As online payments become increasingly popular, direct debit has emerged as one of the primary ways of carrying them out. Direct debit allows a user, the payer, to authorize a business, utility, or peer—the payee—to withdraw money directly from his or her checking account. The money then gets deposited in the payee’s account.
In the United States, direct debits are conducted via the American Clearing House (ACH network). ACH transactions are divided into two different types: push and pull transactions. Direct debit only refers to ACH “pull” transactions, because the payee is “pulling” funds from the payer’s account. Once a payer, for instance a customer, provides his or her bank with information authorizing the payee—say, a merchant—to pull the agreed-upon funds, the merchant submits a request to his own bank providing the customer’s account information and amount. The merchant’s account gets credited for the given amount. The request gets sent in a batch to a clearinghouse, which then processes it and sends the file to the customer’s bank. This bank then posts a debit to the customer’s account and the two banks settle their accounts, which can take one to two business days.
ACH pull, or direct debit, transactions are commonly used for online bill payments and subscriptions. In 2015, more than 25 billion transactions were made on the ACH network, and 62 percent of these were direct debit transactions.
ACH “push,” or credit, transactions, on the other hand, are initiated by the customer to “push” funds directly into a payee’s account. These do not fall under the “direct debit” umbrella but are commonly used in the U.S. for payments such as direct deposits or peer-to-peer transactions.
Other countries also have their own direct debit systems, most notably in the United Kingdom. 80 percent of UK citizens use direct debit to pay at least one regular bill, membership fee, and one-off payment electronically, and the average British consumer has six direct debit connections. The equivalent of a credit, or push, transaction is known in the UK as a “standing order.”
Direct debit is also possible across borders in the European Union, and many countries, such as the UK, maintain two direct debit systems: one for collecting funds in GBP within the country, and one for collecting funds in Euros from outside the border. This system, called SEPA Direct Debit, and introduced last year, has made collecting Euro-denominated funds from international customers easier and cheaper for merchants.
In the United States and abroad, direct debit and ACH pull transactions have a number of advantages. For one, they increase the efficiency of bill payment, allowing consumers to “set and forget” recurring payments, which ensures that payments are always made on time. Moreover, account and routing numbers must only be provided once to the merchant, making the method more secure than other payment methods, such as checks or credit card payments by mail, which require submitting sensitive information on a monthly basis.
Still, there are a number of considerations to keep in mind when making direct debit payments. For instance, even though handing over account and routing numbers just once is preferable to mailing a check, the numbers must nonetheless be given to a third party. This transfer of information brings with it a risk of fraud if the numbers fall into the wrong hands. A push transaction, on the other hand, allows a consumer to control the transaction without surrendering any personal information. Moreover, while a pull transaction can be disputed if it wasn’t authorized or occurred in the wrong amount or on the wrong day, these criteria are narrow compared to a credit card transaction, for example, that can be disputed for many reasons.