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ACH Withdrawal – ACH Debit vs ACH Credit

What is ACH Withdrawal?

ACH WithdrawalAn ACH withdrawal is when funds are electronically pulled directly from a checking or savings account.  It can be for the purpose of making bill payments or purchases. ACH Debit happens when the payee requests to draw funds from the payer’s account via the ACH network. On the other hand, ACH Credit happens when the payer initiates a direct deposit to the payee’s account. An ACH withdrawal can be initiated by contacting your financial institution online or by phone.  It does not require the use of a debit or credit card.

Most people already use ACH withdrawal for payment, although you might not be familiar with the term. Often, employers pay wages through direct deposit.  Or consumers pay bills electronically out of checking accounts.  In these cases, the ACH network is often responsible for those payments.

ACH Withdrawal – What Does ACH Mean?

The term ACH has been around for nearly fifty years. In the late 1960s, the banking industry was swamped with paper.  The volume of paper checks was surpassing their ability to process and clear them. To combat the issue of paper checks, banks began looking for possible solutions. It was ultimately decided the best way to handle it was to create an electronic payment processing system.  The system was referred to as the ACH, or Automated Clearing House.  The first ACH association was formed in 1972.  It was run by the Federal Reserve Bank of San Francisco.

Since then, the ACH network has grown into a huge, centralized electronic payment system.  The network handles billions of transactions every year. In 2019 alone, the ACH network processed 24.7 billion electronic payments. This is according to NACHA, the National Automated Clearing House Association.  The ACH network is a smashing success.  Still, many people are unaware of the relative benefits and pitfalls associated with ACH transactions. Depending on the context in which they are used, switching to ACH can save on labor and processing costs.

How Does an ACH Withdrawal Work?

On the surface, ACH payments are just like any other electronic or credit card payment. They are quick, reliable, and paperless. What differs, is that an ACH withdrawal is funds pulled directly from a checking or savings account.  There are two types of ACH withdrawal – credits and debits. Each involves moving funds directly from one bank account to another. The only difference is who initiates the transfer.

ACH Withdrawal via ACH Credit

An ACH credit is initiated by the payer. Funds are pushed electronically from the payer’s account to the recipient’s account. A common example of this is direct deposit. A business pushes funds from its account into an employee’s account.

ACH Withdrawal via ACH Debit

An ACH debit is initiated by the payee. The payee sends a request via the ACH network to pull funds from the payer’s account. A common example is automatic bill payment for utilities, insurance, loan payments, etc.  All authorization and processing are handled by the ACH network.  This makes it quick and easy for both the payer and the payee. The benefits and costs of an ACH withdrawal depend on the context in which it is being used.

ACH Withdrawal: Good Features

  • Low Fees – ACH withdrawal fees are typically lower than those of credit card and wire transfers. Depending on the payment provider, you will be charged a flat-rate fee or a percentage of the transaction amount. Flat rate fees can range anywhere between $0.25 to $1.50 per transaction.  Percentage fees are typically between 0.5% and 1.5%. For example, if you’re paying 15 vendors $1000 per month with a card that charges a 2.9% transaction fee, it will cost $435 per month. On the contrary, if you were paying the same people via ACH transfers at a rate of $1.00 per transaction, then it’s only going to cost you $15.
  • Low Maintenance – ACH transfers are easy to initiate and work great for recurring payments. Once the transfer is set up, neither the payer nor the payee has to worry about it again. Additionally, unlike credit cards, ACH transfers use bank account information. Bank account numbers and routing numbers don’t expire or change as frequently as credit cards do. This reduces administrative costs of maintaining and updating card information and chasing down late or missed payments when cards expire.
  • Process Automation – Having an accounts payable clerk manually processing and chasing down invoices can be cumbersome and costly. Fortunately, there are platforms available that can automate ACH transactions. This greatly reduces processing time and workload. For growing companies, automation helps prevent bottlenecks as the volume of transactions increases.

