ACH vs Wire Transfer: Which Is Better for Your Small Business?
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).
Electronic fund transfers (or EFT payments) continue to play a growing role in the global payments industry landscape. 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 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 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). Three times daily, banks, credit unions, and other financial institutions send batches of transactions to the ACH network for processing.
The National Automated Clearing House Network (or NACHA) maintains oversight of the ACH transfer process. Note that the ACH system is only available for inter-bank transactions within the United States.
Two types of ACH payments
American companies regularly use two types of ACH payments. 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.
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
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.
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.
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.
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.
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: Key differences
ACH payments and wire transfers are both widely accepted payment methods. However, the two types of transfers have several key differences.
- Geographic boundaries: ACH payments are limited to American businesses. In contrast, companies in many countries can easily send international wire transfers.
- Transaction scope: ACH payments’ batch processing is good for businesses that handle bulk payments. Wire transfers are processed on an individual basis.
- Transaction speed: Wire transfers are processed more quickly than ACH payments. However, international wires take longer than domestic transactions. Note that the Federal Reserve is working to adopt a real-time ACH payment and settlement structure. This may ultimately result in same-day ACH transactions, making them more competitive with wire transfers.
- Processing cost: Batched ACH payments incur lower transfer fees than individually processed wire transfers.
- 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 funds 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’ operation. Armed with that knowledge, they should make their decision accordingly.
Disadvantages of ACH payments
Although ACH transfers process 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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