ACH Credit vs. ACH Debit: Key Differences Every AP Team Needs to Know

The distinction between ACH credit and ACH debit is often unclear

Is your AP team using ACH payments correctly to optimize cash flow? If not, understanding the differences between ACH credit and ACH debit can help optimize cash flow, improve reconciliation, and maximize efficiency and control in the payment process.

ACH payments have changed the way businesses handle transactions, offering secure and convenient funds transfers between accounts. With digital payments steadily replacing traditional paper-based methods, more businesses are using ACH payments to improve efficiency in their vendor payments. In fact, 57% of organizations made their vendor payments via ACH, according to the 9th Annual State of AP Report. Despite this widespread adoption, the distinction between ACH credit and ACH debit transactions is often unclear.

This blog explores the key differences between ACH credit and ACH debit payments, explaining their processes, use cases, and benefits for businesses. Whether you’re looking to streamline your AP processes or want a clearer understanding of how ACH payments work, this post will help you understand the distinctions and determine which method is best suited for your business needs.

Key takeaways

• ACH is a popular digital payment method that eliminates manual processing and enhances visibility for accounts payable teams.
• ACH credit and ACH debit are secure electronic fund transfers that differ in their processes and use cases.
• An AP automation solution can support AP teams with vendor onboarding and management to enable seamless ACH payments.

What is ACH?

The Automatic Clearing House (ACH) is a network that facilitates electronic fund transfers between banks and financial institutions in the United States. ACH payments are governed by the National Automated Clearing House Association (NACHA) and occur either by crediting the recipient’s account or debiting the payer’s account for a direct transfer of funds. Since ACH payments are entirely electronic, they’re more secure and efficient than traditional paper-based methods like checks or cash.

The rise of digital payments like ACH allows AP teams to streamline and expedite the vendor payment process.

While ACH credit and ACH debit transactions both use the ACH network to transfer funds electronically, there are a few key differences for AP teams to consider.

What is ACH debit, and how does it work?

An ACH debit is a “pull” transaction in which money is withdrawn from the payer’s account and transferred to the recipient’s account. ACH debits are often used for recurring transactions, like office rent or utility payments.

Here’s a step-by-step look at the ACH debit process:

1. The recipient obtains authorization to withdraw funds from the payer’s account, usually through a signed agreement or online consent form.
2. After authorization, the recipient submits payment information—like transaction amount and payer’s account details—to their bank, known as the Originating Depository Financial Institution (ODFI).
3. The ODFI sends requests in batches to the ACH network, which routes them to the payer’s bank or Receiving Depository Financial Institution (RDFI) for processing.
4. The RDFI verifies the account details before debiting the specified amount to the receiving account. Settlement is typically completed within 1-3 business days.

In an ACH debit, the party receiving payment initiates the transaction rather than the payer. Unlike debit cards, ACH debits don’t require a card number or issuer network or carry a transaction fee based on the total transaction amount.

What is ACH credit, and how does it work?

During an ACH credit transaction, money is “pushed” from the payer’s account to the recipient’s account. ACH credits are commonly used for employee payroll or government payments like benefits and tax refunds.

ACH credits occur via the following steps:

1. The payer sends payment information, like the payee’s account details, transaction amount, and target settlement date, to their bank or ODFI.
2. The ODFI submits these requests in batches to the ACH network, which routes the requests to the recipient’s bank or RDFI.
3. The RDFI processes the transactions and releases funds to the recipient’s account if there are no errors. Once the transaction is processed, it may take up to two business days for funds to reach the recipient.

Unlike during an ACH debit transaction, the payer initiates an ACH credit to transfer funds to the receiver.

Differences between ACH debit and ACH credit

ACH debit and ACH credit are both convenient digital payment options but differ in terms of their process and use cases for businesses. Some distinctions include:

• How they work
• When they’re used
• Authorization process
• Control and security
• Settlement time

Let’s compare ACH debit vs. ACH credit transactions in greater detail:

How they work

A key difference between ACH credit and ACH debit is the party that initiates the transaction. In an ACH credit, the payer initiates the transfer, and money is “pushed” from the payer’s account to credit the recipient’s account.

