Today, both consumers and businesses have a wide array of options for paying their bills with accounts payable software. One of these options is whether to conduct payments via ACH vs. wire transfer.
This article will address the details of how ACH and wire transfer payments are actually executed, and the benefits and risks associated with each payment type.
Table of Contents
What is an ACH Payment?
An ACH payment is an electronic funds transfer processed through an automated clearinghouse network. It is a way to move money from one bank account to another without using paper checks, wire transfers, credit cards or cash. ACH payments are often used for automatic bill payments such as utility payments and direct deposit of payroll.
What Does ACH Stand For? How Does ACH Work?
The Automated Clearinghouse, or ACH, is a system created by the Federal Reserve to transfer funds between accounts. ACH can be used for transferring funds between your own accounts or sending and receiving e-payments to/from vendors and clients, and for direct deposit payroll.
How are ACH Transfers Most Commonly Used?
ACH transfers are typically best for frequent or recurring payments like direct deposit of employee paychecks. Some mobile applications, like Venmo, use ACH to transfer funds between users securely.
What is an ACH Transfer?
Automated Clearing House (ACH) transfer is an electronic payment method used to send and receive money quickly and securely. It is a convenient way to transfer money between bank accounts, making it a popular choice for businesses and individuals.
An ACH transfer is a convenient and cost-efficient way to make payments and transfer money electronically. This type of payment system is becoming increasingly popular as an alternative to paper checks and traditional bank transfers.
What are the Key Differences Between ACH vs. Wire Transfer?
ACH transfers and wire transfers are methods of moving funds from one bank account to another. They may seem similar. 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.
During ACH transfers, information is sent in a batch to the automated clearinghouse, which clears the payments through and then sends them on to the bank. The clearinghouse is essentially the middleman in this process.
Wire transfers also transfer funds from one account to another, but instead of the clearinghouse, banks act as middlemen. They typically charge a fee ranging from $10 to $30, while ACH transfers are usually free.
Differences Between ACH Routing and Wire Routing
The key differences between ACH routing and wire routing is ACH routing uses a clearinghouse network for batch processing over 1-2 days, while wire routing directly transfers funds between banks almost instantly, with higher fees and stricter requirements, but is better suited for large, urgent payments. Other differences include:
- Payment Information: ACH payment routing information includes the bank routing number and account number. For wire routing, in addition to routing and account numbers, require more detailed information like the recipient’s full name, address, and reason for payment.
- Reversibility: ACH payments can be reversed in cases of errors or fraud, subject to conditions. Wire transfers are generally final and irreversible once processed.
- Maximum Limits: ACH payment routing has limits on maximum transaction amounts. Wire transfers can accommodate higher transaction limits, making them suitable for larger payments.
Choosing the Right Payment Method
When choosing the right payment method, businesses should weigh speed against cost and security. Wire transfers are faster but more expensive, while ACH transfers are slower but cheaper and more secure. For urgent payments, wire transfers are better, but for recurring or non-urgent payments, the cost-effective and secure ACH transfers are typically the best choice. We will go into more detail below.
How Long Does an ACH Transfer Take?
An ACH transfer can often take two to three business days to complete. They take a longer time to clear because they are processed by banks in batches.
In 2017, the National Clearinghouse Association (NACHA) launched Same-Day ACH transfer. In September 2022, NACHA announced new requirements and updates for companies and customers using Same-Day ACH, extending the payment submission time by two hours on business days, increasing the transaction cap to $100,000 and facilitating faster access to funds.
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.
How Long Does a Wire Transfer Take?
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.
Cost of ACH vs. Wire Transfer
Some ACH payment providers charge a flat fee ranging from $0.20 to $1.50 per transaction. Businesses may also have to pay a separate fee of $5-30 per month just for using ACH. There are other potential charges such as return fees ($2-5 per return), reversal/chargeback fees ($5-25 per instance) and batch fees of less than $1.00.
Wire transfers have an expense for the sender and the recipient. Many financial institutions charge $10-35 to send. Smaller institutions may charge a fee to receive a wire transfer. On the high end, those costs can add up to about $55. International transfers can cost even more.
ACH payments are attractive from the standpoint of convenience and cost. The more ACH transactions your business performs, the less you typically pay per transaction.
Payment Security for ACH vs. Wire
ACH transfers 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. 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 money to, because the money can be withdrawn right away and often the transaction cannot be reversed once it is sent.
Common Uses of ACH Payments
ACH payments are widely used for several types of transactions beyond just transferring funds between accounts:
- Direct Deposit: Employers commonly use ACH for direct depositing employee paychecks into their bank accounts.
- Bill Payments: Recurring bills like utilities, mortgages, loans can be paid automatically via ACH.
- Business-to-Business Payments: Companies use ACH to pay suppliers, vendors, contractors etc.
- eCommerce Payments: Online merchants increasingly offer ACH as a payment option.
- Tax Payments: Federal, state and local tax payments can be made through ACH.”
How Can My Business Take Advantage of These Payment Options?
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, a business credit check and a checking account, but each bank and ACH service provider is a little different.
