How does an ACH deposit work?

What exactly happens when money gets deposited in a bank account

Eighty-two percent of American employees get paid via an Automated Clearing House (ACH) deposit, meaning that their paycheck is directly deposited electronically in their bank account. The number of employers adopting ACH deposits is growing; five years ago, only 74 percent of people got paid this way. With ACH deposits, employees don’t have to take the extra step of depositing a physical check, and employers don’t have to devote time and resources to writing, printing, and mailing checks either. Let’s take a look at what happens, exactly, when an ACH deposit is made.

An ACH deposit is what’s also known as an ACH credit transaction, in which funds get “pushed” from the transaction originator’s bank account to the recipient’s. For an employee to get paid on the ACH network, the employer, who is the transaction originator, sends an electronic ACH file to the Originating Financial Depository Institution (ODFI), or the employer’s bank. This file contains information pertinent to the ACH deposit, such as the recipient’s name, the relevant routing and account numbers, and the amount of the transaction. At predetermined times throughout the day, the ODFI then sends that file—along with any others it has received—in batches to a clearing house such as the Federal Reserve. There, the files get processed and transferred to the Receiving Financial Depository Institution (RDFI), which is the recipient’s bank. The RDFI ensures that the right amount of money is deposited in the employee’s bank account. The entire process for making an ACH deposit is automated and conducted electronically. ACH deposits usually take between one and four business days to settle and appear in the recipient’s account.

ACH deposits and checks: a comparison

ACH deposits were developed as an alternative to checks—and they have many advantages over checks. They don’t require the time that checks do to write, mail, and deposit; they’re more convenient for both employers and employees; and they’re safer because there are fewer opportunities for the money to get lost or stolen and fraudulent ACH deposits can be reported and mitigated. What’s more—ACH deposit is cheaper. According to a 2014 study, writing and mailing checks costs businesses between $4 and $20 per check—amounting to $54 billion annually for some employers. An ACH deposit is free. According to another survey, 72 percent of employees also say that being paid by ACH deposit helps them control their finances.

In addition to direct deposit for payroll, ACH deposits can also be used for paying bills or making other online payments such as for insurance, mortgages, or loans; making peer-to-peer transfers; or paying a merchant for a good or service.

The future of ACH deposits

Financial technology companies, including Plaid, are increasingly making ACH deposits easier than ever by eliminating key points of friction. For instance, Venmo allows users to make P2P transfers instantly from their phones and Stripe lets merchants and businesses process ACH deposits efficiently. Plaid allows merchants to, among other things, quickly and seamlessly authenticate users’ accounts without asking them to provide their account and routing numbers, making the process simpler and more secure. Instead, Plaid lets end users use their online banking credentials to authorize the ACH deposit.

ACH deposits continue to grow in popularity, and will only continue to do so as the ACH network becomes faster. As of September 2016, NACHA, the organization that oversees the ACH network, has made it possible for ACH deposit transactions to clear the same day that they’re initiated. This Phase 1 of the Same Day ACH initiative is expected to make ACH deposits—especially for payroll—more reliable, more efficient, and more desirable. Phases 2 and 3—expected to be implemented over the next two years—will also allow same-day ACH debit and faster processing overall.