- ACH transfers use the automated clearinghouse network to transfer money between bank or credit union accounts.
- These transfers are processed in batches, which increases the time required to complete them.
- While other forms of money movement may be faster, ACH transfers remain a key part of the US financial system.
Moving money between individuals and businesses in the 21st century has become an almost seamless process. With the push of a button, you can transfer funds from your bank to a friend’s account. Now your monthly bills can be paid automatically without having to do anything. And on payday, you can have your employer route the money directly to your account, eliminating the hassle of paper checks.
While all of this may seem like one of the marvels of modern technology, in many cases behind the scenes you’re using a decades-old system known as ACH transfers. There are other ways to transfer money, such as wire transfers and network RTP (real-time payments). But ACH transfers remain a crucial part of the financial system.
What is an ACH transfer?
ACH transfers electronically transfer money between bank accounts through the automated clearing house network in the United States. They can be used for international payments to and from US accounts, but other countries also have separate transfer networks.
ACH transfers are “part of a long-established, well-oiled machine that moves money from one bank account to another,” says Ruby Walia, senior advisor for
at Mobiquity, a digital consulting firm. “To most people, it feels like it’s happening invisibly, but it’s a core pillar of the US banking ecosystem.”
ACH transfers can be used to make all kinds of payments, such as for businesses transferring money from corporate bank accounts to employees’ personal accounts via direct deposit, as well as for individuals transferring money from one bank or credit union account to another. Even payment platforms like Venmo rely heavily on behind-the-scenes ACH transfers, Walia says.
For example, if you don’t have enough money in your Venmo account to send your friend money to split a dinner bill, you can always initiate a transfer through your linked bank account. Venmo would then essentially put the money in your friend’s account. Meanwhile, an ACH transfer would move money from your linked bank account to Venmo.
The ACH network is governed by the National Automated Clearing House Association, or Nacha. Members include financial institutions and payment processors involved in ACH transfers and the ACH Network.
Nacha essentially maintains and operates what is analogous to a road network, Walia explains. Then, to facilitate ACH transfers, banks and
typically work with separate organizations called payment processors that “act as on- and off-ramps to that road network,” he says.
Types of ACH Transfers
ACH transfers can be divided into two main categories: credits and debits. With credits, the sender initiates the ACH transfer, so they are essentially transferring money from their account to another. With debits, the recipient initiates the transfer, where they essentially pull money from another account into their own.
Transfers by direct deposit
With direct deposit transfers, payers can deposit money directly into recipient accounts. These transfers are ACH credits because the sender sends money or credits the recipient’s account.
For example, an employer can initiate a direct deposit transfer from their business bank account to an employee’s bank account. So, rather than sending a paper check, which then requires the employee to deposit into their bank account, the money goes directly there.
Direct deposits can also be used for other types of transactions, such as the government depositing Social Security payments into beneficiary accounts.
Direct payment transfers
Unlike direct deposits, direct payments are ACH debit transactions, where the recipient withdraws money from the sender, although the sender gives permission for this to happen. For example, direct payments can be set up to automate bill payments.
If you give your bank details to, say, your electricity supplier to set up direct payments, then each month that utility company can debit your account regardless of your monthly bill.
How long do ACH transfers take to go through?
ACH transfers can take anywhere from a few hours to a few business days (or longer), depending on factors such as the type of ACH transfer and any blockages, such as payment instruction errors.
ACH transfers depend on payment processors sending batches of transactions as electronic files. Transactions are then cleared by one of two ACH operators, the Federal Reserve or the electronic payments network, before the money is finally credited or debited to the relevant accounts.
This clearing typically occurs within certain settlement windows, rather than instantaneously, and depends on the openness of the Fed system. That’s why ACH transfers don’t happen on weekends or holidays, although they can happen overnight.
How much do ACH transfers cost?
ACH transfers have different costs depending on the type of transfer and the parties involved.
For standard transfers, “Nacha charges a fraction of a penny per individual transaction. But payment processors, companies like Stripe and Square, will charge a lot more,” Walia says. “They will charge up to 50 cents per transaction (flat rate). In some cases, they charge a percentage of the transferred amount.”
Sometimes banks cover transfer fees for customers as part of their business models. In other cases, the beneficiaries pay.
For example, “If your monthly gym membership costs $49.99, you will pay $49.99. But the gym might only receive $49.49 because the payment processor and the bank took 50 cents”, explains Walia.
Same-day ACH transfers have higher fees. On the one hand, ACH operators collect and distribute 5.2 cents per transaction from the originating financial institution to the receiving financial institution. Customers might also have to pay additional fees to their financial institutions for this faster speed.
ACH transfer vs wire transfer
ACH transfers and bank transfers may look the same, but they are two different ways to transfer money. ACH transfers go through the ACH network, which ultimately involves money being credited or debited from accounts. Transfer instructions are also sent in batches, rather than for each individual transaction immediately.
In contrast, a wire transfer is a direct electronic transfer that can be made through banks or other types of non-bank providers. Without having to go through a clearing house, the transaction can be done much faster. In many cases, domestic wire transfers are completed the same day they are launched. However, fees for bank transfers tend to be much higher. Instead of pennies, wire transfer fees are often double-digit dollar amounts.
Overall, different types of transfers have their advantages and disadvantages, so their use may depend on how the parties involved prioritize issues such as speed and cost. As things stand, even amid new financial innovations, ACH transfers remain key to the movement of money in the United States.