposit Works

An ACH direct deposit moves money from the employer’s bank account to an employee’s account in an easy and relatively inexpensive way.

In order for the funds to be transferred from the payer, the recipient must provide the name of their bank, account number, and the bank’s routing number to the person or business making the deposit. If needed, they may provide a voided check which has the same information printed on it. It can take a few days for direct deposit to be set up. Once the depositor has the information, they enter it into their banking system. Funds are transferred electronically and are deposited into the recipients account at midnight on the payment date. Since the funds clear automatically through the ACH, they are available immediately.

Uses of an ACH Direct Deposit

Payroll: Direct deposit is a typical method used by employers to transfer employees’ wages directly into their personal bank accounts as part of the payroll process.

Government Benefits: The majority of government benefit programs provide recipients with the option to receive their payments by direct deposit.

Tax Refunds: Taxpayers have the option of selecting direct deposit as the method to get their tax returns from the government in order to obtain their tax refunds.

Paying Vendors: Businesses can use ACH direct deposit to pay their vendors, suppliers, or contractors. It provides a method that is both simplified and effective for managing accounts payable and settling invoices.

Dividends: Companies can choose to pay dividends to their shareholders via ACH direct deposit.

Commissions: Sales representatives, agents, or freelancers who earn commissions as part of their job can choose to have their commission payments made via direct deposit.

Rental Income: Landlords can set up ACH direct deposit with their tenants, which enables them to receive rent payments on a monthly basis directly into the bank accounts selected.

Benefits of an ACH Direct Deposit
1. Lower costs

Compared to paper checks and credit cards, an ACH direct deposit is inexpensive to process. Direct deposits may cost less than other payment methods that rely on more manual, repetitive, time-intensive processing methods. They may also be seen as more environmentally friendly as it does not rely heavily on paper or one-time items.

2. Highly secure

Direct deposit payments can’t be lost in the mail or stolen. ACH payments are among the most secure payment methods, since every transaction that passes through the ACH network is encrypted. Additionally, unlike wire transfers, ACH direct deposit transfers can be reversed if caught soon enough (no later than five business days after settlement). This makes them less likely to be used for fraudulent schemes.

3. Convenient

Direct deposit eliminates the need for physical checks and allows for automatic credited payments to the recipient’s account, saving time and effort in terms of having money hit one’s account. Direct deposit also reduces the risk of lost or stolen checks and the need to carry large amounts of cash.

4. Less frequent payment failure

Bank account numbers change less frequently than credit card numbers. This leads to less opportunity for payments to fail due to expired payment information. When it comes to recurring payments, this is especially helpful!

How do I Set Up an ACH Direct Deposit?
Step 1: Authorization

The employer or business setting up the ACH payment will need to gather the employee’s information: name, bank account number, routing or ABA number, account type, and transaction amount.

Step 2: Transaction initiation

Once the client fills out the form, it must be sent to the ACH provider or the Originating Depository Financial Institution (ODFI.) This institution delivers the Automated Clearing House entries to the ACH operator.

Step 3: Complete the payment request

The ODFI or ACH network will send a request from the business’ checking account to the individual’s account, also known as the Receiving Depository Financial Institution (RDFI.)

Step 4: Payment processing

Once the RDFI approves the fund’s amount, the direct payment will be processed. This entire process involves multiple ACH networks and takes about 1-3 business days. To ensure the payment transfers in time, it’s a good idea to send your payments out three days in advance, just in case!

The Bottom Line

An ACH direct deposit is a simple wire transfer that is an ideal option for a small business who wants to save money and pay employees expeditiously! Since over 90% of Americans receive their pay by direct deposit, the Automated Clearing House (ACH) system has become a vital component of the modern financial landscape! Setting up direct deposits at your small business makes the payment process much more convenient, smooth, and simple.


Download our Free Ultimate Guide for ACH!

Learn all you need to know about ACH payments and how to get started at your small business today! Our free guide includes:

Types of ACH transactionsWhat is ODFI/RDFI?How to set up ACHBenefits of ACHACH returns

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