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Automated clearing house (ACH) transfers are a convenient and increasingly popular way to move money from one person or business to another. Since 2014, ACH payment volume has increased by nearly 72%, according to Nacha, the organization that oversees the ACH network.
If you've ever used online bill pay to make your monthly mortgage payment or a peer-to-peer payment app to split the dinner bill, you've taken advantage of the convenience of ACH transfers. But do you know how they work? Read on to find out and learn about the different types available, the advantages and disadvantages and when a different payment method may be a better choice.
How Does an ACH Transfer Work?
ACH transfers move money electronically between financial institutions through a third party known as the ACH operator. Two operators—the Federal Reserve and the clearing house—are part of the ACH network. Here's how it works:
- Originator: A person or business makes a payment request. For example, if you have your mortgage set on autopay, your mortgage lender acts as the originator of the payment each month. They request that the funds be transferred from your account to theirs on the agreed upon date.
- Originating financial institution: The person's or business's bank or credit union receives the payment instructions and sends the payment files to the ACH operator.
- Receiving financial institution: The ACH operator sends the payment information to the financial institution receiving the payment request.
- Receiver: The bank or credit union that received the request either debits or credits the individual's or business's account.
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Types of ACH Transfers
Many types of payments use the ACH network to transfer money between financial institutions, including:
- Bill pay: Whether you make a one-time payment or establish recurring payments, an ACH transfer occurs when the money is deducted from your checking account.
- Direct deposit: Many types of direct deposits are ACH transfers, including paychecks, tax refunds and Social Security benefits.
- Payment apps: When you connect your bank account to a payment app like Venmo, the app uses the ACH system to transfer funds between account holders.
- Account transfers: You don't have to transfer money to someone else to move money through the ACH network. If you have multiple bank accounts, you can transfer money between accounts at the same institution or from your account at one bank or credit union to another.
- Direct debits: IRA or 529 contributions set up to be debited directly from your checking account each month use the ACH system too.
What Information Is Needed for an ACH Transfer?
Making an ACH transfer is pretty straightforward. You only need a few pieces of information, including:
- Bank routing number
- Bank account number
- Payment amount
- Account type
- Individual's or business's name
Pros and Cons of ACH Transfers
ACH transfers have advantages and disadvantages. Here are some features to know about to help you decide if they're right for you.
Pros of ACH Transfers
- It's convenient. ACH transfers are simple to set up with just a few pieces of information. They also make it easier to pay recurring bills.
- It's inexpensive. Many ACH transfers are available to consumers at no cost; others may have only a nominal fee.
- It can be reversed. Erroneous ACH transfers can typically be reversed by contacting your financial institution.
- International transfers are available. You can transfer money through the ACH network domestically and internationally.
Cons of ACH Transfers
- It's not immediate. It can take up to two banking days from the date the payment is initiated to complete the transaction.
- Nonsufficient funds (NSF) fees may apply. If you schedule an ACH transfer and don't have enough money in your account to cover the transaction, your financial institution may charge an NSF fee.
How Long Do ACH Transfers Take?
The time it takes to process an ACH transfer depends on the type of transaction being requested (debit versus credit), when it's requested and whether same-day ACH transfer is available.
About 80% of ACH transactions are cleared in one day, according to Nacha. However, it can take up to two banking days from the date the transaction is requested to complete the process. Debits typically settle the same or the next banking day, but credits may not clear until two banking days after they're initiated.
How to Do an ACH Transfer
If you have all the information you need, setting up an ACH transfer is simple. Here's how it works.
- Enter payment amount. Choose the payment or transfer amount.
- Provide details. Enter the required information. This may include your name, account number and routing number.
- Confirm transaction. Verify the payment amount and other information you entered is accurate.
- Complete the transaction and wait for the payment to be processed. After the transaction is processed, the payment amount will be debited from your account and sent to the recipient.
What Is the Difference Between a Wire Transfer and an ACH?
Wire and ACH transfers both send money electronically between financial institutions and can be used for domestic or international transactions. They differ in a few key ways, however:
- ACH transfers go through a third party (the ACH operator) and wire transfers don't. Wire transfers are sent directly from institution to institution.
- Wire transfers are typically completed within one business day, but you usually have to pay a fee. ACH transfers are typically free for consumers but may not be completed until two banking days after they're initiated.
- Because wire transfers are completed so quickly, they usually cannot be reversed. However, you may be able to cancel an ACH payment and erroneous ACH transfers can be reversed.
The Bottom Line
Sending funds via ACH transfer is a simple and convenient way to move money from one individual or business to another. The lack of fees and ability to set up recurring payments or deposits make it an attractive option, but it may not always be your best bet. If you need to guarantee your funds will arrive within a business day, a wire transfer is probably a better choice. Additionally, low-tech options like paper checks and cash may be a good alternative if you need to send money to family or friends who haven't embraced technology.