ACH Transfers vs. Wire Transfers: An Overview
As electronic payments become increasingly popular, people find them more convenient, easy, and cheap ways to pay bills or send money. Automated clearing house (ACH) transfers and wire transfers are two of the easiest ways to send money directly from a bank account. While both make it convenient to send money electronically, they differ in speed and cost. What is the difference between them?
An ACH transaction is an electronic transfer of funds between banks, credit unions, or other financial institutions. This type of transfer can be used for various purposes, including processing:
- Paycheck direct deposit
- Direct deposit of government benefits or tax refunds
- Recurring debits (such as automatic bill payments)
- One-time bill payments
- International payments
- Healthcare claim payments
- Person-to-person (P2P) payments
- Business-to-business (B2B) payments
In the fourth quarter of 2021, approximately 7.5 billion ACH payments totaling $18.9 trillion were processed.
The use of ACH transfers has increased 8.2% year over year since 2011, with steady increases in the number of direct deposit and bill payments being processed electronically.
Many high-profile fintech payment apps that used only credit cards before, such as Stripe, have recently begun embedding ACH. ACH is also used as the main means of transfer for rising B2B fintech apps such as Tipalti, Checkout, Fiserv, Affirm, and Bill.com.
How ACH transfers work
How ACH transfers work can depend on several moving parts, such as whether the transaction is a direct payment or debit. To understand how the process works, here are some key terminologies you need to know.
- Originator: The entity that’s authorized to request a payment or transfer from someone else
- Originating depository financial institution (ODFI): The originator’s bank
- ACH operator: the clearing house that processes the transaction
- Receiver: The entity that completes an ACH transaction
- Receiving depository financial institution (RDFI): The receiver’s bank
The first bank initiates an ACH transfer, which groups it together with other ACH transfers. After the day’s transfers have been processed, they are sent to the receiving bank in batches. The receiving bank then credits or debits the appropriate accounts. The clearing house processes those transactions.
ACH transfer example
You schedule a recurring payment through your bank for a bill you have to pay each month, like a credit card bill. The credit card company becomes the originator in the transaction when you log in to your online bank account or mobile banking app and authorize the payment.
The credit card company sends a file that includes the payment details to its originating depository financial institution, the bank. The payment is processed through the clearing house or ACH operator, who sends a file with the payment request information back to your bank. Your bank is the receiving depository financial institution.
In this transaction, you are the receiver, as you’re on the receiving end of a request for payment from your bank to the credit card company.
A wire transfer is a transaction initiated through a bank and allows for the movement of funds from one account to another. When both banks are not located in the U.S., this is called an international wire transfer. An international wire transfer or remittance transfer is when one bank is outside the U.S.
If you’re buying a home, you may be asked to send your down payment funds via wire transfer, for example. Wire transfers are typically used when it’s necessary to send large amounts of money quickly. Individuals can also receive money via wire transfer.
How wire transfers work
Banks use wire transfers to send money to one another and move funds between accounts. The person sending a payment provides the bank with specific details, including:
- The amount to be transferred
- The account number that will be used to complete the transfer
- The name, address, and phone number of the recipient
- The routing number for the recipient’s bank (or SWIFT code for international wire transfers)
- The bank account number for the recipient
The bank can process the wire transfer to deduct the requested amount from the sender’s account once it has this information. This amount is then credited to the recipient’s account. Meanwhile, the person sending a wire transfer may pay a fee. The person receiving the transfer may also pay a fee. Generally, international wire transfers carry higher fees than domestic transfers, but the fee amount can vary by bank.
Wire transfer example
The closing attorney asks that you initiate a wire transfer of $42,000 to make the payment for the home you are buying. After going to your bank, you give them the recipient’s name and account information. Your bank then deducts $42,000 from your money market savings account and wires it to the recipient’s bank. Meanwhile, the money is credited to the recipient’s account within a couple of hours; the bank charges you a $35 fee for the transfer.
ACH vs. Wire Transfer: Which Is Better?
The decision to use an ACH or wire transfer can depend on the situation. For example, if you’re making bill payments or scheduling direct deposits for your paycheck, government benefits, or tax refund, those transactions will be processed via the ACH network. If you need to send someone a large amount of money, you can do an ACH or wire transfer.
The main differences between ACH payments and wire transfers are speed and cost. ACH transfers are usually free but can take a couple of business days to process.
The trade-off for a wire transfer being processed the same day, sometimes in as few hours, is that your bank may charge you fees for this convenience. Domestic wire transfer fees are usually $25-$30, and international fees are usually $45-$50.
Scammers frequently use wire transfers to target unsuspecting victims for wire fraud. For example, you may receive an email telling you that you’ve won a contest, but you must first pay a processing fee using a wire transfer to claim the money. Because the contest never existed, you wired the money only to receive nothing in return. Both ACH and wire transfers are secure.
What Is the Difference Between ACH and Wire Transfers?
An ACH transfer is completed through a clearing house and can be used to process direct payments or direct deposits. A wire transfer allows for the movement of money from one bank account to another, typically for a fee.
How Safe Are ACH Transfers?
Transfers made using ACH are regulated to prevent fraudulent transactions.
It’s important to only initiate ACH transfers or receive them from trusted entities, as they can be safer than certified checks, cashier’s checks, or personal checks.
Are There Fees for ACH and Wire Transfers?
Banks generally charge fees for domestic and international wire transfers, while in most cases, ACH transfers—including online bill payments and direct deposit of paychecks—are free.