ACH

The essential guide to ACH vs. Wire Transfer

ACH transfers vs. wire transfers: An overview
Bella Ward
15

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, and in an ever-evolving world, we can be sure 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 me, you might ask?  Good question.  Keep reading for the answer.

This article is geared to help you make a choice by discussing ACH transfers and wire transfers.  It will make life a little easier for you, and if you don’t have much time, don’t worry.  The work has been done for you. 

ACH transfers vs. wire transfers: An overview

Although these two methods appear to be identical, there are key differences you need to understand to move money to and from bank accounts.

ACH payments are electronic deposits via an automated clearing house (ACH) network.  An ACH network acts as a ‘middleman’ - connecting banks and providing a way to receive money from a customer bank account to your business bank account.  

The payments are concluded in batches at set times at the bank.  Once the funds are cleared, they are released. 

Source: Hubspot

A wire transfer is an electronic funds transfer between financial institutions, both locally and worldwide.  With a wire transfer, funds are available immediately, but this means that you cannot reverse these transactions.

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 are taken from your account at a set time
  • Direct payment - you send money to a bank account number to pay bills 
  • International wire transfer - send money from one country to another 

Who makes ACH and wire transfers?

Consumers, businesses and government institutions are all able to make use of this electronic payment system.

Only the sender can initiate the transfer for wire transfers, but with ACH transactions, the sender or receiver can make a request.

How are ACH and wire transfers made?

- ACH Transfers

An automated clearing house network links banks or credit unions together to enable funds transfer.

Credit transfers allow you to push funds from a bank account and debit transfers pull from your bank on a once-off or recurring basis 

Once processed, the bank or credit union receives their ACH payment in a batch, requiring them to attribute each deposit to the appropriate bank account  The bank statement will reflect amounts that have been electronically processed.  

If you run a business, you can benefit from these payments in the following areas:

  • Low-cost money transfer. Direct payments or deposits such as employee salaries, car insurance, health insurance, loans and tax refunds
  • Pay employees without issuing cheques or cash
  • Customer accounts paid directly to you
  • Lower account fees
  • Pay suppliers by direct payment such as utilities and tax

ACH transfers should not be used if you have many international clients, need to make payments of more than $100 000 or can’t wait for up to 3 days to receive money

- Wire Transfers

Wire transfers allow two parties to quickly and securely share funds, even when they are in different locations [2]  The two institutions do not share cash, but rather the information about the sender’s account and the recipient account allowing wire transfers.

The sender will pay for the amount on their side. The recipient’s bank details and SWIFT identifier will be required to finalise the wire transfer.

The benefits of wire transfers for a business are:

  • Complete a transfer urgently to domestic and international clients 
  • Receive a transfer quickly from domestic and international clients
  • Process large amounts of money

Domestic and International Transfers

A key difference between ACH and wire is the geographical locations of the payments and deposits made. 

ACH works locally between local finance houses, serving as a connection network.  The purpose of it is not to send money globally but to make the transaction of small amounts easy and relatively quick.

A domestic wire transfer is still possible as it takes place between two institutions within the same country. Senders may require a code (SWIFT) that will act as an identifying code for a certain account holder. Generally processed and received on the same day, they settle financial transactions quickly. 

International wire transfers are initiated in one country and settled in another in the same way as a domestic wire transfer.  Two business days is the minimum time frame, as the domestic ACH must clear the funds before it can move on. 

Business-to-business transfers (B2B)

Source: Pexels

B2B stands for ‘business-to-business’ transactions and works in the same way as personal payments.  One bank account is sufficient for bill payments, domestic and international wire transfers, and remittance transfers.

ACH costs to process direct payments are minimal, even with business accounts, since the ACH fees depend on the volume of transactions.

The set- up is done via the online banking system, and payments can be released in batches. This allows a business to manage its direct payments as the cash flow allows.

Fees

Most banks will allow some free ACH transactions when you have a personal or business bank account.  Beyond that, a small fee will apply, set by the financial institution. 

The fees vary on average from $0.29 to $1.50 and will either be a flat rate or a percentage of the transfer amount.  These are mostly processing fees. 

Wire transfer fees are more expensive due to the shorter processing time. Most wire transfers can attract fees between $35 and $50, with higher fees applicable to international money transfers.  This method is useful when money must reach the recipient by a certain date or in an emergency.

