Q: I need to transfer funds between accounts and I’m considering my various options. How are Automated Clearing House (ACH) payments and direct deposits different?

A:  ACH payments and direct deposits both involve the electronic transfer of funds, but there are distinct differences between the two methods. It’s important to know what these differences are before choosing to utilize either transfer method. Let’s take a look at ACH payments and direct deposits as well as their unique characteristics.

What is direct deposit?

Direct deposit is the electronic transfer of funds directly into an individual’s checking or savings account. It’s routinely used by employers to pay their employees’ salaries. Instead of issuing paper checks, employers can electronically deposit funds into employees’ designated bank accounts on payday.

Direct deposit offers several benefits, both for employers and employees. For employers, it eliminates the need for printing and distributing physical paychecks, streamlines payroll processes and reduces administrative costs. From the employees’ side, direct deposit saves them a trip to the credit union and the delay in accessibility of their funds while waiting for a check to clear. They may still need to wait for the direct deposit to completely clear, but they’ll see the funds in their account on payday and they will generally be fully accessible within 2-5 business days. 

What are ACH payments?

ACH payments include a broad range of electronic transactions beyond payroll deposits. The ACH network also facilitates electronic payments like bill payments, business-to-business transactions and person-to-person transfers. It generally takes two to five days for the clearing house to process the transaction.

Unlike direct deposit, which specifically refers to the electronic transfer of funds for payroll purposes, ACH payments can include recurring payments, such as utility bills or mortgage payments, as well as one-time transactions, such as online purchases or charitable donations. However, it’s important to note that all direct deposits are a type of ACH payment, but not all ACH payments are direct deposits. 

What are the primary differences between direct deposit and ACH payments?

There are several key differences between direct deposits and ACH payments, including: 

1. Usage

ACH payments can be used for a large variety of electronic transfers, while direct deposits can only be used for payroll, government benefits and other transactions where money is transferred directly into one’s checking or saving account. Many online businesses and subscription services use the ACH method to collect payment from their customers. 

2. Timing

Direct deposit transactions are typically initiated by employers on payday, with funds deposited into employees’ accounts on the designated pay date. ACH payments, however, can have varying processing times. Depending on the transaction type, there can be a delay of several business days before the payment clears. It’s important to note that ACH transfers classified as ACH debits will process within the next business day to help users avoid an overdrafted account.

3. Authorization requirements

Direct deposit requires authorization from the employer and the employee to initiate the electronic transfer of funds. Employees must provide their account information and authorize their employer to deposit funds directly into their account. In contrast, only some types of ACH payments require authorization from the account holder.

4. Credit vs debit

Another big difference between ACH payments and direct deposits is the type of transactions they cover. While ACH payments can include both a credit (adding funds) and debit (withdrawing funds), direct deposits are only credit payments, in which money is credited to another account through ACH.

ACH payments and direct deposits are electronic methods for transferring funds, and while all direct deposits are ACH payments, not all ACH payments are direct deposits. Use this guide to learn the key differences between these two types of electronic transfers and how to make an informed decision when choosing the method that best suits your needs.