Difference Between ACH and Direct Debit (With Table)

Banking in today’s world is an essential function. Long queues and lengthier waiting periods are a thing of the past. Nowadays, financial activities can be controlled from a single app. Furthermore, transactions are handled automatically by the bank for the customers. ACH is an example of this feature and direct debit is one of the components of ACH.

ACH vs Direct Debit

The main difference between ACH and Direct Debit is that ACH is an automated fund transfer method that includes both direct debit and direct credit functions. On the other hand, Direct Debit is used only to make payments automatically. It is one of the components of ACH and performs the ‘debit’ function of all transactions.

ACH or Automated Clearing House is a financial network that is based in the United States. They help in automated fund transfers or electronic payments. It makes the transactions a hassle-free process. It has two components, namely, Direct Debit and Direct Credit. It is an attractive alternative, especially for large businesses, that need to handle funds daily.

Direct Debit is a process of making payments automatically. Also known as auto-pay, it allows users to authorize the withdrawal of money at a regular interval. This reduces the burden on customers as the payments are being done for them over a fixed charge.

Comparison Table Between ACH and Direct Debit

Parameters of ComparisonACHDirect Debit
DefinitionIt is a network that automatically transfers funds from one account to another.It is a component of ACH that handles the payment transactions of accounts.
FunctionIt controls both the debit and credit accounts.It only controls the debit accounts.
Used byIt is used by both the payee and the payer.It is used only by the payer.
ScopeIt has a wide scope.It has a comparatively narrower scope.
Availability It is a network that is based in the United States.This feature is used by all networks worldwide.

What is ACH?

Automated Clearing House (ACH), also known as direct payments, is an automatic fund transfer method. A group of banks in the United States replaced payment of cheques with a centralized version. This gave way to the first clearing house in 1972. This was operated by the Federal Reserve Bank located in San Francisco.

The two components of ACH are Direct Debit and Direct Credit. The former is an automated withdrawal from one’s account whereas the latter facilitates an automated deposit. They are used respectively as a payout and pay-in device.

The working of ACH is quite simple. When a user subscribes to the autopay feature with a party, they send a request to their bank to deduct the amount owed from the user’s bank. The concerned parties are not burdened with this monthly transaction (say salary payment) as their bank settles it between them. If the user has the required amount in his bank, it gets debited.

This facility is an attractive choice for large businesses as they do not have to deal with huge transactions themselves for example paying their employees. As this is an electronic process, they are considered to be reliable.

ACH period may be long. They usually take a few business days for the completion of the transactions. The processing time is three to five working days.

What is Direct Debit?

Direct Debit, also known as a direct withdrawal, is a fund payment technique. It is one of the two components of ACH. It facilitates automatic payment from one bank to another on the instructions of the customer.

It is a better alternative to cash, cheque, or card payments. The payer has to only give their bank details and the particulars of the transaction once. The same transaction gets repeated at intervals without the payer being concerned every time.

In the United States, direct debit is operated under the ACH network. This connects two or more financial institutions of various parties and helps them to coordinate financial transactions among themselves.

Unlike their credit counterpart, direct debit gets processed within the next business day. It is also fairly affordable which makes them more appealing than physical transfers.

They are not only used by business accounts but also by personal accounts. Some of the direct debit uses may include fixed subscriptions and memberships and regular bill payments. The electronic feature makes it more suitable and convenient.

Main Differences Between ACH and Direct Debit

  1. ACH is a clearinghouse that settles the transactions on behalf of the customers. It handles both debit and credit accounts. On the other hand, direct debit settles only the payment side.
  2. The function of ACH is to either make payments or receive funds. Whereas, direct debit only makes payments for the users.
  3. ACH facility is undertaken by both the payee and payer while direct debit is only for the payers.
  4. The scope of ACH is wider as it includes both direct debit and direct credit. Evidently, the scope of direct debit is narrower.
  5. ACH is a US-based facility that was first operated in San Francisco. Whereas, the feature of direct debit is used worldwide.
  6. The time taken to complete ACH may differ from three to five working days. On the other hand, direct debit is processed within one working day.

Conclusion

The merge between financial services and technology has benefitted us immensely. The various banking functions that are available within our palm’s reach are truly commendable. With the new features that are emerging, long waiting periods and queues can be avoided.

ACH and direct debit are two of the many features that have made life convenient. They are safe, electronic, and automated methods that do not need constant supervision of the users. The risk of missing payment deadlines is a thing of the past. Users now need to enter the required details only once. The rest is taken care of by the ACH facility itself.

ACH now handles billions of bills for many customers in the United States. Due to its electronic feature, it is highly reliable. For large companies especially, this is a favored choice as the burden of making payments is being managed for them.

References

  1. https://www.philadelphiafed.org/-/media/frbp/assets/economy/articles/business-review/1994/brja94jm.pdf
  2. https://www.researchgate.net/profile/Hitesh-Tewari/publication/220693934_Electronic_Payment_Systems/links/56470d7508ae451880abcae8/Electronic-Payment-Systems.pdf