Automated Clearing House (ACH) Debit | B2B Finance Glossary

What Is An Automated Clearing House (ACH) Debit?

An Automated Clearing House (ACH) debit is a certain type of ACH transfer where funds are pulled from a bank account. In other words, the individual or business making the payment gives the receiver permission to collect funds from the payer’s account whenever that payment is due.

ACH stands for Automated Clearing House: the official electronic network that initiates payments from one bank account to another. It connects over 10,000 banks and financial institutions in the US. ACH payments are run by the National Automated Clearing House Association (NACHA) and include different payment categories such as direct deposits, peer-to-peer payments, bill payments initiated by e-commerce platforms, and ACH payments initiated by paper checks.

What Is The Difference Between A Direct Deposit And An ACH Debit?

ACH payments can be split up into two categories: direct deposits and direct payments. Direct payments are another name for ACH debits. The key difference between direct deposits and ACH debits is that direct deposits involve funds being pushed into an account. In contrast, direct payments (ACH debits) involve funds being pulled out of an account.

What Are The Different Types Of ACH Debits?

The ACH network supports many different types of ACH debits. Each of these forms of debits are identified by its own Standard Entry Class (SEC) code that represents a specified ACH debit use case. For example, some ACH debit use cases allow recurring payments, while others only make it possible to send one-time payments.

Here are the primary ACH debit types for recurring payments:

• TEL (Telephone Initiated Entry). This is a type of ACH debit that’s authorized by phone.
• PPD (Prearranged Payment and Deposits). This is an ACH debit that’s initiated via a paper-based customer authorization.
• WEB (Internet Initiated Entry). This is a type of ACH debit that is authorized online.

Here are all of the different kinds of ACH debits:

• Accounts receivable conversion. This type of ACH debit is used when a payment is received for an account receivable in the form of a check. It makes it possible for this paper check to be converted into an electronic ACH payment.
• Back office conversion. A Back Office Conversion is a form of ACH debit used when in-person purchases are made using a paper check that will later be processed in the back office. Back Office Conversions allow paper checks to be converted into an electronic ACH payment.
• Cash concentration or distribution. This type of ACH debit is used largely for cash management purposes. Cash concentration or distribution can be employed when the payment receiver takes the payment from another business or a related entity.
• International ACH transaction. An International ACH transaction is an ACH debit that applies to all collection methods where the ultimate beneficiary of the debit is a business based outside of the US.
• Machine transfer entry. A Machine Transfer Entry is a form of ACH debit used when the debit is initiated at an electronic terminal.
• Corporate trade exchange. This type of ACH debit is used when a business receives a payment from another business; it allows the merchant to add multiple addendums to the payment to cover a number of invoices without the risk of losing critical information.
• Internet Initiated Entry. An Internet Initiated Entry is an ACH debit used when the debit is authorized online.
• Telephone Initiated Entry. This form of ACH debit is used when the debit is authorized by phone.
• Check Truncation. A Check Truncation is an ACH debit used when a debit is initiated under a Check Truncation Program (a check clearance system that digitizes paper checks into substitute electronic forms for transmission to the paying bank).
• Point of Purchase. This type of ACH debit is used when converting a check given to the merchant at the point of purchase or a manned bill payment location. It’s used in instances where the check will be processed immediately.
• Point of Sale. A Point of Sale is an ACH debit used when the debit is initiated at an electronic terminal for a point-of-sale transaction.
• Re-presented Check Entry. This form of ACH debit is used in collecting a debit from a check that was returned due to insufficient funds.
• Prearranged Payment and Deposits. This type of ACH debit is used when the debit is initiated by a paper-based customer authorization system.
• Shared Network Transaction. A Shared Network Transaction is an ACH debit used when the debit is initiated at an electronic terminal for a point-of-sale transaction.