In contrast, an ACH debit is initiated by the party receiving the money. Money is then “pulled,” or withdrawn, from the payer’s account and sent to the recipient.

When they’re used

ACH credit and ACH debit are leveraged for different transaction types. An ACH credit moves funds directly to a recipient’s account and is often used for payroll deposits or vendor payments. For example, a small business might use ACH credit to pay monthly supplier invoices.

Common use cases for ACH credit

• Payroll processing for employees
• Vendor payments (especially recurring or regular payments)
• Tax refunds or government disbursements

ACH debit transactions are typically used for loan or subscription payments where the recipient is authorized to collect payment by withdrawing funds from the payer’s account.

Common use cases for ACH debit

• Subscription services (e.g., SaaS companies)
• Utility payments (e.g., electric, water, internet)
• Loan payments or membership fees

Authorization process

In an ACH credit transaction, the payer authorizes the financial institution to debit their account for a specified amount and transfer funds to the recipient. This is typically executed through an ACH credit authorization form.

For an ACH debit, the recipient needs explicit authorization from the payer to withdraw funds from the payer’s account. The payer provides signed consent, usually through an ACH debit authorization form, which remains valid for ongoing withdrawals unless revoked.

Control and security

An ACH credit gives the payer control over payment timing and amount, while an ACH debit gives control to the payee to initiate withdrawals.

ACH credits are often seen as more secure since the payer determines when to transfer funds, reducing the chance of any unauthorized withdrawals by the recipient.

Did you know? An AP automation platform like MineralTree can streamline payment processes and improve security by adding critical layers of protection. Automated fraud prevention features, such as cross-checking vendor details and verifying payment information, reduce the risk of errors and unauthorized transactions, ensuring that your ACH payments are processed securely and reliably.

Settlement time

ACH credits tend to settle within 1-2 business days, while ACH debits may take up to 3 business days to settle.

However, both ACH credit and ACH debit process faster than traditional paper checks, helping support on-time payments. Some AP solutions also offer same-day ACH, which enhances cash flow management and control over days payable outstanding (DPO).

The key differences between ACH debit and ACH credit

The benefits of ACH payments for businesses

ACH payments provide businesses with a host of benefits. By relying less on checks and manual processes, they can cut costs, improve cash flow, and enhance security. Whether using ACH credit or ACH debit, AP teams gain greater control over payment schedules and reduce the risk of fraud and human error. Let’s examine the specific benefits that ACH payments offer below.

• • Faster transactions: ACH payments are typically quicker than paper checks, resulting in faster payments to vendors and improved cash flow. The State of AP Report indicates that buyers want to make more digital payments, and 80% of vendors want to receive more digital payments, including ACH and cards. The research also shows that ACH (55%) and checks (57% of organizations made more than 25% of their vendor payments via check) were by far the payment of choice over the last year.
    

• Lower transaction costs: ACH payments often have lower fees compared to traditional payment methods like wire transfers or checks.
• Reduced fraud risk: ACH payments offer better security and fraud protection mechanisms than paper-based methods.
• Improved reporting and reconciliation: ACH payments generate digital records, which can simplify tracking and reconciliation for AP teams.

Did you know? According to the State of AP Report, less than 20% of businesses have fully automated their AP process, indicating a significant opportunity for growth in ACH adoption.

The direct debit vs. intermediary account model

Many AP teams leverage an AP automation solution to streamline the ACH payment process. However, not all solutions afford businesses the same control over payment timing, so it’s essential to understand the differences between a direct debit and an intermediary account model.

Some AP automation solutions use intermediary accounts or For-Benefit-Of (FBO) accounts to transfer funds. Money is debited from the customer’s bank and held in the FBO account before being transferred to the vendor. Typically, a single debit will include funds to pay several vendor invoices. For example, if you authorize $30,000 to be debited for 10 payments, one ACH debit for $30,000 will be deducted from your account.

In this structure, businesses relinquish control over when funds are moved from the FBO account to vendors, which can extend payment timelines and potentially strain vendor relationships. Additionally, since multiple payments are deducted in a lump sum, it is challenging for AP teams to accurately reconcile bank statements and payment records.

