Definition of Reverse Wire
A reverse wire transfer occurs when a company, typically a vendor, can initiate a wire transfer from an authorizing company for payment of services.
What is a reverse wire?
A reverse wire transfer does not mean that you’ve initiated a wire transfer and want to cancel it. Nor is it when you want to reverse polarity in electrical wiring systems.
In its most basic form, a reverse wire is a transaction where a business pulls a payment from another company via instant wire transfer. One of the most common uses of this function is when a company funds its employee payroll process.
Because this transaction is performed via a wire transfer, and it ensures the payee receipt of immediate funds from the paying company. There is typically a bank transaction fee associated with each time the process runs.
Why is reverse wire an important term?
Because of their size, some companies are not eligible to participate in an ACH 2-day funds transfer. A reverse wire provides an alternative process so that employers can:
- Fund multiple payroll processes with a single banking transaction (for example, regular employee payroll, contractor payroll, and payroll tax payments could all be pulled with one transaction rather than 3 different withdrawals).
- Continue earning interest on those funds in their bank account longer than having to send funds up to a week before payment is sent to the employees.
- Provides a means for companies to fund transactions that may carry a higher risk factor — international transactions, for example.
This process is also used by companies that need immediate access to funding to pay for large purchases of perishable goods. This assures that the product is not held, thereby compromising its freshness or viability.
What is the history of the reverse wire?
Wire transfers have been part of our societal infrastructure since the 19th century — the 1870s, to be more precise. Western Union was the first company to facilitate the process of sending funds over long distances via telegraph to provide the intended recipient faster access.
Reverse wires, however, are a much more recent enhancement.
It’s important to note that not every financial institution has the capacity to support the reverse wire process. With that in mind, it’s important to verify that not only does your financial institution have the ability to process reverse wires but also that the bank that will be accepting the funds can do so.
Other terms used to refer to reverse wires
In addition to being called reverse wire transfers, you may hear the process referred to as:
- Draw-down requests
- Reverse draw-down wires
- Reverse wire requests
The terms are interchangeable, and the difference between them is nothing more than semantics.
Other terms related to reverse wires that can assist you
When you are working with reverse wire transfers, you are likely to also experience the following terms:
- ACH: ACH is a network that enables the electronic transfer of funds from one bank account to another. For example, during payroll processing, the employer transfers funds from the company’s bank account to each respective employee’s bank account.
- Fedwire: The Fedwire is the system implemented by the Central Bank involving the various Federal Reserve Banks around the Nation.
- SWIFT: SWIFT is the Society for Worldwide International Financial Transactions. As the ACH makes it easier for payments to transfer between different domestic financial institutions, SWIFT performs a similar function for international member financial institutions.
- Wire service enrollment form: This is the form each financial institution uses to verify the legitimacy and permission for them to conduct reverse wire transfers on a customer’s behalf.
Recap of reverse wire transfers
Reverse wire transfers are a business-to-business (B2B) process set up to ensure the business owed funds can gather them from the sending business’s bank account. It is a faster process than traditional payment methods and allows vendors and clients a secure and approved method for settling accounts.
Similar glossary definitions you must know
- Tax Identification Number (TIN): While SSNs (individual social security numbers) are issued by the Social Security Administration (SSA), company TINs are issued by the IRS (Internal Revenue Service).
- Direct Deposit: A type of ACH payment that allows employers to transfer employees’ wages directly into their bank accounts, thereby avoiding paper checks.
- Employee Payroll Taxes: The federal, state, and local taxes an employer is required to withhold from employees’ wages.