Question

How do automatic bank drafts work? Do you think this is an effective method or have you worked with something more simple or complicated than this way presented?

Answer 1

Automatic bank drafts are part of the electronic banking system, as automatic bank drafts permit two parties to exchange funds through a paperless process. No check or even a debit card is needed to complete the transfer

Automatic Payments

When used synonymously with automatic payment plans, automatic bank drafts are a convenient and paperless means of paying bills whereby funds are debited from one account and credited to another. For instance, a consumer may use automatic bank drafts to pay the monthly mortgage payment or other regular bills such as utilities, installment loan payments and recurring insurance premium payments. Funds can then be transferred through the Automated Clearing House system.

ACH System

The Automated Clearing House computerized system processes electronic debit and credit transactions for financial institutions with the assistance of the Federal Reserve. Through the ACH system, funds are moved quickly from one account to another electronically with no paperwork. The process saves both businesses and consumers money over the long run. Companies are relieved of the expense of billing and collecting payments, and consumers don't have to spend money on paper checks and postage stamps.

Terminology

A business wanting to accept automatic bank drafts for ongoing regular payments or pay bills using automatic bank drafts can set up the process with the appropriate financial institution. Consumers offered this option to pay bills can then authorize the process and begin regular bank drafts to pay recurring bills. The account holder who authorizes the automatic bank draft is called the drawer. The bank that honors the authorization is the drawee or drawee bank. When a bank account holder signs the authorization, the drawee is given permission to pay the draft to a third party

Often, to begin the process, the bank account holder must provide the third party or payee with a voided check along with a signed formal authorization form. The payee then presents the authorized request to the bank or financial institution. It may take several weeks before the first automatic bank draft is completed. Thereafter, the drafts generally work on a set schedule. The company often sends the customer a notice prior to requesting the payment from the financial institution if the amount varies from month to month. The notice lets the customer know the amount to be withdrawn from the checking or savings account and the date on which the transfer will take place