Source:tipalti.com

ACH Withdrawal: Not-So-Good Features

  • Security – ACH withdrawal – specifically a debit, pose a small risk to your private information. In an ACH debit, the payer shares their banking information with the payee. While you only have to pass the information one time, there’s still a risk of the information falling into the wrong hands. Many banks offer additional fraud filters for a small fee that can help mitigate some of this risk.  However, the best way is to make sure you are familiar with who is getting the information. It’s also a wise idea to make sure that bank accounts with large balances are kept safe.  You can separate the accounts you are using to pay third party vendors. ACH credits, on the other hand, are initiated by the payer. That means, there is no need to pass banking information on to the payee.
  • International Transactions – ACH payments work great when transferring funds between two entities in the U.S. The process is cheap, quick, and seamless.  However, other countries have their own clearing systems, regulations, fees, etc. It’s still possible to make transfers using ACH-like systems, but the process is less fluid and more costly. This can make it less desirable than other methods.
  • Processing Time – Processing time for ACH payments has significantly decreased over the years. However, it also depends on the size of the transfer, the time it was made, and who it is going to. The process can take up to a few business days. This can be burdensome for time-sensitive transactions.  On the other hand, this also offers a window of opportunity to cancel a payment made incorrectly. It is during this period that your financial institution has the opportunity to reject a suspicious or fraudulent transaction.  It allows them to act before the funds are taken from your account.

Source:ibid

How to stop an ACH Withdrawal

  • ACH debits – To delay or adjust ACH debits, contact the organization that is initiating the payment.  Whether this is the biller or your bank. Provide them with the name of the organization and the monthly payment amount. You should submit the request three business days before the scheduled payment date.  An ACH withdrawal is a convenient option for account holders who want to pay regular bills. But you may need to make an adjustment occasionally.  Still, organizations can automatically ‘pull’ funds from the account when they become due.  So, there is no chance of a missed or late payment.
  • ACH credits – These require account holders to initiate the transaction. You can stop previously authorized payments.  But, you will need to notify your bank before the ACH withdrawal is made. Provide the name of the organization, the exact payment amount and your account details. The process differs by financial institution.  Some banks allow you to stop payments over the phone.  Others require written form submissions.

Source:brex.com

How to request an ACH reversal

A merchant can reverse an ACH payment under certain circumstances. The National Automated Clearing House Association (NACHA) have strict ACH reversal rules. Reversals must occur within five business days of the transaction.  Only three situations qualify for approval:

  • Wrong Amount – If the payment was for the wrong dollar amount.
  • Wrong Account Number – If the account number provided was incorrect.
  • Duplication – If duplicate transactions occur.

Account-holders will always receive a notification if their account is due to be debited. The bank has no obligation to honor ACH reversals.  If the dollar amount entered is at a higher value, it may cause a negative checking account balance. You may accrue charges on your account if this results in insufficient funds for the due payment.

Source:ibid

Final Words

Paying bills is a necessary evil and a fact of doing business.  However, paying them inefficiently can hurt your bottom line and waste time and money. Knowing if and when to use ACH payments can lower transaction fees.  It can also reduce administrative costs and create a seamless payment system for you and your vendors.  The savings will vary from one company to another depending on the volume of transactions and the amount of each. However, if you’re racking up hefty processing fees every month, it might be worth checking with your payment provider to see about switching to ACH.

Up Next: Who is Ben Abbott?

Ben Abbott is an expert swordsmith.  He won the top prize of the reality TV series Forged in Fire, not once but twice. Ben first appeared on Forged in Fire in 2016 where he won the ninth episode of the second season.  Ben also prevailed in the Season 3 Champion’s Only episode where four former champions were pitted against each other. Based on his impressive performances, Ben was invited to work as a judge replacing J Neilsen in various episodes during the fifth and sixth seasons. His interest in making swords and knives developed from tours of English castles as a young teen.  Ben’s knife making skills are largely self-taught.

Ben currently lives in Pasadena, California.  But, you might detect a slight British accent, because he was born in Great Britain. He is a former Caltech electrical engineer who now operates Ashgrove Forge.  In his forge, Ben makes just about anything metal you can imagine. His wife Mandy states that he made most of the pans and cutlery they use in their kitchen.

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