It’s increasingly popular to make many purchases via direct debit from your checking account, especially when shopping or paying bills online. This is sometimes called an “electronic check” or “direct debit,” and it works just like any other payment you’d make online. You just supply your account and routing numbers instead of a credit card or debit card number.
These transactions are made possible by the Automated Clearing House (ACH), an electronic network for securely accepting deposits and disbursing payments. ACH is used for many types of money transfers – including direct deposit of your paycheck.
Making payments by letting others pull money from your account is convenient, but it also can be risky. If your account information falls in the wrong hands, fraudsters can use it to make unauthorized withdrawals from your account. The good news is there are things you can do to protect yourself.
There are two basic types of ACH transactions:
- ACH credits. An originating financial institution sends funds to an account at receiving financial institution. This is how direct deposits and online bill pay transactions are processed. ACH credits take 1-2 business days to process.
- ACH debits. A bank or credit union requests funds that it has been authorized to take from an account at another financial institution. This is how your payment is processed when you give your account information to a third party to make a purchase or pay a bill. ACH debits take one business day to process.
There are four ways that consumers commonly use ACH, outlined in the table below. In general, these transfers are free to consumers or have very low fees.
Type of Transaction
Commonly used for
How It's Processed
Cost to You
Risk of Fraud
|Direct Deposit||Receiving payroll checks and government benefits||ACH credit||Free||Low|
|Online bill pay||Household bills such as loan payments, utility bills||ACH credit||Usually free||Low|
|"Electronic check" or "direct debit"||Online purchases, paying bills on biller's website, sending funds to PayPal account||ACH debit||Usually free||Moderate|
|Electronic funds transfer||Sending funds to another individual's account||ACH credit||$3 or less||Low|
Whether the transaction is an ACH debit or an ACH credit, the party initiating the transfer will need two pieces of information about the account on the other end of the transaction. To make an online purchase, for example, you would need to supply your financial institution’s nine-digit routing number and your account number.
If you have a checkbook, you can find the routing and account numbers printed on the bottom of your checks. Otherwise, you’ll need to contact your financial institution for this information.
But don’t type those numbers into an online form just yet. Continue reading to learn how to safeguard your account.
Frank Abagnale is a lecturer and consultant on security issues in the financial industry, but you may know his name from the book and movie “Catch Me If You Can,” which popularized his exploits as a check forger during his youth. Asked what consumers can to do prevent unauthorized ACH debits, Abagnale replied, “To be honest, because of my 40 years of experience working on these threats, I avoid ACH debits.”
Remember that to initiate an ACH debit transaction, you need to hand over your account number and your bank’s routing number, which can be used to withdraw money from your account. NACHA, the not-for-profit association that manages the ACH network, advises consumers to treat these numbers as “sensitive information” and to “safeguard them just like a Social Security Number.” This is not an issue with ACH credits, since when you send money from your account, you do not need to give your account number to anyone.
That said, while ACH fraud does occur, it’s also very rare. According to NACHA data, fewer than 3 out of every 10,000 ACH transactions are rejected because a consumer said the transaction was not authorized.
So what should you do when an ACH debit is the most convenient payment option? It matters who is on the other end of the transaction.
You’re on safer ground when you have an existing relationship with a company, such using an ACH debit to make a mortgage payment. But otherwise, it’s best to exercise caution. For example, NACHA advises that “consumers should never give their bank account numbers to telemarketers, or in response to unsolicited emails.”
Abagnale’s advice? “Know the person with whom you are dealing,” he says. “Fraud happens by incorrectly assuming an unknown party is legitimate.”
Given the risks of paying by ACH debits, it’s important to consider two convenient alternatives.
Let’s say you log into your electric utility’s website to submit a payment online. You’re given the option to enter your bank routing number and account number so that they can process the payment with an ACH debit. Before you key in your account information, let’s compare ACH debits to two other convenient ways to pay.
ACH Debit vs. Credit Card
To pay on the electric company’s website, you probably have the option to use a credit card as well. In both cases, you have to type in account numbers and other information that can be used for fraud if it falls into the wrong hands. So both payment methods may seem equally risky.
There is a difference, though, in the protection you have if you’re a victim of fraud. By paying with a credit card you are protected with $0 liability for any fraud. If you pay with an ACH debit, on the other hand, you probably have a much lower level of protection. By law, you can only be held liable for $50 if you report the fraud in two days or for $500 if you report the fraud in 60 days. Your own bank or credit union may offer a higher level of fraud protection, but that’s entirely at their discretion.
There’s another important distinction: A fraudulent credit card charge affects your available credit, but doesn’t immediately take money from your pocket. An ACH debit, on the other hand, takes real money out of your bank account, and can trigger bounced checks or prevent you from paying important bills.
|Consumer Liability for Fraud|
|ACH debit||$50 if reported in 2 days
$500 if reported in 60 days
ACH Debit vs. Online Bill Pay
Instead of going to the electric company’s website, you can log into your own bank or credit union’s website to pay your bill through online bill pay. In both cases, the payment is processed by the ACH network, but one is an ACH credit and one is an ACH debit. Here’s why that matters:
By using online bill pay, you don’t need to give your routing number and account number to anyone. Your financial institution will be the one initiating the transaction and will not disclose your account number, so you never need to put your personal information at risk.
Letting someone else debit your account, on the other hand, means you need to give them account information, and that account information can be used for fraud if it is intercepted by a third party.
|ACH debit vs. ACH credit|
|ACH debit||You must give your routing number and account number to the payee|
|ACH credit (online bill pay)||No need to give your routing number and account number to anyone|
Furthermore, when you set up the payment with your own bank or credit union, you are in control of when the payment will be made. Requesting an ACH debit – especially a recurring one – can open you up to withdrawals when you don’t expect them and can trigger unintentional overdrafts.
Americans now pay the majority of their bills through some form of electronic payment: online bill pay, ACH debit, credit card or debit card. According to a NACHA survey, 42 percent of bills were paid through the mail in 2012, and that number is shrinking.
The newer forms of payment are appealing because they’re faster and more convenient than sending checks through the mail. But more importantly, they’re also safer.
Pull out your checkbook and take a careful look at the information that’s printed on every check. They not only have your account number and your bank or credit union’s routing number, but they also probably have your full name, your home address and your phone number.
“When you think about it,” observes Abagnale, “checks carry a tremendous amount of information, not only for ACH fraud but identity theft, as well.” NACHA’s advice to consumers is blunt: “The most effective way to safeguard your bank account number is to stop using paper checks.”
In general, paper checks pass through more hands during processing than electronic payments do. They may also sit in a file drawer or warehouse for months or years.
So with all the safer and more convenient forms of payment available today, it’s best to leave your checkbook locked away.
For consumer accounts it’s important to be vigilant:
- Safeguard your account information. Avoid paying by check or ACH debit.
- Carefully review your bank statements. Report any suspicious transactions as quickly as possible.
If you have a business account, you have additional options to protect your funds. Many banks offer tools to combat ACH debit fraud to their business customers. This can include:
- ACH Debit Block. Prohibits all ACH debit withdrawals from the account.
- ACH Debit Filters. Only ACH debit transactions that match criteria you set based on payee, dollar amount, etc., are permitted.
- ACH Positive Pay. Allows accountholder to review ACH debit requests before they are paid.