Learn the basics: ACH and direct deposit
Sure, you’ve used electronic banking in the past. Now, it’s time to understand what’s really going on.
Meta description: Don’t be in the dark about electronic deposits and withdrawals. This quick tutorial will help you understand them.
If you’re owed money from an employer, from a significant financial transaction, or for some other reason, you know how convenient is it to have those funds deposited right into your bank account, no cash required. It is also convenient to electronically transfer money that you owe to someone else. As you use this service however, you may just appreciate that the funds are changing hands without giving any further thought to the mechanics behind the transfer.
Not understanding what’s happening with any part of your banking, including how your deposits and withdrawals are made, just isn’t the best way to go. To help, we’ve got information on what’s really involved.
First step: Understanding ACH basics
In the twelve months of 2018, consumers made more than 28 billion electronic payments through the ACH network.
ACH is the nickname for the cash-free process that sits behind most electronically processed fund transfers. The abbreviation stands for Automated Clearing House, the network that most of the funds are transferred through. The network is widely used and very popular. In fact, during the twelve months of 2018 consumers made more than 28 billion electronic payments through it.
To facilitate these transfers, the organization or individual that is requesting payment needs specific information from the bank that the money will be coming from. You’re probably already familiar with what these are: the name of the financial institution providing money, the type of account the withdrawal will come from and go to, and account numbers. These requirements are fairly common sense, right?
There are a couple of circumstances when financial institutions may need slightly different types of information. One of these happens if an ACH transfer is processing a check electronically, specifically converting the paper representation of cash to an electronic one. In such a case, a bank may also need a check number from a voided check that the check holder will make note of in their ledger. Once that information is in place, the money changes hands electronically just as with other electronic processes.
How electronic payments work better than cash
ACH transaction records aren’t just more consistent, they’re often more reliable. There’s simply less possibility for human error or for paper checks to be lost in transit.
There’s a reason that lots of people prefer electronic payments over cash. The most obvious one is based on the fact that because the processes are electronic they draw on less physical resources like paper and ink. ACH transactions also generally provide for a more consistent base of transaction records, as everything is reliably noted in computer logs every time without fail. These transaction records aren’t just more consistent, they are noted with less possibility for human error or for paper checks to be lost in transit.
Another significant advantage to the system is that with electronic deposits things are completed faster than with manual, paper-based processes. The data moves quickly from one institution to another with no paper checks needing to be received through the mail, checked, and recorded into a system. Funds are not only credited to the recipient in a day or two, but they’re also debited from the payer’s accounts more quickly too. The lack of lag time keeps everyone’s records more accurate.
Lastly, as it turns out, many times ACH transfers are a less expensive way for businesses to receive payments from their customers, particularly recurring payments, than other forms of payments like credit cards. In fact, sometimes there’s not a fee for paying through an automatic transfer (which makes it similar to paying with cash.) The process has advantages for bill-payers too, because they can automate payments. This means that there’s one less task for them to do each month.
One of the most common uses for ACH transfers are direct deposits for payroll and other benefits
With all of the advantages of ACH transfers, it is not surprising that businesses and individuals use the system widely. One of the most common of these uses is for payroll direct deposits. In fact, this use of the ACH process is so common that most people mistakingly assume it is a system of its own. It’s not.
The payroll direct deposit process is run through an ACH system rather than running all on its own. That’s why when you sign up to receive it your payer requests all of the same information required for other kinds of ACH payments.
Just about any form of income that someone could receive from another entity can be processed electronically.
As you might expect, there’s a wide range of income payment systems that now use direct deposits. These include both traditional employers and contractors. However, these also include other income sources like insurance payroll replacement programs, social security payments, unemployment payments, child support payments, medical malpractice system payments, and other legal settlement payments. In fact, just about any form of income that someone could receive can be processed electronically.
Other uses of ACH transfers
In addition to payroll deposits, plenty of other billing systems use ACH. If you regularly pay your bills (or rent) electronically, then your funds are withdrawn from your account using the ACH process. If you’ve ever made a phone payment for a bill or for a credit card that’s been directly withdrawn from your checking account, this process was also likely to have used ACH.
The risks of using ACH transfers
Keep in mind, if you rely on ACH transfers to automate bill payments, you’ll need to be on top of the fund balance that’s in your account.
Though there’s a lot of advantages to using electronic fund transfers, the system isn’t without some risks and drawbacks. For starters, if you rely on ACH transfers to automate bill payments, you’ll need to be on top of the fund balance that’s in your account. Because you don’t physically have to write a check or hand someone cash for your payments, you’re not going to be automatically aware if you’re short on funds to cover it. If you accidentally overdraw your account you’ll have to pay insufficient funds fee and other charges.
In addition, there can be weekly or monthly limits that are placed by your financial institution on the amount of money that you’re allowed to move between accounts. If you have reached these limits and haven’t realized it, you’re not going to be able to make payments like you’d expect to. A final drawback to the system is connected to how it works internationally. If you need to transfer or receive funds across international boundaries, you should check with your financial institution so that you’re clear on how things will proceed.
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