ACH Debit vs ACH Credit: What’s the difference?

What types of payments are made via ACH credit? ‍

ACH credit is commonly used for vendor payments, direct deposits, and other recurring payments. The government may use it to send social benefits to citizens, for example, while a business can pay for goods and services. How about ACH credit vs direct deposit? Direct deposit, which is also a form of ACH credit, is often used by employers to pay salaries.

ACH credit is the most common type of ACH for business-to-business (B2B) transactions, and it’s also used by Melio, the digital accounts payable tool.

Benefits of ACH credit

There are several reasons why ACH credit payments are so popular for business payments, including vendor payments and salaries. Firstly, ACH credit payments typically cost less than wire transfers or credit card payments. For businesses with a lot of outgoing payments and bills, this can save significant amounts on transaction fees.

ACH payments are processed through the secure ACH network and are much safer than traditional paper checks, which can easily get lost, forged, or stolen. Another huge advantage is the speed of ACH credit. These payments are processed quickly, within 1-3 business days usually, while checks and wire transfers take far longer. 

Finally, ACH credit transactions are automated, so they are extremely convenient for busy teams. ACH payments can be scheduled in advance for automatic processing, saving the time and energy of manual payments.

What types of payments are made via ACH debit?

ACH debit is typically used for recurring payments where the payor has authorized the payee to draw funds from their account. For example, ACH debit is used for rent and utility bills, loan repayments, subscription or membership fees, insurance policy payments, and tax payments. 

Benefits of ACH debit

ACH debit enables automatic, scheduled withdrawals so that recurring payments are made without the need for manual intervention. For businesses, this means payments are received automatically on a regular schedule, improving cash flow management. For the payor, this reduces the risk of late or missed payments, so they can avoid late fees and maintain a good payment history with the business.

Moreover, ACH debit transactions are often quicker and always less expensive to process than paper checks or credit card payments, which helps businesses reduce transaction fees and administrative overheads.

ACH credit payment flow

A business receives goods from a supplier. The business will now pay the vendor via ACH credit payment:

From the business’s side (the payor): 

• The business receives an invoice from the vendor and initiates an ACH credit payment. 
• The business provides the transaction details to their bank, including the vendor’s bank account information, payment amount, and date. 
• The business’s bank sends the payment instructions to the ACH network for processing. 
• At the scheduled date, the business’s bank account is debited for the payment amount.

From the vendor’s side (the payee):

• The vendor is notified by their bank that an invoice payment has been initiated by the business.
• On the scheduled date, the ACH network processes the transaction and credits the vendor’s bank account. 
• The vendor’s bank confirms that payment was received, and the funds are available for use.

ACH debit payment flow

A utility company charges a customer on a monthly basis for services provided. The customer pays via ACH debit payment:

From the company’s side (the payee):

• The company has been previously authorized by the customer to withdraw funds from their bank account. For example, a customer completes a form authorizing a gas company to take payments on a monthly basis from their account. 
• At the appointed date, the company initiates the ACH debit payment by submitting a request to their bank to collect the funds from the customer’s account. 
• The company’s bank sends the debit request to the ACH network for processing.

From the customer’s side (the payer):

• An ACH debit is initiated by the company to draw funds from the customer’s account. In some cases, the customer may be informed of this via email or SMS notification. Often, there is no notification and the payment is simply viewable on the bank statement after the fact. 
• The customer’s bank verifies the authorization and processes the payment.
• The customer’s bank account is debited for the specified amount, and the funds are transferred to the company’s account. The transaction is now complete.