What is an ACH Withdrawal and How Does It Work?

A Brief History of ACH

The term “ACH” has been around for nearly fifty years. In the late 1960s, the banking industry was growing concerned that the volume of paper checks was going to surpass their ability to process and clear them. The first ACH association was formed in 1972 and was run by the Federal Reserve Bank of San Francisco.

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 called the ACH (Automated Clearing House). 

Since then, the ACH network has grown into a huge, centralized electronic payment system that handles billions of transactions every year. In 2019 alone, the ACH network processed 24.7 billion electronic payments according to NACHA (the National Automated Clearing House Association).

However, many people are still 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 a business a lot on labor and processing costs.

How Does 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 transfer is funds pulled directly from a checking or savings account.

ACH Credit vs. ACH Debit

There are two types of ACH transactions: credits and debits. Each involves moving funds directly from one bank account to another. The difference is who initiates the transfer.

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 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 is handled by the ACH network, making this quick and easy for both the payer and the payee. The benefits and costs of ACH transfers highly depends on the context in which it is being used.

ACH Withdrawal: Pros

Low Fees

ACH transfer 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 and 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.

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.

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.

ACH Withdrawal: Cons

Security

ACH transfers, specifically debits, pose a small risk to your private information if you aren’t careful. 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 separate from 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, thus eliminating this risk.

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 before the funds are taken from your account.

Knowledge is Power

The bills will always have to be paid, but paying them inefficiently can hurt your bottom line. Knowing if and when to use ACH payments can lower transaction fees, reduce administrative costs, and create a seamless payment system for you and your vendors.