The History and Evolution of Money
Although not everyone is interested in the history of money, it does make for interesting reading.
Humans come up with more innovative ideas every decade. According to britannica.com, we have evolved from carrying around barley and whale teeth to complex electronic systems where money is more of an idea than something tangible [1].
What we knew about cash and paper money a short while ago no longer applies. In an ever-evolving world, we can be sure that we need new and more relevant information.
In 1871, Western Union initiated electronic fund transfers, changing how we see financial transactions. By 2029, it is projected that 1.96 trillion non-cash payments will be concluded yearly.
So, what does this have to do with you? Keep reading to find out.
This article will help you make informed choices by discussing ACH transfers and wire transfers. It will simplify the decision-making process for you, and if you’re short on time, don't worry—we’ve done the work for you.
ACH Transfers vs. Wire Transfers: An Overview
Although these two methods appear similar, there are key differences you need to understand to move money between bank accounts.
ACH Transfers
ACH payments are electronic deposits made via an Automated Clearing House (ACH) network. An ACH network acts as a ‘middleman,’ connecting banks and providing a way to transfer money from a customer’s bank account to your business account.
Payments are processed in batches at set times by the bank. Once the funds are cleared, they are released.
Wire Transfers
A wire transfer is an electronic funds transfer between financial institutions, both locally and internationally. Funds are available immediately with a wire transfer, but these transactions are irreversible once completed.
Frequently Used Terms
- Direct Deposit: Money placed in an account by a sender.
- Electronic Transfers: Payment of money online.
- Domestic Transfers: Sending or receiving money between local banks.
- Recurring Payments: Payments automatically taken from your account at a set time.
- Direct Payment: Sending money to a bank account to pay bills.
- International Wire Transfer: Sending money from one country to another.
Who Makes ACH and Wire Transfers?
Consumers, businesses, and government institutions can use this electronic payment system.
For wire transfers, only the sender can initiate the transfer. With ACH transactions, either the sender or the receiver can make the request.
How Are ACH and Wire Transfers Made?
ACH Transfers
An Automated Clearing House network links banks or credit unions together to enable fund transfers.
- Credit transfers push funds from a bank account.
- Debit transfers pull funds from your bank on a one-off or recurring basis.
Once processed, the bank or credit union receives their ACH payment in a batch and attributes each deposit to the appropriate bank account. The bank statement will reflect electronically processed amounts.
Business Benefits of ACH Payments:
- Low-cost transfers for direct payments, such as employee salaries, insurance, loans, and tax refunds.
- No need to issue checks: Pay employees without issuing paper checks or cash.
- Direct customer payments: Customer accounts are paid directly to you.
- Lower fees: ACH transfers generally incur lower fees.
- Pay suppliers directly: Set up direct payments for utilities, taxes, and more.
Limitations of ACH Transfers:
- Not suitable for international clients.
- Payments over $100,000 may not be possible.
- Transfers can take up to 3 days.
Wire Transfers
Wire transfers allow two parties to quickly and securely exchange funds, even across different locations. The two institutions share information about the sender’s and recipient’s accounts rather than transferring physical cash.
- The sender pays for the amount on their side.
- The recipient’s bank details and SWIFT identifier are required to finalize the wire transfer.
Benefits of Wire Transfers for Businesses:
- Urgently transfer funds to domestic and international clients.
- Receive transfers quickly from domestic and international clients.
- Process large sums of money efficiently.
Domestic and International Transfers
A key difference between ACH and wire transfers is the geographical location of payments and deposits.
- ACH Transfers: These operate locally, between local financial institutions. ACH networks are not designed for international transactions but make domestic transfers of smaller amounts fast and efficient.
- Domestic Wire Transfers: These occur between two institutions within the same country. They are generally processed and received on the same day.
- International Wire Transfers: These are initiated in one country and settled in another. They take at least two business days to clear, as the domestic ACH must first clear the funds.
Business-to-Business Transfers (B2B)
B2B, or business-to-business, transactions work similarly to personal payments. One bank account can manage bill payments, domestic and international wire transfers, and remittance transfers.
- ACH fees are minimal, depending on the volume of transactions.
- Payments can be released in batches, allowing businesses to manage cash flow effectively.
Fees
Most banks offer a few free ACH transactions when you have a personal or business account. After that, a small fee applies, typically ranging from $0.29 to $1.50, either as a flat rate or a percentage of the transfer amount.
Wire transfer fees are higher due to the shorter processing time. Fees typically range from $35 to $50, with higher fees for international transfers. Wire transfers are ideal for time-sensitive or emergency payments.
Always check the fees before signing up for online payment services to avoid unexpected costs. Ensure that you have sufficient funds in your account, as insufficient funds can result in high reversal fees.
Fund Transfer Limits
The National Automated Clearing House Association (NACHA) provides guidelines for ACH transfers. As of March 18, 2022, they increased the individual transaction limit to $1 million, applicable to all same-day payments. However, individual banks may have their own daily and monthly limits.
Wire transfers have higher limits, especially for international transactions. The average limit for wire transfers is $1.6 million, though guidelines vary between institutions.
Processing Time for Transfers
Funds passing through the ACH system can take 3-5 working days due to banking hours. Holidays and weekends are not counted. Transactions after a bank’s cut-off time will be processed the next business day.
Wire transfers occur much faster, typically within seconds to a few hours, with a maximum of 24 hours for domestic transfers. Cross-border payments may take longer, depending on the country’s banking regulations.
Security of ACH and Wire Transfers
The Federal Reserve Bank considers ACH transfers to have the lowest fraud rate by value [3].
Since funds pass through a clearing house governed by strict regulations, security and confidentiality are enhanced. Banks generate daily transaction reports, and suspicious activity is flagged and investigated.
Wire transfers are also safe, as both parties’ details must be verified by law. International wire transfers are regulated by entities like the Office of Foreign Assets Control in the USA, which ensures that funds are not directed to illegal businesses or terrorist organizations.
Reasons for suspicious activity flags include:
- Large amounts wired to cash-only businesses.
- Numerous wires of identical amounts (potential money laundering).
- Transfers to tax haven countries.
- New or unusual patterns in money transfers.
Payment Cancellations or Reversals
-
ACH Transfers: Cannot be canceled but can be recalled. A credit transfer request can be made within 5 working days, while a debit transfer query can be raised within 60 days of the ACH transfer. Banks often charge fees to discourage recalls.
-
Wire Transfers: Can be canceled up until the funds are cleared, but once processed, they are irreversible. Exceptions may occur if the wrong bank account details were used, or if the bank made an error.
Summary of ACH vs. Wire Transfers
| ACH Transfers | Wire Transfers |
|---|---|
| Location | Domestic |
| Processing Method | Batched |
| Transfer Time | 3-5 business days |
| Fee Type | Flat or percentage |
| Avg Fee | $0.20 - $1.50 |
| Reversible? | Yes |
| Frequency | Once-off and recurring |
Conclusion
Growing companies looking for efficient payment methods and seamless integration with their accounting processes can achieve this through ACH and wire transfers.
In 2021, ACH payments amounted to $5.32 billion, with $49.79 trillion transferred. In May 2021, nearly 16 million wire transfers, totaling $75.6 trillion, were processed.
These staggering amounts demonstrate the importance of electronic transactions in the financial system. For companies, the decision is no longer whether to use electronic payment methods, but which ones will best suit their needs.
Payvy.com offers multiple solutions to help transform the way you handle your business transactions.