Automated Clearing House (ACH) or direct payments is an electronic model of a bank to bank money transfer mechanism which was introduced in 1974. It is run by the National Automated Clearing House Association (NACHA). ACH payments enable direct money transfer from one bank to another without any paperwork, payment slips, checks, or cash. It is a reliable and efficient mode of money transfer that is considered to be one of the safest payment systems.
ACH system is used for making low-volume transactions that are not urgent. There are a number of ACH systems around the world, in India, the ACH system is monitored under the National Automated Clearing House and National Electronic Funds Transfer.
An ACH debit transaction is adopted by entities, businesses, or individuals who plan on doing business for a long period of time. In an ACH debit, the payment is initiated by the payee to receive payments that involve direct deposits made for recurring transactions.
You may not know but many of us already must have been interacting with this system for some time without being aware of it. Some of the most common usages of ACH debit transactions are insurance payments, loans, mortgages, PF transfers, pension deposits, etc.
These are some recurring transactions that work just like the subscription process where the funds are transferred directly from your bank account to the receiver's account, transferred within 2-3 business days and the money travels electronically through the safe network of ACH.
An ACH debit mandate is a process that is set up to make recurring payments to a specific government body, financial institution, or any service provider that works on a subscription basis. In the ACH debit mandate, you register yourself as a consumer by providing your bank details and authorization to collect payments to the receiver or payee. Once you are ACH debit mandate registered, the payments get auto-debited to the billing company from your bank account on the fixed date of settlement.
ACH debit transactions are an electronic transfer of funds from one bank account to another through a secured ACH network without the use of any paperwork or documents. In an ACH debit transaction, the payee initiates the request to receive payment for an already agreed upon service.
Here is a simple framework to explain how the process works:
1. The payee initiates the payment request via their bank (originator) also known as Originating Depository Financial Institution (ODFI) by providing the account of the payer. The details include the payer's name, the requested amount, the categorization code, and the agreed date of settlement.
2. The bank then sends the payment request to the ACH network for processing and collection of funds to the payee's bank (receiver) also known as Receiving Depository Financial Institution (RDFI).
3. The ACH network receives a ton of payment request messages daily, thus it takes 2-3 business days to batch the payment request that is expected from different financial institutions. After batching the messages, the ACH network sends the request to the institutions to collect payments.
4. The payer's bank then sends the requested amount electronically to the ACH network that further transfers it to the payee's account after charging a minimum commission amount.
5. In case of error, the payer's bank/financial institute issues an ACH debit return with the error code to rectify any discrepancy.
In simpler banking terms an ACH debit payment return is exactly like a bounced cheque. The ACH debit return occurs in case the system encounters an error. There are multiple errors that could lead to ACH return but the most significant error is insufficient funds in the payer's account that could not meet the payee's requested amount.
The payee (receiver) on account of issues can reject the payment request by sending the originator an ACH return by stating the 3-digit error code with the reason for rejection of the payment request.
The process of ACH debit return between the ODFI and the RDFI is controlled completely by the ACH networking system.
In most cases, the ACH return can be caused due to simple reasons like misspelled name of the account holder. In such minor cases, there is nothing to worry about.
But there are cases of unauthorized collection of payments that need reporting and are considered serious offenses.
An ACH debit return charge is demanded by the bank or service provider in case of an ACH return. The ACH return charges vary depending upon the amount of payment that was initially requested.
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