Derek Tallent
By: dtallent
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What Are ACH Transfers and How Do They Work?

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Have you ever heard the term “ACH Transfer” and wonder what that meant? ACH transfers are a way of sending money between banks through the Automated Clearing House network. This can include transferring your funds to a different bank, paying bills or receiving paychecks through direct deposit, or payments made between businesses.

In this article, we will be discussing this method of transferring funds and find out if this is a good option for your business’s day to day operations.

How Do ACH Transfers Actually Work?

ACH transfers are not like wire transfers that can be done immediately and place the money in the destination bank in real-time. ACH transfers are processed by the network and are done in batches 2 or 3 times a day (once a certain threshold of transactions is on hold, they are all processed).

This is why if you have ever tried to pay a credit card balance, for example, your bank will notify you that the payment will not be received until one or two business days later (there are a lot of transfers over the U.S. and the ACH network will not push everyone through when it comes in).

The Two Types of ACH Transfers

Another important thing to note about ACH transfers is that there are two types, each that operates slightly differently:

  • ACH Debit Transfers- Debit transfers are when the ACH Network pulls money from an account. If you set up a recurring bill payment, for example, the company you are paying will make an ACH Debit Transfer to take the money owed directly from your account. Debit transfers must be processed within one business day according to guidelines set by the National Automated Clearing House Association.
  • ACH Credit Transfers- Credit transfers let you personally send money from your accounts to an account at another bank, your friend’s or family’s bank accounts, etc.

What’s the difference?

The key difference is that a debit transfer does not have to have input from the account owner, while the account owner chooses how much (if any) to send to a different account in a credit transfer. Also, unlike ACH debit transfers, banks can choose whether to process credit transfers in one business day or two.

How Much Does an ACH Transfer Cost?

Most ACH transfers are, thankfully, free. The vast majority of banks will do ACH transfers at no cost. The two exceptions are if you send money between banks there may be a $3 fee (but many banks will still do the ACH transfer for free), or if you need an expedited bill payment which could have different fees depending on your bank.

Overall though an ACH transfer is unlikely to cost you much money, if any.

What Is the Difference Between ACH Transfers and Wire Transfers?

Below is a table explaining some of the key difference between an ACH transfer and a wire transfer:

 

ACH Transfers Wire Transfers
Are handled by the Automated Clearing House in batches only three times a day. Are handled by the bank’s network themselves and are sent through and completed almost immediately after the transfer is made.
Money for the transfer typically comes from a bank account. Money for the transfer is paid to the bank upfront through a debit card, cashier’s check, cash, etc.
Takes 1 or 2 business days for the money to transfer. The money transfers almost immediately, but it still takes most banks 1 or 2 business days to process wire transfers.
Are typically free, with fees of at most $3. Typically cost anywhere from $25 to $50.
Can usually be reversed if for example your employer overpays by accident or too much money is taken out of your account. Cannot be reversed, making it critical that you know who you are sending money to and how much you will need.

Limitations of ACH Transfers

As with anything else, ACH transfers do have some drawbacks:

  • Slow– ACH Transfers are handled in batches 2 or 3 times a day. ACH transfers usually take at least one full business day to process and often can take even more. This makes them not a great option for time-sensitive payments, as there is no telling when the transfer will go through (this is especially true for credit transfers).
  • Takes Money Only When Processed– ACH Transfers do not actually take the money from your account once you request the transfer. Rather, once the transfer is processed in a batch the money will be taken from your account. The problem with this is that you may not have the funds necessary to transfer. This is why it is important when you are paying a credit card, bill, or making any other ACH transfer to make sure you have sufficient funds and will have sufficient funds two or three business days from now. Otherwise, the transfer will be declined two days later and you will likely have to deal with lots of headaches going through and figuring out where the transfer went wrong.

Alternatives to ACH Transfers

While we have already discussed the key differences between ACH transfers and the most popular alternative, the wire transfer, there are other options for transferring money that you should be aware of:

  • Credit Cards- Credit cards are essentially a form of transferring money, as the bank receives your credit card payment, transfers the money to who you paid and then charges you for the amount you charged to your credit card. Credit cards are convenient but have significant drawbacks, so you need to use them carefully.
  • ePayment SystemsePayment systems are electronic payment systems, which are similar to a check but of course, are handled completely online. There are many different ePayment systems: the most innovative being electronic wallets that contain your bank information to make transactions faster (you may have already seen buyers tapping their phones on the scanner in a store in order to make a payment), or the use of bitcoin or another cryptocurrency.

We hope that this article has helped shed some light on ACH transfers and gotten you closer to deciding what type of electronic transfers are right for your business.

Our goal at Camino Financial is to provide you with the tools and resources to improve your financial performance and run your business smoothly. Want to get more information about options to transfer money? We invite you to keep reading:

   

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