Have you ever wondered what possible ways of moving money from one account to another electronically? Yes, it is possible with the ACH Transfers. They enable you to send or receive money conveniently and securely. This article will show you how ACH transfers work.
You may be using ACH transfers without even realizing it. If you’re paid via direct deposit, for example, that’s a form of ACH transfer. Paying bills online through your bank account is another.
You can also use ACH transfers to make single or recurring deposits into an individual retirement account, a taxable brokerage account, or a college savings account.
Business owners can also use ACH to pay vendors or receive payments from clients and customers. More than 21 billion ACH transactions were processed in 2019 alone.
What are ACH Transfers?
According to the National Automated Clearing House Association (NACHA), the ACH network is a batch processing system that banks and other financial institutions use to aggregate ACH transactions for processing, which typically happens three times each business day.
An ACH transfer is the electronic movement of money between banks through the Automated Clearing House network, one of the biggest U.S. payment systems.
ACH transfers have many uses and can be more cost-efficient and user-friendly than writing checks or paying with a credit or debit card. If you’re curious about how ACH transfers work, here’s everything you need to know.
Benefits of ACH Transactions
In addition to lower transaction fees, ACH benefits can include:
- Convenience; ACH payments create less administrative hassle for a business. There are fewer paper checks to handle, paper invoices, and trips to the bank.
- Easier recurring billing; unlike checks, ACH supports recurring billing.
- Preferred funding compared to checks; while payment schedules vary, typically banks and credit unions process electronic payments before they process check payments.
- Fewer disputes; credit and debit card transactions can be disputed for a variety of reasons and they have a higher rate of non-payment compared to ACH payments.
- More secure; paper checks touch multiple hands during processing. They could be lost or left out in an unsecured area. With ACH payments, bank account information is encrypted within a secure system.
- Environmentally friendly; no checks means less paper. Electronic checks issued through ACH, therefore, reduce the use of ink as well as fuel to transport checks. ACH can help those businesses looking for ways to reduce their environmental footprint.
Downsides to ACH Transfers
ACH transfers are convenient, but not necessarily perfect. There are some potential drawbacks to keep in mind when using them to move money from one bank to another, send payments, or pay bills.
- ACH Transfer Transaction Limits; many banks impose limits on how much money you can send via an ACH transfer. There may be per-transaction limits, daily limits, and monthly or weekly limits.
- Transferring Too Frequently From Savings Could Trigger a Penalty; savings accounts are governed by Federal Reserve Regulation D, which limits certain types of withdrawals to six per month.
- Timing Matters for ACH Transfers; when you choose to send an ACH transfer matters, because not every bank sends them for bank processing at the same time.
Types of ACH Transfers
The ACH Network processes two types of ACH transactions: direct deposits and direct payments.
ACH Direct Deposits
An ACH direct deposit is any kind of electronic transfer made from a business or government entity to a consumer. The kinds of payments that fit in this category include direct deposits of:
- Employer-Reimbursed Expenses
- Government Benefits
- Tax Refunds
- Annuity Payments
- Interest Payments
With ACH direct deposits, you’re receiving money. When you send one, you’re making an ACH direct payment.
ACH Direct Payments
Direct payments can be used by individuals, businesses, and other organizations to send money. For example, if you’re paying a bill online with your bank account, that’s an ACH direct payment.
Also, in an ACH direct-payment transaction, the person sending the money sees an ACH debit appear in his or her bank account.
This debit shows to whom the money was paid and in what amount. The person or entity receiving the money registers it in his or her bank account as an ACH credit.
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Wire Transfers vs. ACH Transfers
ACH Payments and wire transfers each have their uses. If you wish to send or receive smaller payments that can be scheduled and paid out automatically, ACH is likely the way to go.
However, if you have larger, one-time transfers that are time-sensitive, then wire transfer is pretty much your only choice.
ACH costs much less than wire transfers, but a large part of that is because ACH is an automated process requiring no human intervention while a wire transfer requires humans to send and receive the payment.
The wired network, however, processes transactions in real-time, so you can expect U.S. wire transfers to be delivered within hours, if not minutes.
Because of its cost and speed, a wire transfer is best for large-sum and time-sensitive transfers, either in the U.S. or abroad.
Frequently Asked Questions
When it comes security for ACH and wire transfers, there are a number of fairly obvious points of vulnerability. Money transfer messages can be hijacked in mid transfer, or fraudulent transfer messages can be initiated by criminals.
2. How does ACH transfer differ from debit and credit card transactions?
ACH transfer is similar to debit card transactions in that funds are drawn from a checking or savings account, but that’s where the similarities end.
3. How much does it cost to process an ACH transfer?
The cost of processing an ACH transfer depends on the merchant’s payment processing provider and other factors specific to their business. But the short answer is “not much.”
4. How long does it take to get paid?
Historically, ACH payment deposits have taken longer to post than credit or debit card payments (within several days), but the gap has been closing in the last few years.
5. What’s needed to accept ACH payments?
A business can accept ACH payments at the point of sale (POS), online, by phone, or mail. The first thing a business needs to do if they want to receive ACH payments from customers is work with a payment processor that offers the service.
In conclusion, ACH transfers can be a relatively hassle-free way to send money or receive it. Either way, make sure you understand your bank’s policies for ACH direct deposits and direct payments. Also, be vigilant for ACH transfer scams.