It is best to check the fees that will be charged before signing up for online payment services to avoid unwanted costs.  Another caution is to ensure that you have sufficient funds in your bank account before a payment request occurs, as there can be high fees for the reversal of these electronic payments.

Fund transfer limits

The National Automated Clearing House Association (NACHA) provides the guidelines for ACH transfers.  Effective March 18, 2022, they increased the individual transaction limit to $1 million, applicable to all eligible same-day payments for incoming and outgoing funds.  However, individual banks have their own set limits per day and per month. 

Wire transfers have a much higher limit due to international transactions in different currencies.  The conversion rate of the currency at the time of the direct deposit or payment necessitates this ruling.  $1.6 million is the average limit for wire transfers but each institution will provide guidelines on their website to assist you. 

Processing time of transfers

NACHA is responsible for rules that dictate online transactions.  They provide the statutory requirements that stabilise the network, giving the consumer or business security about financial transactions.  All transfers must comply with their regulations.

Funds passing through the ACH system can take 3-5 working days because it is linked to when banks are operating.  Holidays and weekends will not count.  If you have an online bill to pay, you must make allowances for how the process works.

After a certain time on a business day, there will be a cut-off and transactions will only be processed the next working day. This can severely delay sending money to other accounts.

Wire transfers happen within seconds to a few hours, taking a maximum of 24 hours in the USA to clear. Cross-border payments to countries whose banking systems are not heavily regulated may take longer.  

A good guideline to follow is to investigate the challenges you will have with each country you transact with before deciding on the method to use.

Security of ACH and Wire transfers

If one considers the amount of transactions done annually, the Federal Reserve Bank considers ACH transfers to have the lowest fraud rate by value [3]

Since the funds must pass through a clearing house that has well-defined regulations to govern it, it greatly increases the security and confidentiality.  Banks generate daily reports of transactions and anything suspicious is flagged and sent to be investigated by the relevant department.  Notes are made on the account and stay there as an alert permanently. 

Wire transfers are safe because the bank or credit union is obligated by law to verify the details of both parties to ensure safe banking.  

International wire transfer payments are checked by regulatory bodies such as the Office of Foreign Assets in the USA ensuring that money is not forwarded to terrorist organisations or illegal businesses.  They have the ability to freeze international wires if flagged as suspicious.

Reasons for this can include:

  • Large amounts wired to cash-only businesses
  • Numerous wires that reflect the same amount (laundering can occur like this)
  • Transfers to safe haven countries
  • New or different patterns in sending or receiving money

Payment Cancellations or Reversals

ACH transfers cannot be cancelled but they can be recalled.  A credit transfer request can be made within 5 working days and a debit transfer query can be raised for 60 days after the date of the ACH transfer.  Debit transfers may also be returned due to insufficient funds.  Banks charge fees to discourage these actions.

Wire transfers can be cancelled up until they’re cleared (which could be just minutes), after this, they are not reversible.  An exception to this is when the bank account information is incorrect or the bank has made an error,

A summary of ACH vs wire transfers


ACH Transfers

Wire Transfers

Location

Domestic

Domestic and International

Processing Method

Batched

Real-time

Transfer time

3-5 business days

Same day

Fee Type

Flat or percentage

Flat or percentage

Avg Fee ($)

$0.20 - $1.50

Domestic - $0-35

International - $35-50

Payment reversible?

Yes

No

Frequency

Once off and recurring

Once off

Source: Pexels

Conclusion

Growing companies who are looking for ways to do business effectively and to integrate such payments with their accounting processes can achieve this with ACH and wire transfers.

ACH payments amounted to $5.32 billion in 2021, with $49.79 trillion being transferred in 2021. In May 2021, almost 16 million wire transfers totaling $75.6 trillion were processed.

These are staggering amounts and prove that electronic transacting is an important part of the financial system.   The consideration for companies is no longer whether to use electronic methods, but which ones will be best for them.

Payvy.com has multiple solutions for you to transform the way you handle your business transactions.

Footnotes:

[1] https://www.britannica.com/video/187664/history-money

[2] https://www.investopedia.com/terms/w/wiretransfer.asp

[3] https://blog.hubspot.com/sales/what-is-ach-payment

[4] https://www.ir.com/guides

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