ACH vs Wire Transfer: Which Is Better for Your Small Business?
Technology has made it very convenient to electronically transfer money from one’s bank account. Two popular methods that allow this include Automated Clearing House (ACH) payments and wire transfers. Both of these electronic money transfer methods fall under the broad category of Electronic Fund Transfers (EFT).
Electronic fund transfers (or EFT payments) continue to play a growing role in the global payments industry landscape. In 2022, a Vantage Market Research report highlighted that the worldwide EFT market had a value of more than $66 billion. The same report projects that the value will surpass $129 billion by 2023.
Fedwire is a secure wire transfer system used by the US Federal Reserve and the organization releases detailed statistics on its wire transfer volumes. In 2022, the value of originated transfers through Fedwire crossed $1 billion and annual volumes grew by 4.1% from 2021.
Similarly, Automated Clearing House (or ACH) payment volumes continue to rise in the US. In the third quarter of 2021, 7.3 billion ACH payments were completed, representing a 7.7% increase over the same timeframe in 2020. This follows similar strong growth in the previous two quarters, says the National Automated Clearing House Network (or NACHA). The growth of payment volumes in the B2B (business-to-business) sector was robust too with an increase of 28.7%.
In this article, we’ll take a closer look at ACH vs wire transfer payments and see how they stack up against each other with respect to small businesses.
ACH Payment Gateway vs Wire Transfer: An Overview
In the rapidly growing digital payments arena, millions of consumers complete credit card and debit card transactions every day. However, these electronic payment methods aren’t the only widely available payment options.
Today, many businesses process customer payments via ACH transactions and wire transfers. These electronic fund transfers each involve the movement of money between two financial institutions.
The Automated Clearing House network is based in the United States and consists of more than 10,000 credit unions, banks, and other financial institutions. It processes ACH transfers while banks handle wire transfers. Both methods require the merchant to provide the recipient’s bank routing number or bank account number.
A Snapshot of ACH Transfers
An ACH transfer is a bank-to-bank money transfer sent through the Automated Clearing House network (or ACH network). The bank that requests the ACH transfer is known as the receiving bank. It uses ACH instructions to request funds from the originating bank. Up to five times a day, receiving institutions such as banks, credit unions, and other financial institutions send batches of transactions to the ACH network for processing. Processing these ACH submissions can take from a few hours to a few days.
Financial institutions that make up the ACH network in the US group transactions together and process them in batches. As mentioned earlier, batch processing can occur a maximum of five times a day. NACHA is the overseer of this process and it sets, implements, and maintains the rules for ACH transactions.
ACH transactions occur independently of any bank as the ACH network processes transfers. This makes ACH transfer an excellent solution for recurring transactions such as bill payments and paying employee paychecks.
In general, the time taken for debit and credit transfers is one business day and two business days, respectively. However,
the National Automated Clearing House Network (or NACHA) which maintains oversight of the ACH transfer process has now set up same-day ACH transfers that can be requested by paying an additional fee. Note that the ACH system is only available for inter-bank transactions within the United States.
Two Types of ACH Payment Gateway
American companies regularly use two types of ACH payment gateway. Depending on the needs of a small business, the business owner may utilize one or both ACH payment methods. An ACH payment typically incurs a relatively small fee.
ACH Direct Deposit
An ACH direct deposit is sent from a business or government entity to an individual. Payroll deposits and Social Security benefits, typically deposited into a recipient’s checking account, are two examples of ACH direct deposits. Tax refunds, interest payments, and annuity payments also qualify as ACH direct deposits.
ACH Direct Payment
An ACH direct payment is ideal for making bill payments and supplier invoice payments. A business owner may also use the ACH processing system to avoid using paper checks. If you are currently sending money via a PayPal or Venmo app, you are completing ACH direct payments.
To route money between two different banks, the ACH direct payment network uses an ACH debit and ACH credit system. A typical transaction involves a money transfer from the sender’s account to the recipient’s account.
How ACH Payments Work
Both ACH payment types involve the same processing method. Funds are withdrawn from the sender’s account and transferred into the recipient’s account. Batches of ACH transfers are processed three times daily.
Global ACH Payments
A global ACH payment is similar in nature to a US-based ACH payment. Global ACH payments are designed for cross-border transactions that involve international money transfers.
As previously noted, ACH payments in the US always comply with NACHA standards. In contrast, financial institutions involved in global ACH payments do not have any universal compliance standards. Successful global ACH payments rely on the ethical and efficient execution of transactions by participating banks.
There is, however, a financial body in Europe that is the equivalent of NACHA. Known as SEPA or Single Euro Payments Area, this ACH institution consists of 36 European countries.
