What is an ACH Withdrawal & How Does It Work?

Introduction

Efficient, reliable, and secure payment systems are essential for modern businesses to thrive. Automated Clearing House (ACH) payments have become a key tool in achieving these goals, providing a seamless way to handle electronic transactions while saving time and reducing costs.

If your business receives payments from clients directly into its bank account, that’s an ACH deposit. Similarly, if your business sets up automatic payments for supplier invoices from its account, that’s an ACH withdrawal. Both types of transactions are integral components of ACH payments.

In this blog, we will delve into ACH withdrawals, from what they are to how they work. Let’s get to it.

What Is an ACH Withdrawal 

An ACH withdrawal refers to the process of electronically transferring money from one bank account to another through the Automated Clearing House system. It is widely used for recurring payments like payroll, utility bills, and loan payments, due to its reliability and cost-effectiveness.

How to Do an ACH Withdrawal ?

To set up ACH withdrawals for your business, follow these essential steps:

1. Initiate the ACH withdrawal

   A business (the customer) decides to pay for a goods or service by ACH transfer. The customer provides their routing number and account number to the merchant (the business providing the goods or services) or to the merchant’s third-party payment processor.

2. Send the request to the bank

   The merchant or the third-party payment processor sends the ACH withdrawal request to the merchant’s bank, also known as the Originating Depository Financial Institution (ODFI). This request includes the customer’s banking information.

3. Submit the request to the ACH network

   The ODFI batches the ACH withdrawal request along with other ACH transactions. These batches are typically sent out at regular intervals during the business day to the ACH network.

4. ACH network processes the withdrawal

   An ACH operator, such as the Federal Reserve or a private entity like The Clearing House, receives the batched transactions. The operator sorts the transactions and submits them to the customer’s bank, known as the Receiving Depository Financial Institution (RDFI).

5. Process and complete the withdrawal

   The RDFI processes the ACH transaction. The customer’s account is debited for the payment amount, and the corresponding amount is credited to the merchant’s account at the ODFI. Both parties receive notifications confirming the transaction.

The initial setup requires most of the effort. Once completed, theACH withdrawal processbecomes straightforward, requiring only client confirmation and submission of the transfer request.

ACH credit vs. ACH debit

ACH transactions fall into two main categories: credits and debits. Both types involve moving funds directly between bank accounts, but the key difference lies in who initiates the transfer.

ACH credit

Initiation and Process:

• Payer Initiated: An ACH credit transaction ( also called ACH Deposit) is initiated by the payer. This means the payer authorizes their bank to ‘push’ funds to the recipient’s account.
• Examples: Common uses of ACH credits include direct deposits for payroll, vendor payments, and refunds.
• Process Flow: The business (payer) provides transaction details to their bank, which forwards the request to the ACH network. The recipient’s bank then deposits the funds into the recipient’s account.

Key Benefits:

• Control: The payer has control over the timing and amount of the payment, making it useful for regular disbursements like salaries.
• Reliability: Funds are deposited directly into the recipient’s account, ensuring timely and secure payments.
• Cost Efficiency: Typically, ACH credits are less expensive than wire transfers and reduce the need for paper checks.

ACH Debit Initiation and Process

• Payee Initiated: An ACH debit transaction or ACH withdrawal is initiated by the payee. The payee sends a request via the ACH network to ‘pull’ funds from the payer’s account.
• Examples: Common uses of ACH debits include automatic bill payments for utilities, insurance premiums, mortgage, and loan payments.
• Process Flow: The payee obtains authorization from the payer and initiates the debit request. The payee’s bank sends the request to the ACH network, which communicates with the payer’s bank to transfer the funds.

Key Benefits:

• Convenience: Automated debits simplify recurring payments for services and subscriptions, reducing the risk of missed or late payments.
• Efficiency: ACH debits streamline the collection process for businesses, improving cash flow management.
• Security: Transactions are secure, with robust encryption and authentication measures to protect both parties.

Pros & Cons of ACH Withdrawal 

Now that you know how ACH withdrawal works, let’s check the pros and cons of leveraging this payment method. 

Pros of ACH withdrawal

1. Convenience

   ACH withdrawals automate recurring payments, significantly reducing the need for manual intervention. ACH benefits both businesses and customers by ensuring payments are made on time without the hassle of paperwork. For businesses, this means less administrative work and fewer errors in payment processing, while customers enjoy the convenience of not having to remember due dates or manually process payments each month.

2. Accuracy

   By eliminating most of the manual steps involved in payment processing, ACH withdrawals significantly reduce the risk of human error. Payments are handled electronically, ensuring precise and consistent transactions. This accuracy is crucial for maintaining financial records and ensuring that payments are processed correctly every time.

3. Cost-effectiveness

   These transactions typically have lower processing fees compared to credit and debit card transactions. The median cost of an ACH payment is around $0.29, which is much cheaper than the average $25 fee for wire transfers. This cost advantage makes ACH an attractive option for businesses that need to process a high volume of transactions, such as payroll or vendor payments.

