What is the Automated Clearing House (ACH)?
The Automated Clearing House is a funds transfer that requires a bank account number and routing number to transfer money between banks, credit unions, and even individuals within the United States. ACH can be used for paychecks, monthly recurring payments, or online bill payments.
Payments sent through the Automated Clearing House are usually received very quickly and clear to bank accounts within a matter of hours or business days, however, there are times when ACH transfers process slower due to safeguards put in place to avoid fraud or money laundering. Banks often process ACH payments in batches, rather than individually, which can cause processing delays.
ACH payments are sent directly from your bank account. With an ACH debit, you give the other party permission to debit a particular amount from your account, and with an ACH credit, you give permission to pay your account directly.
The ACH system is primarily for domestic payments within the US, so if you need to pay an international vendor, you’ll usually need to send funds through an international wire transfer.
What is a Wire Transfer?
A wire transfer is often a broad term used to describe any method of electronically sending or receiving money. It does not always refer to a specific type of electronic transfer and can be used in very unclear terminology.
However, the term is reserved for only those electronic transfers which occur from one bank or credit union to another. Wire transfers that go between the United States and a foreign country are known as remittance transfers and are usually not referred to by the same name.
In terms of wire transfer eligibility, wire transfers require the money to be available in the sender’s account before money can be sent. The sending institution will immediately remove the money before being cleared to be sent. ACH transfers work slightly differently, and the rules are a bit more lenient. ACH transfers can be reversed in the case of obvious fraud or a clear mistake such as the wrong dollar amount, wrong account number, or a duplicate transaction. This is because ACH payments are moved through the ACH network, a collection of designated ACH operators who approve, process, and carry out the transaction request. It takes multiple business days, but ACH transfers are more secure than wire transfers because they require an intermediary. The ACH approval process includes the creation of a return code, which is not issued for wire transfers. For this reason, ACH transfers are reversible, while wire transfers are not.
When to use ACH or Wire Transfers
The differences between ACH transfers and wire transfers can be important considerations for business owners. While both ACH and wire transfers are workable options for businesses, the optimal choice for a company will depend on whether it prioritizes speed or cost.
- Speed: f your business regularly needs to send funds quickly, a wire transfer could be the right choice. However, wire transfers are more expensive than ACH transfers—you pay for the convenience of same-day delivery.
- Cost: If your business is more interested in cost-saving than transaction speed, ACH transfers are a smart decision. ACH transfers are typically free, and the most you can expect to pay for an ACH transfer is three dollars. Meanwhile, wire transfers can cost up to $35 domestically or $65 internationally.
- Size: If you need to make large payments another thing to keep in mind is that some banks may impose transfer limits on ACH transfers that are time-bound (e.g. daily, weekly, or monthly) or by transaction. Wire transfers on the other hand, tend to be used for large transactions (Fedwire handled an average of $5.4 million per transfer in 2022).
- Security: Both ACH and wire transfers are secure options although ACH transfers are slightly safer than wire transfers because businesses can reverse funds in the event of fraud or errors.
Pros and Cons of Electronic Financial Transfers
Financial transfers come with their own pros and cons. For example, if you’re considering a transfer from one individual to another, you might consider using alternate methods that will be discussed in greater detail below such as checks, credit transactions, direct debit, or peer-to-peer payment services like Paypal, Cashapp, or Venmo. These methods are instantaneous, but they typically come at some small cost to the party sending or receiving the funds. They are less secure, and they are also subject to federal limitations. Still, individuals often default to these alternative methods because of the significant delay associated with both ACH and wire transfers.
Electronic financial transfers are an excellent way to make sure that you meet the requirements for a secure transaction as banks and other financial institutions always keep an electronic record of any transfers they send or receive on behalf of others as well as themselves. An additional benefit to electronic transfers is that they are faster than physical checks. If you were to write a check, send it in the mail, and then have the recipient deposit it, there’s a several-business day turnaround transfer time associated with that transfer.
Electronic funds transfers happen instantly with minimal downtime reserved for security and confirmation purposes. In the off chance that funds are not received or there are insufficient funds, an alert is triggered back to the sender rather than delivering an automatic overdraft penalty.
Finally, wire transfers are considered to be very similar to an electronic cashier’s check. For example, if you receive a wire transfer into a bank account, you can use that money immediately rather than it a few hours to process or even days. The financial institution responsible for sending the money has already verified its existence and has cleared those funds automatically.
Purchases Vs. Transfers
The main reason debit and credit purchases are separate functions than wire transfers or other electronic methods is that purchase laws cover an entirely separate financial transaction.
For example, purchases may be subject to federal and state sales tax, depending on the type of goods purchased. On the other hand, transfers are subject to entirely different types of taxes, such as capital gain or other related taxes.
Other methods of money transfer
There are several other methods of transferring financial funds that you can consider if you’re looking to send money quickly. Some of the most common currently are services such as Paypal, Venmo, and CashApp, which are applications that allow users to sometimes instantly send and receive money for a small percentage fee or to allow a regular transfer to take place (which usually takes a few days to process).
For example, you may hire individuals rather than companies to perform some services for your business, such as photo retouching or influencer marketing. These vendors may accept payment via mobile apps like Venmo so that they can receive money instantly for a very small fee, rather than needing to wait for a funds transfer that could take days.
Other payment methods include cash, check, credit transactions, and direct debit. All of these methods will eventually get the money from one place to where it needs to go, but the difference is all in the timing, the security, and the use case.
How Settle can help
Businesses can save time and money with Settle AP Automation. Settle will take care of your business’s vendor payments in a convenient and secure way whether they're ACH transfers (average processing speed of 1-2 days), wire transfers, or paper checks. Settle allows vendors to track incoming payments, and we even offer same-day ACH transfers. Our team knows first-hand how tedious and time-consuming paying vendors can be - Settle helps get your funds where they need to go in a fast and secure way with competitive pricing and speed. Get started for free with free bill pay and 10 free purchase orders.
Sources:
- https://www.thebalance.com/ach-vs-wire-transfer-3886077
- https://www.consumerfinance.gov/ask-cfpb/can-i-use-the-automated-clearing-house-ach-network-to-transfer-funds-abroad-en-1165/
- https://www.investopedia.com/terms/w/wiretransfer.asp
