What Is an ACH Transfer? Types of ACH Transfers

ach transfers

If you need a reliable payment method for moving money to or from your bank account, ACH transfers might be the ticket. 

Whether you know it or not, you’re very likely already using ACH transfers. When you receive your salary as a direct deposit from your employer or pay a utility bill directly from your bank account, you are using ACH. You can also use the ACH network to make one-off or recurring deposits into various accounts, like an IRA or brokerage account. In the business world, ACH works as a means to pay vendors or accept payments from customers.

What is an Automated Clearing House (ACH) transfer?

The term “ACH transfer” refers to an electronic funds transfer from one bank account to another. They take place on the Automated Clearing House (ACH) network, which is an electronic network maintained by an organization called NACHA, or the National Automated Clearing House Association. 

The design of the network calls for payments to be processed in batches. It waits for a queue of transactions to build up before actually carrying them out, and it executes that queue about three times every business day.

Making a transfer on the ACH network only necessitates a few basic pieces of information: you must know the account and routing number where you want to send funds, the type of account it is, and the total transaction amount. Money transferred on the ACH network will reach its destination in approximately one to three business days.

What kinds of ACH transfers are there?

Within the category of ACH transfers, there are two types: direct deposits and direct payments. The difference between the two largely lies in which party initiates a transaction from one account to another. 

Direct deposits

Direct deposits are an ACH mechanism for putting money into an account. Here the transaction is initiated by the entity making the payment. Automatically receiving your salary as a deposit into your bank account is an example of direct deposit. Direct deposits on the ACH network are most commonly used for things like tax refunds, social security benefits, and payroll.

The person receiving a direct deposit will see an ACH credit in their account for the amount that they received. At that point, it can be withdrawn as cash, used to pay bills, or spent however the account holder sees fit.

Direct payments

If direct deposits are about “pulling” money from one account to another, then direct payments are the “push.” Bills that are on autopay, like your credit card or utility bill, use direct payments to automatically satisfy a transaction.

In a direct payment scenario, the person spending the money sees an ACH debit appear in their bank account, showing who received the money and how much they received. The entity receiving the money sees it in their bank account as an ACH credit.

ACH transfers vs. wire transfers

Of course, ACH transfers aren’t the only way to make payments. Wire transfers are another valuable tool to that end, but there are some important differences to note here.

ACH is predominantly focused around making domestic payments within the United States, from one American financial institution to another. There is infrastructure for making cross-border ACH payments, but that is a specialized use case.

Wire transfers typically involve moving larger amounts of money, whether domestically or internationally. While wire transfers tend to come with some associated fees, ACH transfers are usually free.

ACH transfers vs. credit card payments

There are some big differences between how credit card payments and ACH transfers work. Specifically, those differences are about the guarantee of payment, the time it takes for an automated clearing house to process payment, which entity actually makes the payment, and fees.

Credit card payments are considered “guaranteed funds” transactions. The credit card network will verify whether the person making the payment is within their credit limit, then approve the transaction, meaning that the funds are guaranteed. ACH offers no such guarantee, and a transaction can be rejected for a number of reasons, from having insufficient funds to having a closed account.

ACH processing times generally take longer, while credit card processing times are usually quite a bit faster—you’ll commonly receive payment immediately, which can help businesses with their liquidity.

Then there’s the matter of whose funds actually satisfy the payment. When using a credit card, the credit card company pays on your behalf, and then you pay the credit card company. With an ACH transfer, the money comes right out of your bank account, not unlike swiping a debit card.

Lastly, there’s the matter of fees. In general, ACH transactions have the least cost associated with them out of any other payment system. Credit card companies, meanwhile, may charge as much as 2.5% of the total transaction value as a fee, then take an additional processing fee on top of that.

For businesses with big sales volume, ACH transactions can translate into real savings that protect the bottom line.

Final thoughts

ACH transfers are an extremely useful way to move money while avoiding the service charges and transaction fees that are associated with other payment methods. It may take a little more time for the money in an ACH transfer to reach its destination account, but organizations from small businesses to large financial institutions rely on them to manage their transactions.

If you need a proven and affordable way to conduct your business, you may want to implement ACH.

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