By comparison, an AP automation solution employing direct debit funding will only debit a payor’s account when payments are made. For an ACH credit, for example, the payor’s account will only be debited when the credit is initiated. This provides better control over payment timing and cash flow and enables faster payments since funds go directly to vendors. The direct debit process also produces a 1:1 transaction record for each payment, helping simplify the reconciliation process.

Selecting an AP automation solution with a direct debit model can help AP teams control cash flow and execute timely ACH transactions.

Take the next step! Simplify your ACH payments with MineralTree

Given the inefficiencies, security risks, and high processing costs of paper-based payments, it’s no surprise that electronic payment methods like ACH payments have gained popularity for vendor transactions. With both ACH credit and ACH debit options, businesses can select the funds transfer method best tailored to their needs.

MineralTree’s end-to-end AP automation solution streamlines ACH payments (processed as ACH credits) and makes them more efficient and secure. The platform also automates check and virtual card payments (processed as ACH debit transactions) to reducemanual errors and improve reconciliation. It also simplifies vendor onboarding by securely storing ACH payment information, making it easy to pay vendors directly. With the ability to schedule same-day ACH transfers, MineralTree ensures timely payments, while its built-in fraud prevention features guarantee security. Seamlessly integrating with your accounting systems, MineralTree optimizes the entire payment workflow, so AP teams spend less time on administrative tasks and can focus on strategic initiatives.

Schedule a demo to learn how MineralTree can help you leverage the convenience of ACH payments.

FAQs on ACH payments

Tl;dr? If you’re short on time, the frequently asked questions below provide a quick snapshot of what you need to know about ACH credit vs. ACH debit.

1. Does MineralTree process ACH payments as ACH debits or ACH credits?
   MineralTree processes direct ACH payments to vendors as ACH credits. Payments executed from MineralTree via check or virtual card will initiate ACH debits from the payor’s account once the check has been deposited or the card number has been processed by the vendor.
2. How secure are ACH payments?
   ACH payments are regulated digital transactions, making them generally safe and secure. Nonetheless, businesses must stay alert to the potential for ACH fraud.ACH payment scams may involve a fraudster impersonating a vendor or using stolen account details to redirect or initiate a fund transfer to an unauthorized account. MineralTree’s AP automation solution offers fraud protection measures—like automatic cross-checking of vendor information—to reduce the risk of ACH fraud.
3. What are the benefits of ACH payments?
   ACH payments offer several advantages, including faster transaction speeds, improved cash flow management, and lower processing costs than traditional methods.With an AP automation solution, ACH payments can be automated and tracked to ensure timely vendor payments and simplify the reconciliation process for AP teams.
4. What types of businesses benefit most from using ACH payments?
   ACH payments can benefit businesses of all sizes, but they’re particularly advantageous for companies with recurring transactions, such as subscription services, utilities, and payroll. These businesses can streamline their payment processes, reduce transaction costs, and improve cash flow management.
5. Can ACH payments be reversed?
   Yes, ACH payments can be reversed under certain conditions. For example, if a transaction was made in error or if unauthorized access was granted to the payer’s account, the payer can request a reversal. However, the process and timeline for reversals may vary depending on the bank and the reason for the reversal.
6. How do ACH payments compare to wire transfers in terms of cost and speed?
   ACH payments are generally less expensive than wire transfers but typically take longer to process. ACH transactions usually cost between $0.20 and $1.50 per transaction, while wire transfers can cost $10 to $35 or more. However, ACH payments typically take 1-3 business days to settle, whereas wire transfers can be completed within hours or even minutes. Businesses often prefer ACH for regular, high-volume transactions, while wire transfers are better suited for urgent, high-value, or international payments.
7. How long do ACH payments take to settle?
   ACH credits typically settle within 1-2 business days, while ACH debits can take up to 3 business days.
8. Can international payments be made using ACH?
   Standard ACH payments are limited to transactions within the United States. However, there is an International ACH Transaction (IAT) system that allows for cross-border payments to select countries. IATs are subject to additional regulations and reporting requirements. For most international payments, businesses typically use wire transfers or other international payment methods.