How does an ACH deposit work? A behind the scenes look

Roughly 94% of Americans receive their pay by what is commonly known as direct deposit—the informal name for ACH credit transactions. They’re an unsung part of the financial plumbing in the US, responsible, along with ACH debit transactions, for nearly $62 trillion in payments in 2020.

To understand what ACH is and how it works, it's helpful to first define ACH deposits. Then, we'll discuss the different entities involved in processing ACH payments, how they compare to other payment methods, and what factors impact how fast payments arrive. 

ACH deposits are electronic payments initiated through the Automated Clearing House (ACH) system, which transfers money electronically between bank accounts. The ACH network manages the process from initiation to final disbursement, ensuring the validity of each transaction. Direct deposit paychecks, Social Security payments, utility bill payments, and other recurring payments like subscriptions and mortgages are often processed through ACH.

What’s an ODFI or RDFI in ACH deposits?

To better understand how the ACH process works, you need to understand the two main entities involved in an ACH transfer: the ODFI and RDFI. Both are typically banks that are members of the Federal Reserve System. 

• ODFI (Originating Depository Financial Institution): Initiates ACH transactions on behalf of the sender.

• RDFI (Receiving Depository Financial Institution): Accepts and validates ACH deposits.

The ACH, or Automated Clearing House, connects these two financial institutions and processes the payment. 

It’s also common for third-party senders to operate between originators and ODFIs. A company wishing to pay its employees, for example, is an originator. In many cases, their payroll processor has an agreement with a bank (the ODFI) to transmit those files to the ACH network under the ODFI’s master contract with the ACH Operator.

From the network’s perspective, ODFIs and their processing partners are the digital post offices through which bundles (or “batches”) of ACH transactions come in. These batches are then processed by one of the two ACH network operators, at whose clearinghouses the individual messages are bundled according to their destination. While RDFIs sometimes send back error messages called return codes, the ODFI is always the first to start the exchange.

How do ACH deposits compare with checks?

Paper checks involve more processing steps and, therefore, more administrative expense. They’re also just generally inconvenient: the payer needs their checkbook handy, the payee needs to accept the check, there is often mailing involved, and checkbooks can be lost, stolen, or otherwise depleted.

This chart breaks down the core differences between ACH payments and physical checks. 

Informally, eChecks are paper checks that have been manually converted into ACH debit requests, where the information has been digitized and the check archived or destroyed. However, the term can also represent the idea of ACH transactions as "a digital replacement for the paper check," where no physical check is ever used.

Many mobile banking apps let customers capture paper checks via their phone’s camera. Those apps might then strip the relevant info and create ACH requests, or they might just forward the digital scans to a traditional check-clearing facility. 

How long does the ACH deposit process take?

Generally, ACH deposits take one to three business days but can be expedited using same-day ACH for a small fee. The speed depends on the time of day the transaction is sent and whether errors or return codes are encountered. 

ACH messages are delivered 6x per business day, which allows for faster communication than was once possible. Same-day processing is also available for a small fee (typically about $0.05).

Not factoring errors/returns, a standard ACH transaction follows this timeline:

What’s the difference between ACH and EFT?

The Automated Clearing House (ACH) network is one specific protocol for moving funds between financial institutions. EFT, or Electronic Funds Transfer, is an umbrella term that includes ACH transactions, wire transfers, and all other types of electronic payments.

While the most cost-effective, ACH is also the slowest EFT solution. Its messages are sent in batches to the network to be sorted and repackaged for delivery six times per business day. Also, ACH can’t show whether a given transaction will clear in real-time, while others can.

This distinction is narrowing, though, as new solutions built on top of ACH allow for features formerly available only through other EFT types. For example, Plaid enables businesses to carry out real-time balance checks before initiating an ACH transfer to help avoid non-sufficient funds returns, and has partnered with Vesta to guarantee funds in some ACH transactions.

Is direct deposit the same as ACH?  

Generally, yes, a “direct deposit” is a type of payment made via the ACH network. It’s an informal name for common ACH deposits where individuals receive electronic transfers directly into their bank accounts. 

The ACH payments often referred to as direct deposit payments, include: 

• Salary and wages

• Social Security and pension benefits

• Tax refunds

However, there are some differences between ACH and direct deposit—and not all ACH deposits are referred to as direct deposits. The term is generally not used when referring to transactions like peer-to-peer transfers and online bill payments made through banking portals, even though these deposit types use the same underlying ACH protocol.

The benefits of ACH for payroll

With ACH, businesses can send payroll directly to their employees' bank accounts. It's often more convenient for workers, but there are several reasons why ACH is the preferred method for payroll processing:

• Cost-effective: ACH transactions typically cost just a few cents per payment, whereas issuing paper checks can cost $2–$4 per check, factoring in printing, mailing, and processing fees.

• Convenient and reliable: Employees receive their wages directly into their bank accounts—no need to pick up a check or make a trip to the bank. Employers can also schedule payments in advance, ensuring timely payroll processing.

• More secure: Unlike paper checks, which can be lost, stolen, or altered, ACH transactions provide a safer way to transfer funds. This reduces fraud risk and helps businesses maintain better financial security.

With these benefits, it’s no surprise that the ACH payment method has become the backbone of payroll processing for businesses of all sizes.

What’s the future for ACH deposits?

While ACH deposits already dominate payroll and government cash transfers, they still have room to grow. The system is well-positioned to replace the last remnants of the paper check industry. It also has the potential to compete more directly with wire transfers for consumers paying bills and electronically transferring funds to friends and family.

The first will likely happen automatically as check-supporting infrastructure naturally winds down and as legacy institutions complete their digital transitions. The second will require banks and fintech companies to continue to make using ACH easier, less burdensome, and less likely to experience transaction failure.

Ready to leverage ACH for your business? Learn how Plaid's payment solutions can help.