Business & Finance Personal Finance

How Do Automatic Bank Drafts Work?

    Definition

    • An automatic bank draft is a prearranged withdrawal of a specific amount of money from your checking or savings account that is paid to a particular vendor or merchant. You may establish a recurring automatic bank draft to pay regular bills, such as utility bills, or a one-time automatic bank draft to pay obligations such as an annual income tax obligation. Automatic bank drafts are set up directly through individual vendors, utilities or merchants, or as collective payments through your bank. Once arranged, an automatic bank draft takes place with no further action from you, unless you withdraw your authorization in writing and in advance of a payment.

    Process

    • The bank transmits funds from an automatic bank draft through the ACH network, from your bank account to the specified individual, merchant or vendor. If you use an automatic bank draft to pay a bill, you may still receive a paper or electronic bill for your records. With most automatic bank drafts, if the designated date falls on a weekend or holiday, the actual payment takes place on the following business day.

    Automatic Bank Drafts versus Automatic Check Processing

    • Automatic bank drafts differ in several respects from electronic checks. Electronic checks may begin as paper checks that you present to a merchant at a point of sale; automatic bank drafts never do. When electronic check payments occur over the Internet or by phone, you must initiate the specific transaction and, in many cases, provide a check number. Even if you make several electronic check payments to the same merchant or schedule an electronic check payment for a future date, you must initiate the payments separately.

    Problems

    • If your bank account does not have sufficient funds to cover the automatic payment, your bank, the merchant or both may charge a fee for a returned payment. If you set up automatic bank drafts via the Internet, you risk unauthorized access to your account. Unscrupulous telemarketers and other scam artists may trick you into disclosing your banking information, then withdraw funds from your bank account without your knowledge through "demand drafts," which are similar to checks but do not require a signature. If you are a victim of unauthorized access or automatic bank draft scams, the Federal Trade Commission advises you inform your bank immediately, to increase your chances of recovering your money.

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