How ACH Payments Differ From EFT Payments
There’s a simple distinction between ACH payments and electronic fund transfer (or EFT) payments. ACH payments are exclusively sent through the Automated Clearing House (or ACH) network. No other payment services are involved in ACH transactions.
In contrast, EFT payments include the entire range of electronic payments. Besides ACH payments, cashless EFT payments include credit card and debit card transactions along with digital wallets. An ATM cash withdrawal also qualifies as an EFT transaction.
The authorization methods for ACH and wire transfers are also different. While bank employees authorize ACH payments, EFT payments receive authorization via secure passwords or PIN codes.
A Snapshot of Wire Transfers
The origin of wire transfers is still evident from its name—the telegraph wire. Wire transfers are digital financial transactions containing similarities to eChecks, or electronic cashier’s checks. A wire transfer begins when the sending bank securely messages the receiving bank. The sending bank’s wire instructions include the recipient’s ABA bank routing number, bank account number, and wired funds amount.
Although wire transfers offer same-day fundingtransfers, banks usually have their own rules regarding deadlines for such wire transfers. Moreover, they may also have limits on the amount of money that can be transferred in a single same-day transaction. Hence, even though wire transfers are best suited for single, large transactions that need to be processed quickly, cutoff rules and transfer limits by banks can negate the benefits of wire transfers.
Wire transfers are also known as remittance transfers. In simple terms, wire transfers are processed individually, in real-time, where payment instructions are transferred from one bank to the other. Unlike ACH payments, wire transfer requests do not join a queue of requests that are processed a few times a day. This is why wire transfers typically carry high transaction fees. For that reason, this payment method is best suited for high-dollar transactions or one-time international wire transfers.
Domestic wire transfer fees usually don’t go beyond $35 but there could be fees levied by intermediary institutions. The transfer fee is not the only fee that banks charge. Service fees, investigations fees, and reimbursement fees can also be charged and all this adds to the overall cost of wire transfers.
ACH vs Wire Transfer: Transfer Speed
When comparing ACH vs wire transfers, the transaction’s transfer speed is an important consideration. It’s not uncommon for an ACH payment to take several business days, and there’s no way to speed up the process. Note that the Federal Reserve is working to adopt a real-time ACH payment and settlement structure. Also, same-day ACH is available but customers need to pay an additional fee for this service. This may result in ACH transfers becoming more competitive with wire transfers.
In contrast, a wire transfer generally goes through very quickly. Each financial institution decides on the cutoff time for initiating a same-business-day transfer of funds. The recipient can usually access the funds within 24 hours after the money arrives in their account. From that perspective, a wire transfer often provides next-day funds availability.
In the case of ACH transfers, the funds will appear under “Pending” status for a few days till the ACH system processes the transaction. It should be noted that the cutoff time for ACH transfer requests can be later in the day when compared to wire transfers because ACH batch processing is usually scheduled for a time within the next three days.
Completing domestic wire transactions or international transfers appears to be a simple, streamlined process. However, wire transfers are subject to scams. In addition, know that wire transaction reversals are highly unlikely.
ACH vs Wire Transfer: Other Key Differences
ACH payments and wire transfers are both widely accepted payment methods. However, the two types of transfers have several key differences apart from just the transfer speed.
- Geographic boundaries: ACH payments are limited to American businesses. ACH transfers are also available within US military bases and embassies. In contrast, companies in many countries can easily send international wire transfers. However, international wire transfers may not be available with every bank.
- Transaction scope: ACH payments’ batch processing is good for businesses that handle bulk payments. This makes ACH perfect for recurring bill payments, payroll, tax refunds, and receiving government benefits. Wire transfers are processed on an individual basis and are best used when quick payments need to be made. Wire transfers are also a better choice for international payments.
- Processing cost: Batched ACH payments incur lower transfer fees than individually processed wire transfers. ACH processing fees are usually only 1% of the transacted amount and the receiving of ACH payments is mostly free. On the other hand, sometimes wire transfers can cost as much as $100.
- Transaction security: Because ACH payments use the dedicated NACHA network, they are considered more secure than wire transfers. Wires are sent through widely used banking channels and are subject to scams.
Choosing The Best Fund Transfer Services
ACH payments and wire transfers have their respective pros and cons. However, there are certain cases where one payment method is clearly the better choice.
When ACH Payments Are The Better Option
You’ll save money by paying your personal bills online via the ACH network. In addition, know that certain banks and other financial service organizations enable free bill payments through the ACH network.
The ACH network’s batch processing method is also ideal for business-to-business (or B2B) payments. In addition to more efficient processing cycles, smaller fees will boost the originating business’ bottom line.
