Electronic payments are becoming increasingly popular as more people choose to pay bills or send money online. Two of the easiest ways to send money directly from a bank account are direct transfers and wire transfers. So what is the difference between them? While both make it easy to send money electronically, they’re not exactly the same in terms of speed and cost.

  • Both the Automated Clearing House (ACH) and wire transfers offer convenience when sending money or paying bills electronically.
  • In terms of speed, wire transfers tend to be processed much faster than ACH transfers.
  • Most banks charge wire transfer fees to send or receive money, while ACH payments are usually free.
  • Determining when to use ACH or a wire transfer can depend on the reason for sending or receiving money and the urgency of completing the transaction.

ACH explained

An ACH transaction involves the transfer of funds between banks, credit unions, or other financial institutions through an electronic network. This type of transfer can be used for a variety of purposes, including processing:

  • Direct deposit of paychecks
  • Direct deposit of government benefits or tax refunds
  • Recurring charges (such as automatic bill payments)
  • One-time bill payments
  • International payments
  • Healthcare Claims Payments
  • Person-to-person (P2P) payments
  • Business-to-business payments (B2B)

Approximately 7.5 billion ACH payments totaling $18.9 trillion were processed in the fourth quarter of 2021. Since 2011, the use of ACH transfers has grown 8.2% year over year, with a steady increase in the number of direct deposits and bill payments processed electronically.

How ACH transfers work

An automated clearing house transaction has several moving parts. How ACH transfers work can vary depending on whether the transaction involves a direct payment or a debit. Here are some key terminologies you need to know to understand how the process works.

  • Author-The entity that is authorized to request a payment or transfer from someone else
  • Original Depository Financial Institution (ODFI)—The originator’s bank
  • ACH Operator—the clearinghouse processing the transaction
  • Recipient-The entity that performs an ACH transaction
  • Receiving Depository Financial Institution (RDFI)—Receiver’s bank

Simply put, the first bank initiates an ACH transfer, which is bundled with other ACH transfers. These transactions are processed by the clearing house. Once the transfers are processed for the day, they are sent in batches to the receiving bank. The receiving bank then credits or debits the appropriate accounts accordingly.

With the exception of same-day transactions, ACH transfers can take one to two business days.

ACH transfer example

Suppose you have a recurring bill that needs to be paid every month, like a credit card bill. Rather than logging into your credit card company’s website every month, you decide to schedule a recurring payment through your bank. You log into your online banking account or mobile banking app and authorize payment to your credit card company. The credit card company becomes the initiator of the transaction.

The credit card company sends a file to their bank that includes the payment details. His bank is the original custodian financial institution. The payment is processed by the clearinghouse or ACH operator. The ACH operator sends a file containing the payment request information back to your bank, which is the receiving depository financial institution.

Your bank makes the payment to the credit card company as scheduled. In this transaction, you are the recipient, because you are the recipient of a payment request.

For an ACH transaction to be processed, there must be sufficient funds in the account. Otherwise, the payment or transfer will be returned, which may result in charges.

Bank transfers explained

A wire transfer is a transaction initiated through a bank that allows the transfer of funds from one account to another. When both banks are located in the United States, this is called a “domestic wire transfer”. When a bank is located outside of the United States, it is referred to as an “international wire transfer” or “money transfer”.

Wire transfers are typically used when large sums of money need to be sent quickly. For example, if you are buying a house, you may be asked to send your down payment funds by wire transfer. You can also use wire transfers to send money to individuals.

How bank transfers work

Wire transfers allow banks to communicate with each other to transfer funds between accounts. The person sending a payment provides the bank with specific information, including:

  • The amount to transfer
  • The account number that will be used to make the transfer
  • The name, address and telephone number of the recipient
  • The recipient’s bank routing number (or SWIFT code for international transfers)
  • The recipient’s bank account number

Once the bank has this information, they can process the wire transfer to deduct the requested amount from the sender’s account. This amount is then credited to the recipient’s account. During this time, the person sending a wire transfer pays a fee. The person receiving the transfer may also pay a fee. Fees may vary from bank to bank, but international wire transfers generally incur higher fees than domestic transfers.

Once a wire transfer payment is sent and accepted, the transaction cannot be cancelled.

Example of bank transfer

Let’s say you buy a house and the amount owed at closing is $42,000. The closing attorney asks you to initiate a wire transfer to make the payment. You go to your bank and provide them with the recipient’s name and account information. The bank deducts $42,000 from your money market savings account and transfers it to the beneficiary’s bank. The bank charges you a $35 fee for the transfer. Meanwhile, the money is credited to the recipient’s account within hours.

ACH vs Bank Transfer: Which is Better?

Whether it makes sense to use an ACH or wire transfer may depend on the situation. If you make bill payments or schedule direct deposit for your paycheck, government benefits, or tax refund, these transactions will be processed through the ACH network. On the other hand, if you need to send someone a large sum of money, you can choose to do so using either an ACH transfer or a wire transfer.

In terms of differences, speed and cost are what set ACH payments and wire transfers apart from each other. ACH transfers are usually free, but may take a few business days to process. A wire transfer can be processed the same day, sometimes in just a few hours. The trade-off is that your bank may charge you a fee for this convenience.

Both ACH and wire transfers are secure, although the latter are frequently used by scammers to target unsuspecting victims for wire fraud. For example, you may receive an email telling you that you have won a contest, but to claim the money you must first pay a processing fee by bank transfer. You transfer the money, but you get nothing back because the contest never existed.

What is the difference between ACH and bank transfers?

An ACH transfer is made through a clearing house and can be used to process direct payments or direct deposits. Wire transfers allow money to be transferred from one bank account to another, usually for a fee.

How secure are ACH transfers?

ACH transfers are regulated and designed to prevent fraudulent transactions. They may also be more secure than certified checks, cashier’s checks or personal checks. However, it is important to initiate ACH transfers or receive them only from trusted entities.

Are there fees for ACH and transfers?

In most cases, ACH transfers, including online bill payments and direct deposit of paychecks, are free, while banks typically charge fees for domestic and international wire transfers.

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