Though they’ve been around for some time, two types of electronic payments remain popular with consumers and merchants today: Automated Clearing House (ACH) and wire transfer payments. Let’s look at ACH vs wire transactions and how these two funds transfer methods differ from one another.
What is an ACH payment?
Automated clearing house payments are ideal for several business-to-business and business-to-consumer scenarios.
- Paychecks.
- Bill payments.
- Tax refunds.
- Healthcare claim payments, and more.
An ACH payment occurs when money from one bank or financial institution is moved to another with the help of a payment processor. ACH transfer payments move through a national network, allowing a clearinghouse to process them.
When transactions pass through the clearinghouse, the network “batches” daily payments, allowing the network (and not a bank) to process those payments later in the day, making sure each recipient receives the proper amount. Once processed, the bank or credit union receives their ACH payment in a batch as well, requiring them to attribute each deposit to the appropriate bank account. The batching and distribution process is automatic; no manual process occurs. By processing electronic payments rather than paper checks, recipients receive money faster, safer, and cheaper.
Although automatic, ACH payments are not instantaneous. The process may take up to 1-3 days for funds to reach a vendor or a business. Furthermore, the payment will not clear a customer’s bank account until the clearinghouse processes the batch. Thus, a company may expect an ACH payment, but the business won't know if those funds are good until the ACH process concludes. If a customer does not have enough funds in his or her account to satisfy the payment, the ACH process can overdraw his or her account.
Although this technology has been around for more than 40 years, ACH use continues to increase. In fact, the ACH network currently processes more than 24 billion electronic transactions, amounting to $41 trillion annually. Some examples of recurring ACH payments include direct salary deposits, governmental benefit payments, bill payments, tax refund payments, and vendor payments. These types of electronic transactions are best used for periodic or recurring payments, such as a monthly electric bill, or a monthly service provided by a business, such as a gym membership.
How they work.
When arranging ACH payments for your business, the process often depends upon your bank. Some banks allow you to set up ACH payments online. Others require a form to be completed by the receiver, who then shares that information with your bank. Note, there are usually no processing fees when making ACH payments though there are typically funds transfer limits.
What is a wire transfer?
Wire transfer payments are ideal for scenarios when large sums of money need to be sent and received the same day, or even within a matter of hours.
- Real estate transactions.
- Law office payments.
- International transactions, and more.
A wire transfer is also a form of electronic payment, occurring between two banks. Unlike ACH payments, however, wire transfers are immediate since they don’t have to be processed through a clearinghouse. For large dollar purchases, such as purchasing a home or paying off a significant loan, the recipient may require a wire transfer.
For example, a lender may require an individual to wire money for the down payment on the house. Often, a lender won’t move forward on closing a home purchase until this money is received (and cleared). A wire transfer creates same-day access to these funds, expediting the home’s purchase.
When you wire money to another entity or person, the funds are electronically transferred from one bank to another using a wire transfer service. When the transfer is complete, both the sender and the recipient receive notice of the wire’s completion. Unlike ACH payments, wire transfers typically cost money. For example, the sender pays a $20-$35 fee when initiating the transfer and the bank charges the recipient anywhere between $10-$20.
How they work.
Arranging a wire transfer, again, depends on the receiving bank’s policies. You may be able to arrange a wire transfer over the phone. Other banks may require your signature as permission to initiate the wire.
What are the differences between ACH vs. wire transfer?
Both ACH and wire transfers electronically move money from one financial institution to another. However, key differences exist. Let’s examine the overall differences between ACH vs. wire transfer payments.
- Wire transfers are immediate whereas ACH payments can take a couple to a few days to process.
- Wire transfers cost money for both the sender and the receiver whereas ACH payments are free or cost very little per transaction.
- Wire transfers are initiated and processed by banks while ACH payments are processed automatically through a clearinghouse.
- Because of clearinghouse rules, ACH payments are often more secure than wire transfers.
- For wire transfers, only the sender can initiate the transfer. For ACH payments, businesses or individuals can send or receive funds.
ACH vs. wire transfer speeds.
ACH payments often take 1–3 days to be processed. However, many ACH services today are integrating next-day receipt of ACH payments. When choosing an ACH vendor, whether it’s your bank or another merchant services provider, make sure you understand the required processing time for you to receive money in your business account. After all, if you’re running a business, tracking cash flow is one of your top priorities.
For wire transfers (because they are instantaneous) you often have access to these funds the same business day. Because wire transfers can be expensive, you would only want to use this electronic payment option for high dollar or urgent transactions.
ACH vs wire transfer security and safety.
Let’s dig deeper into the differences in security between ACH payments and wire transfers. Although both methods of transfer are secure, ACH payments edge out wire transfers in safety. Because ACH payments pass through clearinghouses, each payment is subject to more rules, regulations, and scrutiny. At the same time, if a mistake or fraudulent transaction occurs, most ACH transactions can be reversed, whereas wire transfers cannot.
Although wire transfers aren’t as secure as ACH payments, they are still safer than cashier’s checks. Because cashier’s checks are paper checks, they are more susceptible to fraud or forgery. When sending a wire transfer, however, the sender must confirm the recipient’s banking details, such as routing and account number. If this information is correct, and not transposed, for example, wire transfers are still considered a safe electronic transaction.
What is the best option when choosing between ACH payments and wire transfers?
Given their affordability and convenience, ACH payments are preferred by most businesses.
If you’re looking to change ACH vendors, you should explore several options. You should also ask several questions. For example, how long does it take for a potential payments partner to process ACH payments? When will you receive the funds? Further, ask if there’s a cost for accepting or sending ACH payments. How are these payments assessed? Are they based on the number of transactions?
In the real estate business? Running a law firm? You’ll want to explore your wire options with your bank so you can receive larger sums of money quickly.
The benefits of accepting ACH and/or wire payments are numerous. Not only does providing these services offer additional, convenient payment systems for your customers, they also can increase your cash flow by allowing you to receive payments faster and freeing your team up to focus on high-level issues.
At NAB, we can help guide you through the setup of ACH and wire transfers. We have the technology you need to accept almost any payment in the modern world. Better still, we’ll help you tailor your payment processing to your specific business, giving you peace of mind. To set up a consultation, contact us here or give us a call at 877.840.1952.
