What is an ACH withdrawal?
ACH withdrawals are becoming more common for recurring payments, like payroll. Learn how they work and why your business might want to start using them.
Head of Growth
If you’ve set up automated utility payments from your bank or credit card, then you’re using ACH withdrawals. The same goes for receipt of direct deposits to your account, whether from clients, customers or debtors. You also use ACH every time you send money to your bank through third-party apps like Venmo, PayPal and Zelle.
So, what does ACH withdrawal mean? Short for Automated Clearing House, ACH withdrawal refers to a method of Electronic Fund Transfer (EFT) where money is pulled from one account and deposited into another. After authorization, funds are taken from the sender’s account, bundled with similar payments in the Automated Clearing House Network, processed, cleared, and finally deposited into the receiver’s account.
Because of this straightforwardness, ACH withdrawals are also known as direct deposits, direct payments or e-checks. They’re an easy and convenient payment option in the U.S., even if the sender and receiver use different banks.
For businesses, ACH presents a great payment method. By setting up automated payments, you can reduce (or completely eliminate) the hassle of handling checks, processing credit cards, and chasing down invoices.
Cash and paper checks are becoming less popular, particularly in business transactions. They’re not just unreliable and inconvenient, they're also massively insecure. A paper check sent via mail, for instance, can easily land in the wrong hands.
The disadvantages of cash and paper checks make a strong case for EFTs. This explains why modern businesses are turning to electronic payments like debit cards, credit and wire transfers. ACH presents another convenient option, especially for businesses. It’s especially great for recurring payments like payroll, utility bills, mortgage and other direct bank account transactions.
The ACH network is run by the federal reserve and ACH operators, however it’s managed by the National Automated Clearing House Association (NACHA). This nonprofit creates and enforces laws for the ACH network. It is responsible for the network’s strict standards, which make it extremely safe and reliable.
ACH can be used for various transactions, including payroll, direct deposits, bill payments and B2B payments. Depending on who initiates the ACH transfer, the transaction will either be a debit or credit.
ACH debit occurs when the party initiating the transaction seeks to pull funds from another party. I.e., the payee initiates the transfer of funds from the payor’s account.
Say, for example, that you’re a small business accepting ACH payments. Rather than chasing down invoices, you might opt to withdraw payments directly from your customers’ accounts.
The customer will give you the green light to initiate fund transfer from their account to yours. This includes furnishing you with their banking information. You’ll then send details of the transaction to your ACH service provider or bank, who will in turn send a request to the customer’s bank, asking for the payment to be processed.
The customer’s bank will check to ensure that they have enough money to complete the transaction. Then, funds will be transferred from your customer's account to your checking or savings account.
ACH debit can be a one-time payment or a recurring transaction that happens periodically or after a service/product delivery.
The opposite of an ACH debit, ACH credit occurs when the party initiating the transaction seeks to transfer funds to another party. I.e., the payor initiates the transfer of funds to a payee’s account.
A good example is if you set up automated mortgage payments. The funds will automatically move from your account (payor) to your landlord’s account (payee).
You can make an ACH withdrawal either as a payor or payee. Whatever the case, you’ll first need to have your bank account information as well as that of the other party. This includes the account number and routing number. Here’s a step-by-step guide for making an ACH withdrawal:
If you don’t already have an ACH merchant account, then you’ll need one. Any US-based bank account should support the ACH network. This includes traditional bank accounts, online accounts and credit card accounts.
When you’re trying to get a customer to pay via ACH, you’ll need to request their authorization. They’ll give you the green light as well as their bank details. This includes their bank account number and routing number.
Submit this information, along with your bank details, to your bank or ACH provider. You’ll also need to include transaction details (like amount).
The same applies if you’re the one making the payment (not requesting a payment). I.e., you’ll still need to submit your account details and those of the recipient to your bank/ACH provider.
You’ll only have to do this once if you’re setting up a recurring payment, but then you’ll have to specify the frequency of ACH withdrawals (e.g., monthly).
Your request will be sent to the ODFI (originating depository financial institution). This is essentially a depository institution that processes ACH requests on the payor’s side.
