Function

• A direct debit must be authorized by the account holder and may be canceled by the account holder by communicating with both the bank and the vendor. The account holder must monitor the account regularly to assure that funds are available to cover the automatic payment; otherwise, non-sufficient funds or overdraft charges may be incurred at the origin account banking institute. The vendor may also assess fees and penalties for non-payment if the charge is declined.
  
  

Why?

• Using direct debit helps consumers avoid late fees, missed payment penalties and saves the time required to write and mail checks each month. With certain vendors, the establishment of a direct debit garners perks such as a reduction in interest rates.
  
  

How It Works

• When a direct debit is initiated, funds are taken from the origin account and transferred to the appropriate vendor on the scheduled date without the origin account holder having to take any additional action. While the account holder remains responsible for assuring that adequate funds are in the account, he is no longer held to remembering due dates and writing checks.
  
  

Facilitated by ACH

• Direct debits are facilitated by Automated Clearing House, an automatic electronic system that connects all of the financial institutions in the nation in order to facilitate the transfer of funds from consumers to businesses, from businesses to consumers and from businesses to other businesses. Automated payments are held in ACH until cleared to be transferred to the end banking destination.
  
  Consumers who do not closely view their bank accounts may not even know the process is conducted by ACH and may not even understand how the process works.
  
  

Development

• Initially, ACH debits were used in place of paper checks, but as the system grew in popularity and as Internet technology emerged, other applications of ACH included online bill payments and the development of online banking institutions, including PayPal, which is a form of online ACH, transferring funds between traditional banking institutions (banks and credit cards), processing funds as an intermediate.