What are ACH transfers?

ACH transfers are electronic bank-to-bank transfers processed through the Automated Clearing House (ACH) network. According to Nacha, the association responsible for these transfers, the ACH network is a batch processing system that banks and other financial institutions use to aggregate these transactions for processing, which typically occurs three times per business day.

You might be using ACH transfers without even realizing it. Receiving your salary by direct deposit or paying your bills online through your bank accounts are just two examples of ACH transfers. You can also use ACH transfers to make one-time or recurring deposits to an Individual Retirement Account (IRA), taxable brokerage account, or education savings account. Business owners can also use ACH to pay vendors or receive payments from customers and customers.

Automatic payments through the system are growing in popularity. Nacha said more than two billion online transfers were initiated in 2020. This is an increase of 15.2% from the previous year. Person-to-person and business-to-business transactions also increased to reach 62 million (44%) and 1.2 billion (15%), respectively, for the same period.

ACH transfers have many uses and can be more economical and user-friendly than writing checks or paying with a credit or debit card. If you are curious about how ACH transfers work, here’s all you need to know.

Key points to remember

  • ACH transfers are electronic bank-to-bank transfers processed through the automated clearing house network.
  • Direct deposits are transfers to an account, such as payroll, benefits, and tax refund deposits.
  • Direct payments involve taking money out of an account, including bill payments or when you send money to someone else.
  • ACH transfers are convenient, fast, and often free.
  • You may be limited in the number of ACH transactions you can initiate, you may incur additional charges, and there may be delays in sending / receiving funds.

Types of ACH transfers

ACH transfers can make life easier for both sender and receiver. Gone are the days of having to write and wait for a check to clear, or have your utility bill pay your bill before it is due.

While all of this is still possible, now you have other options. ACH Money Transfers allow you to conveniently and securely send and receive money without ever having to leave your home. The ACH network processes two types of ACH transactions: direct deposits and direct payments.

ACH direct deposits

An ACH direct deposit is any type of electronic transfer made from a business or government entity to a consumer. The types of payments that fall into this category include direct deposits of:

With ACH direct deposits, you get money. When you send one, you are 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 pay an invoice online with your bank account, it is an ACH direct payment. Social payment apps like Venmo and Zelle also use the network when you send money to friends and family.

In an ACH direct payment transaction, the person sending the money sees an ACH debit appear on their bank account. This debit indicates to whom the money has been paid and for what amount. The person or entity that receives the money records it in their bank account as an ACH loan. The first withdraws money from one account while the second pushes it to another account.

ACH transfers are generally fast, often free, and can be more user-friendly than writing a check or paying a bill with a credit or debit card.

Benefits of ACH transfers

Using ACH transfers to pay bills or make person-to-person payments offers several benefits, starting with convenience. Paying your mortgage, utility bill, or other recurring monthly expense using an ACH electronic payment can be easier and less time consuming than writing and sending a check. Not to mention that you can save a few dollars by not having to spend money on stamps. Additionally, an ACH payment may be more secure than other forms of payment.

Sending and receiving ACH payments is generally fast. The settlement of a transaction, or the transfer of funds from one bank to another through the ACH network, usually takes place the day after it is launched. Nacha’s operating rules require credits to be settled within one to two business days and debits to be settled the next business day.

Another advantage is that ACH transfers are often free, depending on where you bank and the type of transfer involved. For example, your bank may not charge you anything for transferring money from your checking account to an account at another bank. And if it charges a fee, it can be a nominal cost of just a few dollars.

ACH transfers are much more economical than wire transfers, which can range from $ 14 to $ 75 for outgoing international transfers. Bank transfers are known for their speed and are often used for same day service, but sometimes they can take longer. With an international bank transfer, for example, it can take several business days for the money to move from one account to another, and then a few more days for the transfer to clear.

Never send money to someone you don’t know.

Are there any downsides to ACH transfers?

ACH transfers are convenient, but not necessarily perfect. There are some potential downsides to keep in mind when using them to transfer money from one bank to another, send payments, or pay bills.

Limits of ACH transfer transactions

Many banks have limits on the amount of money you can send through an ACH transfer. There may be limits per trade, daily limits, and monthly or weekly limits. There may be a limit for bill payments and another for transfers to other banks. Or one type of ACH transaction can be unlimited, but not another. Banks can also impose limits on transfer destinations. For example, they can prohibit international transfers.

Transferring savings too frequently could trigger a penalty

Savings accounts are governed by Federal Reserve Regulation D, which limits certain types of withdrawals to six per month. If you exceed this limit with multiple ACH transfers from savings to another bank, you may be subject to an excess withdrawal penalty. And if frequent transfers of savings become routine, the bank can convert your savings account into a checking account.

Timing issues for ACH transfers

When choosing to send an ACH transfer, the delay is important. This is because not all banks send them for bank processing at the same time. There may be a cut-off time when you need to complete your transfer for it to be processed for the next business day.

Initiating an ACH transfer after the deadline can cause a delay, which can be a problem if you’re trying to reach a due date for one of your invoices to avoid late fees. ACH takes an average of one to three business days and is considered slow in the age of fintech and instant payments. Same-day ACH processing is expanding to address the sluggishness of service of the standard ACH system. Same-day ACH volume increased 35.7%, with a total of 96.7 million payments made in Q4 2020.

Money transfer apps don’t charge a fee for sending money to friends and family most of the time, but some may charge a processing fee of almost 3% when paying with a credit card. credit, then read the fine print.

Other ways to send money online

If you need a faster way to send money online, a social payment money transfer app can help. These apps allow you to send money to people using their email addresses or phone numbers. The money you send can come from your bank account, your credit card, or an in-app balance.

There are of course traditional money transfer services, such as MoneyGram and Western Union. These services allow you to send money online and pay bills by creating an account and linking it to your credit or debit card. Keep in mind, however, that these companies often charge a fee.

The biggest advantage of these apps, besides being easy to use, is the speed they can offer for transfers. Depending on which one you use, you might be able to complete a money transfer in just a few minutes. This gives them an advantage over ACH transfers.

The bottom line

ACH transfers can be a relatively easy way to send or receive money. Either way, make sure you understand your bank’s policies regarding direct deposits and ACH direct payments. Also watch out for ACH transfer scams. A common scam, for example, involves someone sending you an email letting you know money is owed to you, and all you need to do to receive it is provide your bank account number and number. Routing. If something sounds too good to be true, it probably is.