The ODFI confirms the request and then forwards it to the recipient’s (payee’s) bank, also known as the receiving depository financial institution (RDFI).
Once the RDFI confirms that the payor has sufficient funds in their account, they’ll authorize the ACH withdrawal.
ACH transactions are processed by the ACH company in batches seven times per day. They typically take two to five business days to clear, though at times they clear faster – the next business day or less. Because it’s a quick method of payment, ACH is great for businesses. It not only ensures that you get paid on time, but it may also improve your relationship with contractors, vendors and suppliers when you make quick payments. Make sure to read up on your financial institution’s specific ACH policies too.
As a payor, you can cancel authorization for ACH withdrawals at any time. As a good business practice, start by notifying the payee that you intend to cancel the ACH withdrawal. Next, proceed to inform your bank to revoke authorization for the ACH withdrawal. At this point most financial institutions will provide an online form to fill. Once submitted, wait at least three business days for the cancellation to take effect. For this reason, it’s always wise to stop ACH withdrawals at least three business days before the next scheduled payment.
If you intend to stop future payments, then you’ll need to send your bank a “stop payment order”. Depending on your bank, you may have to pay a small fee for stopping a payment order.
In rare cases, under a standing order ACH withdrawal, a payment may still go through even after you have cancelled ACH withdrawals. Should this occur, make sure to contact your bank immediately and make sure that they permanently cancel your ACH withdrawal.
As a business (and payee), a customer may request you to cancel their ACH withdrawals. Whether it’s a one-off or a recurring payment, simply contact your bank or ACH provider and ask them to stop the withdrawal.
There’s a good reason why businesses are turning to ACH withdrawals as their preferred method of making and receiving payments. From faster payment processing times to the elimination of paperwork, there are plenty of benefits. Here are the main advantages of ACH withdrawals for business:
Your customers can automate payments for goods and services, thus saving you the hassle of processing manual payments. Furthermore, when your business automates payment of its payroll, bills and purchases, you cut down on processing time and completely eliminate human errors from the process.
ACH payments typically take two to five days to clear, which is pretty fast compared to other secure alternatives. In some cases, transactions may complete in a day or less. This doesn’t just ensure that money gets in your account faster, but it also improves B2B relationships. Your vendors, suppliers and creditors will be happier when payments from your business to them complete faster. You’ll also have fewer to no late fees that come from held up checks.
ACH transaction fees range from $0.20 to $1.50, making them less expensive than wire transfers. Low fees means that your business gets to save more on transaction costs.
ACH withdrawals are quite straightforward, but in case you need some extra information, here are a few frequently asked questions:
A: ACH is short for Automated Clearing House. It’s a form of electronic payment where money is pulled from one account and deposited in another.
A: ACH withdrawals typically take two to five days but may complete within the same day. The time it takes for an ACH transaction to clear largely depends on your bank or ACH provider.
A: Yes, ACH is a form of direct deposit. Actually, the two terms – ACH and direct deposit – are often used interchangeably. ACH is also known as direct payment or e-check.
A: Compared to other methods of payment like cash and credit card, ACH is extremely safe. In fact, one of the biggest differences between ACH and credit card payments is that ACH transactions are guaranteed to go through while credit cards aren’t. Besides, payors and payees of ACH transactions are usually required to provide banks and ACH providers with their full details. This makes it easier for authorities to track down fraudsters should they attempt illegal activities.
A: The easiest way to stop an ACH withdrawal is to give your bank a stop payment order. You can do this online on their website, in writing, via call, or by visiting the bank in person. Make sure to give the stop payment order at least three days before the next scheduled payment.
Looking to start using ACH withdrawals for your business? The Nearside checking account is the perfect place to start. Designed for startups and growing businesses, the Nearside checking account allows you to make and receive ACH withdrawals.
In addition to low ACH rates, Nearside accounts come with no NSF fees, no minimum deposit requirements, and no maintenance fees. Sign up today and enjoy ACH withdrawals for one-off and recurring business payments.