4. Security

   ACH transactions are processed through regulated clearinghouses, which enhances their security. These transactions involve direct transfers between bank accounts, keeping sensitive information confidential. Additionally, ACH payments can be reversed if necessary, providing an added layer of security compared to wire transfers, which are final and irreversible.

5. Low maintenance

   Once ACH transfers are set up, they require minimal ongoing management. Unlike credit card information, which changes frequently due to expiration or card issuance, bank account numbers and routing numbers remain relatively stable. This stability reduces the administrative burden of updating payment information and tracking down missed payments.

6. Environmentally Friendly

   ACH payments reduce the need for paper checks, supporting digital transactions that are more eco-friendly. By minimizing paper use, businesses can contribute to environmental sustainability and streamline their payment processes.

Cons of ACH Withdrawal

• US Only

  One significant limitation of ACH payments is that they can only be used for accounts within the United States.. For international transactions, businesses must rely on other networks like SWIFT or similar services, which may incur higher fees and longer processing times.

  

• Processing Times

  The ACH withdrawal time can be a significant drawback for businesses. Standard ACH withdrawals typically take about 2-3 business days to complete. Although same-day ACH can expedite the process and reduce the ACH withdrawal time , it comes with extra fees and requires a separate Originating ID, complicating and increasing the cost of transactions. 

• Amount Limits

  Banks may impose limits on the amount that can be transferred via ACH, affecting daily, weekly, or per-transaction amounts. These limits vary by institution and type of transaction. Additionally, ACH transfers for same-day payments are capped at $100,000, which might be restrictive for large transactions.

• Potential for Fraud

  The automated nature of ACH withdrawals can be exploited for fraud, such as payroll fraud or by fraudulent entities posing as legitimate recipients. Businesses must implement robust bank account verification systems and exercise caution when setting up new payees to mitigate this risk.

• No Instant Confirmation

  Unlike wire transfers, ACH payments do not provide immediate confirmation of fund transfers. Businesses may need to wait until the transaction is fully processed to verify the transfer, which can impact cash flow management and planning.

• Reversal Policies

  While ACH transactions can be reversed if necessary, the process can be complex and time-consuming. Ensuring proper authorization and accurate transaction details from the outset is crucial to avoid disputes and potential financial setbacks.

• Limited Payment Flexibility

  ACH payments are not ideal for one-time, high-value transactions due to transfer limits and processing delays. They are better suited for recurring, smaller payments rather than large, infrequent ones. Businesses with substantial payment needs might find ACH less flexible compared to other payment methods.

Streamlining ACH Payments with HighRadius Payment Gateway

Manual invoice chasing is very costly. ACH payments, when automated, can significantly streamline this process. There are platforms that automate ACH payments that can greatly reduce processing time and workload. For growing companies, automation helps prevent bottlenecks by efficiently handling an increasing volume of transactions. This allows businesses to scale their operations without a corresponding increase in administrative overhead.

For businesses seeking to optimize their ACH payment processes, HighRadius offers a robust payment gateway that enhances ACH processing efficiency. Here’s how: 

• 90% Less Processing Costs: Significantly reduce processing costs by validating bank accounts and accepting low-cost ACH payments.
• ACH/eCheck via Merchant Bank: Process ACH payments in the USA and Canada through your bank, ensuring secure and efficient transactions.
• ACH/eCheck via Processors: Utilize payment processors to handle ACH/eCheck payments across the USA and Canada, providing flexibility and reliability.
• Bank Account Validation: Validate first-use bank accounts to minimize fraud and reduce the risk of failed payments.

Conclusion
Making an ACH withdrawal is a straightforward process that offers numerous benefits, including cost savings and improved efficiency.Businesses can effectively manage their ACH transactions, both deposits and withdrawals, by ensuring compliance with regulations and enhancing their financial operations.

FAQs

1) How do you track ACH withdrawal?

If you are waiting to receive a payment, contact your bank using the ACH trace number. You may need to ask the payer for these details. If you are the payee waiting for the transaction to clear, contact your bank. Sometimes, the transaction’s date and amount will be enough to trace the payment.

2) What is an ACH pull?

An ACH (Automated Clearing House) pull is a type of ACH debit transaction where the payee (recipient) initiates a request to withdraw funds from the payer’s (customer’s) bank account. This is commonly used for recurring payments like utility bills, loan repayments, and subscription services.

3) How to start ACH withdrawal?

To start an ACH (Automated Clearing House) withdrawal, set up your business with an ACH provider and obtain written or recorded consent from your customer. Enter the customer’s bank details into your ACH payment processor and submit the withdrawal request for the agreed amount.

4) What is the ACH withdrawal Fee?

ACH withdrawal fees vary depending on the provider and the volume of transactions. Typically, fees range from $0.25 to $1.50 per transaction or a percentage fee between 0.5% and 1.5%. It’s important to compare the fee structures of various ACH providers to choose the most cost-effective option.

5) How long does ACH withdrawal take?

ACH withdrawal time can vary based on several factors. Standard ACH withdrawals typically take 2-3 business days to complete. With same-day ACH, the process can be expedited within the same day if initiated early, typically before 10:30 AM ET or 2:45 PM ET. But, same-day ACH incurs extra costs.