What are they?
ACH payments and wire transfers are methods of moving funds from one bank account to another. They may seem similar, almost identical. However, the two are quite different, and understanding the differences between them is beneficial for anyone who is interested in using electronic methods of payment for moving money to and from bank accounts.
A Closer Look
The Automated Clearinghouse, or ACH, is a system created by the Federal Reserve Bank to transfer funds between accounts. ACH can be used for transferring funds between your own accounts, sending or receiving payments with vendors and clients, or even bulk sending or receiving a large number of payments with customers.
During ACH transfers, information is sent in a batch to the automated clearinghouse, which clears the payments through and then sends them onto the bank. In this sense, the clearinghouse is essentially the middleman in this process.
Wire transfers also transfer funds from one account to a another, but instead of the ACH, banks are acting as middlemen.
How are they different?
1) Transfer Speed
ACH payments can often take two to three business days to complete. They take a longer time to clear because many are processed by banks together at once.
Wire transfers send the funds along almost immediately. There is usually no hold on funds received by wire transfer, so the recipient can access it right away.
2) Cost of Transfer
ACH transfers are often free, especially for the receiver. For senders, the fees are less than a dollar, if anything.
Wire transfers can cost both for the individual who sent it and the recipient. Many financial institutions charge $10 to $35 dollars to send, and smaller institutions may charge a fee to receive a wire transfer. On the high end, those costs can add up to about $55 when combining all fees, and international transfers can cost even more.
ACH payments are a bit safer for senders. Unlike most wire transfers, funds can be reversed in cases of fraud or payment error. The criteria for reversals is usually determined by banks.
Wire transfers have little disadvantage for the recipient. They’re a full step above cashier’s checks, which have become easy to fake. When you receive a wire transfer, the funds are accessible immediately.
For senders, there is a little more risk. It’s important to know and confirm the person or account you’re sending to, because the money can be withdrawn right away and often the transaction can not be reversed once it is sent. Generally, they are secure.
What are each typically used for?
ACH payments are typically best for frequent or recurring transfers. These types of payments are typically used by businesses for direct deposit of employee pay. They’re also used for automated monthly bill payments, like a scheduled payment for car insurance or student loans. Some mobile applications, like Venmo, use ACH payments to transfer funds between users securely.
Wire transfers are typically used much differently, when transfers need to be immediate. These types of transfers are used only when sending the funds quickly is critical. Otherwise, it makes sense to wait the extra time for the ACH payment.
Which is better?
When comparing the two, the only real advantage to a wire transfer is the speed of the transaction. ACH payments are quicker, more convenient, cheaper, and more secure. If the funds need to be sent immediately, go with the wire transfer. If it’s something that can potentially wait three days, use the ACH payment.
How can my business start using ACH payments?
Getting started with ACH processing requires an ACH merchant account, similar to the merchant account used for credit and debit card processing. Signing up for a merchant account typically requires general business information and a business credit check, and a checking account to link, but each bank and ACH service provider is a little different.
Contacting a processor like AvidXchange or reaching out to your bank are both good ways to get started.