Refresher Course: Knowing all of your options is critical for success in any business. In this blog from our archives, we explore the crucial differences between reverse wires for payroll and ACH direct deposits. Enjoy!
A lesser-known wire transfer type is known as the "drawdown reverse wire," which is the opposite of a direct wire. Also known as Fedwire drawdowns, drawdown requests, drawdown wires, or simply drawdowns – Nacha tends to prefer "drawdown" over "reverse wire" – this type of wire transfer is unique because it's initiated by the receiver instead of the sender. Of course, the sender needs to authorize the receiver to do so with their bank, but the receiver only needs to do this once.
As a result, drawdowns save a lot of time for each transaction and, more importantly, guarantee funds for the receiver.
What Is a Fedwire Drawdown Request?
A Fedwire drawdown request refers to a reverse wire made over the Fedwire Funds Service, which was set up by the Federal Reserve Bank in 1918 to handle electronic transactions by telegraph between all 12 Federal Reserve banks, so that interbank payments no longer needed to be settled by the physical delivery of cash or gold.
Since the 1970s, Fedwire transactions migrated from the telegraph to telex, to computer operations, and then to a proprietary telecommunications network. In 2018, Fedwire handled over 158 million transfers with a value of over $716 million – that's over $2.8 million transferred every day.
What is a Fedwire 1031 Drawdown Request?
The "1031 Fedwire Drawdown Request” is the same thing as a Fedwire drawdown request but is how banks refer to it: 1031 is the electronic form that includes the requester's name and the dollar amount. It's preceded by a "1090" which is the form by which the sender of the money authorizes the funds to be transferred out of their account.
The "1031" is followed by a "1032" – the banking code for the process by which the money then goes out to the requester.
FedACH vs. Fedwire
FedACH refers to the automated clearinghouse (ACH) system run by the Federal Reserve. According to the Federal Reserve website, “FedACH is a nationwide network through which depository institutions send each other batches of electronic credit and debit transfers. The direct deposit of payroll, social security benefits, and tax refunds are typical examples of ACH credit transfers.”
Thus, the FedACH is a network for direct ACH payments that are cleared on a next-day basis—the sender’s account is credited and receiver’s account debited on the next banking day—and is reversable.
The Fedwire Funds service, also operated by the Federal Reserve, “is the premier electronic funds-transfer service that banks, businesses and government agencies rely on for mission-critical, same-day transactions. Fedwire Funds Service participants benefit from the finality of payments credited to their Federal Reserve Bank master accounts.”
Thus, a Fedwire is a type of direct ACH payment that is cleared on a same-day basis, is irrevocable (cannot be reversed, which reduces risk), can be submitted in batches, and, because of this added value, costs more than a standard direct ACH payment made over the FedACH network.
Why Use a Drawdown Reverse Wire?
Drawdowns are useful when payments are made for varying amounts on a recurring basis, especially if the sender is high-risk. While drawdowns can be used for any form of wire transfer, they are especially useful in the payroll industry.
Payroll Drawdown Reverse Wires
Drawdown reverse wires guarantee funds for payroll providers, PEOs and ASOs, by "pre-funding" payroll transactions and preventing insufficient fund (NSF) situations. That is because their client's money is already in the payroll processor's bank account, which avoids the situation where the payroll processor has paid their client's payroll only to find that their client doesn't have enough funds in their bank account at the time of debit. NSFs can cause severe financial pain for payroll providers, so the drawdown reverse wire option helps many payroll provider owners and managers sleep well at night.
Why Use Drawdown Reverse Wires Instead of ACH Payroll Transactions?
ACH transactions are normally used for payroll because they cost less but are not guaranteed. Drawdown reverse wires are guaranteed and help offset the risk associated with payroll. Drawdowns are typically reserved for employers whose businesses are still new, who are new clients for the payroll provider, have a higher dollar payroll, and/or are companies in high-risk industries – and, of course, have to be acceptable to the payroll provider's client.
Does Your Bank Offer Drawdown Reverse Wires?
Many banks offer drawdown reverse wires for payroll or other types of transactions, but they make it a cumbersome process and only offer them during banking hours, which may not be convenient for you especially if something goes wrong. Banks rarely allow payroll providers to process drawdowns with software or online and typically require a special file or separate processing, which can be inconvenient.
A few third-party ACH payroll providers like Cachet Financial Services offer drawdown reverse wires that you can initiate online from software, so consider this if you're a payroll provider, PEO or ASO with high-risk clients.
Setting Up a Drawdown Reverse Wire
After determining if your bank or ACH payroll provider offers drawdown reverse wire, you'll need to work with them and the sender's bank to fill out an enrollment application for each of your payroll clients for whom you want to use the service. Once the sender's bank approves the application, you can begin the service.
Executing a drawdown reverse wire simply requires the ABA routing number and account number of the sender's financial institution and some basic information about the sender, which has to match the information on the application.
Drawdowns from Cachet Financial Services
Cachet has provided drawdown reverse wires to payroll providers since 2007. If you'd like to explore how drawdowns can work for you, whether you're using the service currently or not, we can walk you through the process, charges and benefits. All drawdown reverse wires can be made at any time from our web-based system, so it couldn't be easier – and it just might help you sleep better at night.
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