When Wire Transfers Are The Better Option
Wire transfers lend themselves to large personal transactions such as a real estate down payment or closing cost fees. A wire transfer (or bank transfer) is also ideal for high-dollar transactions that justify the hefty transaction fee and must be executed quickly.
On the business side, wires are well-suited for making substantial B2B payments. Examples include merger and acquisition transaction payments and commercial real estate purchases.
ACH Payments and Wire Transfers: The Downsides
Along with each payment method’s advantages, they each have their downsides. Each small business owner should consider which factors will have the most impact on their business’s operation. Armed with that knowledge, they should make their decision accordingly.
Disadvantages of ACH Payments
Although ACH transfers are processed automatically, payments can take up to three days to complete. This delay results from the banks’ and ACH network’s batch processing schedule.
This means that a specific transfer request can sit for several hours before being sent to its destination. However, NACHA has recently taken steps to move toward same-day ACH funds availability.
In addition, the ACH network only operates within the United States. Therefore, global merchants cannot take advantage of the network’s lower transfer fees and better transaction security.
International merchants can use an “ACH-like” network operating within that country, such as Europe’s Single Euro Payments Area (or SEPA). Other international transfer options are SWIFT payments or PayPal transfers.
Disadvantages of Wire Transfers
A wire transfer is a notoriously expensive way to send payments. For example, banks typically charge fees of $15 to $30 for domestic wire transfers. Some banks will charge up to $20 to receive a wire transfer. Because of the high cost, wire transfers are not practical for businesses with high transaction volumes.
Wire transfers are a less secure form of payment than ACH transactions. Note that a wire transfer isn’t generally subject to reversals. Therefore, verify that the recipient’s banking details are legitimate before processing the payment. Otherwise, your business runs the risk of being scammed by a devious fraudster.
Choosing The Best Payment Option for Your Small Business
If your budget-conscious small business doesn’t require tight-turnaround transactions, more secure ACH payments are the best choice. ACH payments are also ideal for recurring or high-volume payments such as monthly membership fees. Reserve the wire transfer option for high-dollar transactions or more time-critical payments.
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Quick FAQs about ACH Payments and Wire Transfers
Q: What are ACH payments and wire transfers?
ACH payments and wire transfers are electronic methods of transferring money. They fall under the category of Electronic Fund Transfers (EFT). While ACH payments are sent through the Automated Clearing House network, wire transfers are sent directly from one bank to another.
Q: How does the Automated Clearing House function?
The Automated Clearing House network, based in the United States, processes ACH transfers. It consists of more than 10,000 financial institutions such as banks and credit unions. The network groups transactions together and processes them in batches up to five times a day. It is overseen by the National Automated Clearing House Network (NACHA) that sets, implements, and maintains the rules for ACH transactions.
Q: What are the different types of ACH payments?
There are two types of ACH payments: ACH direct deposit and ACH direct payment. ACH direct deposit is used for transferring funds from a business or government entity to an individual, like payroll deposits and Social Security benefits. ACH direct payment is used for making bill payments and supplier invoice payments.
Q: What is the difference between ACH payments and EFT payments?
ACH payments are a type of EFT and are exclusively sent through the Automated Clearing House network. EFT payments, however, include a range of electronic payments such as ACH payments, credit card and debit card transactions, and ATM cash withdrawals.
Q: How does a wire transfer work?
A wire transfer begins when the sending bank sends a secure message to the receiving bank. The message includes the recipient’s bank routing number, bank account number, and the amount of funds to be wired. Wire transfers are processed individually, in real-time, and are best suited for large, one-time transactions.
Q: What are the key differences between ACH payments and wire transfers?
The main differences lie in geographical boundaries, transaction scope, processing cost, and transaction security. ACH payments are limited to American businesses and are best suited for bulk payments with smaller transfer fees. Wire transfers, on the other hand, can be sent internationally and are best used for quick, individual payments, albeit with higher transfer fees.
Q: What are the advantages and disadvantages of ACH transfers and wire transfers?
ACH transfers offer security and low transfer fees, making them ideal for recurring or high-volume payments. However, they only operate within the United States and payments can take up to three days to complete. Wire transfers are ideal for high-dollar transactions that need to be executed quickly. However, they are expensive and less secure than ACH transactions.
Q: Which is the better choice for my small business, ACH payments or wire transfers?
The choice between ACH payments and wire transfers depends on your business’s needs. If your business doesn’t require tight-turnaround transactions and processes recurring or high-volume payments, ACH payments would be the best choice. On the other hand, if your business needs to make high-dollar, time-critical payments, wire transfers would be more suitable.