Difference Between ACH Credit and Debit

The Automated Clearing House (ACH) network is a messaging system that connects financial institutions and enables them to coordinate funds transfers between their customers' accounts. In the United States, direct debits happen via the ACH network. There are two types of transactions in an ACH network: credit and debit.

An ACH credit transaction occurs when a payer initiates a payment from their account to another party's account. This type of transaction is typically used for bill payments, such as utility bills or insurance premiums. When a customer sets up automatic bill pay through their bank, the bank sends an ACH credit request to the receiving institution, which then credits the recipient's account.

On the other hand, an ACH debit transaction occurs when a payee initiates a payment from the payer's account. This type of transaction is typically used for recurring payments, such as loan or subscription payments. When a customer agrees to make ongoing payments for regularly billed services, they sign an authorization form that allows their bank to automatically debit their account on a regular basis.

The process of ACH debit transactions is similar to credit transactions. The payee submits an ACH debit request through an Originating Depository Financial Institution (ODFI) or ODFI-approved processing partner, which in most cases is the customer's bank or a payment processor like PayPal or Dwolla. The customer has previously authorized the automatic debit by signing an agreement.

In the United States, the typical process for ACH direct debit transactions looks like this:

1. The payee submits an ACH debit request through an ODFI or ODFI-approved processing partner.

2. The ODFI rebundles the incoming batches at six set times each business day.

3. The ACH network receives batches containing millions of these requests every hour and settles between RDFIs (Receiving Depository Financial Institutions) and ODFIs accordingly.

4. Once processed, the ACH debit request instructs the ACH network to pull the requested funds from the customer's account at a given time interval.

In summary, while both ACH credit and debit transactions are used for bill payments, the key difference is that an ACH credit transaction initiates payment from the payer's account to another party's account, whereas an ACH debit transaction initiates payment from another party's account to the payer's account.

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