Differences Between ACH Payments and Direct Deposits

Q: I need to transfer funds between accounts, so I’m considering my options. How do Automated Clearing House (ACH) payments and direct deposits differ?

A:  ACH payments and direct deposits both involve the electronic transfer of funds, but there are differences between the two methods. Let’s take a look at ACH payments, direct deposits and 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 employee salaries. Instead of issuing paper checks, employers can electronically deposit funds into employees’ designated accounts on payday.

What are ACH payments?

ACH payments include a broad range of electronic transactions beyond payroll deposits. The ACH network also facilitates 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.

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

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

• 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 account. 

• 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.

• Authorization requirements

Direct deposit requires authorization from the employer and the employee to initiate the electronic transfer of funds. In contrast, only some types of ACH payments require authorization from the account holder.

• Credit vs debit

While ACH payments can include both credit (adding funds) and debit (withdrawing funds), direct deposits are only credit payments, in which money is deposited to another account through ACH.

Use this guide to learn the key differences between these two electronic transfers and how to make an informed decision when choosing the method that best suits your needs.