ACH payments are a popular, low-cost way to move money between US bank accounts. Most people will have used ACH payments before - they are used for most bill payments and direct deposits in the US.
This article explains how ACH transfers work and the advantages and disadvantages of ACH.
Understanding how transfers work helps you choose the best method for what you need. ACH transfers are low-cost and safe. But they are not the quickest, nor are they the best for overseas transfers.
If you need to transfer money abroad, then try Wise - The one-stop shop for cheap and fast international transfers!
ACH stands for Automated Clearing House. The Automated Clearing House network provides the mechanism for ACH transfers¹.
The ACH network started in the 1970s. Banks across the US came together to find ways to improve payment systems. The growing volume of paper checks in use was a shared concern.
The solution was an electronic network for payments between banks. Consistent standards were developed, and the ACH network was born.
Today, Nacha manages the ACH network. It is used to transfer money between bank accounts all over the US. ACH is the system behind Direct Deposit, Direct Payments, and several other methods.
In 2019, the ACH network processed 24.7 billion payments totaling over $55.8 trillion². Chances are you have used ACH without even realizing it!
An ACH payment is an electronic transfer between bank accounts that is handled by the ACH network. This payment can be to or from a business, individual, or government account.
ACH payments are different from wire transfers. These are direct payments between bank accounts, without intermediaries. They are also different from payments using other networks, such as VISA or Mastercard.
You may also see ACH payments referred to as ACH transfers or ACH transactions. These are all the same!
ACH transfers work by grouping transfers between banks together. Once placed, transactions are checked and then held by the bank for batch sending. The transactions are then sent in bulk.
There are two types of ACH transfer:
Direct deposits are payments from organizations to an individual. If you have a regular payment made to your bank account from your employer, chances are it is an ACH direct deposit. 93% of salaries in the US are paid this way³.
Common ACH direct deposits include:
- Government benefit payments
- Bank interest payments
- Dividend payments
- Pension payments
- Tax rebates
Transactions that make payments, to either a company or another person, are known as direct payments. If you are putting money into another account, this is a direct payment.
There are two types of ACH direct payments:
ACH credit payment. This is a payment made straight to the bank account of another person or company. It’s what you’ll use when paying family or friends, or one-off invoices.
ACH debit payment. This is an instruction that allows a company to take money from your account. It can be set up for regular payments, such as recurring bills.
Direct deposits are an important part of the ACH network. They cover many regular payments across the US. If you receive money from a company or the government, this is a direct deposit.
But whenever you make a payment to another person or company, you are looking at an ACH direct payment.
Transferring money is often a worry. No-one wants to see payments go missing.
The ACH network and payments are one of the safest transfer methods. Transmitted data is encrypted with bank-level encryption⁴. This reduces the chances of it being compromised.
Importantly, you can reverse an ACH payment. If you later notice an error or suspect fraud, the payment can be tracked and reversed. This is a great feature – and not something you can do with wire transfers.
ACH transfers have several advantages for individuals:
- Cheap way to transfer funds between US bank accounts
- Often free to make and receive transfers
- Safer than a wire transfer, as you can reverse payments
- Setting up regular transfers helps avoid missed or delayed bill payment
But ACH is not perfect! There are also some drawbacks to think about:
- Transfers can take up to 4 days
- There are cut-off times to make transactions for that day - missing this will add to the transfer time
- Limited in use for transferring overseas
- Banks may have limits on the amount sent per account (this can be per transaction, daily or monthly)
- The law limits transfers from savings accounts to six per month
ACH is very popular for business for several reasons:
- Free, or low-cost, transfers even for high volumes
- Easy way to manage bulk payments, such as payroll
- Lower transaction costs than other networks (such as credit or debit card, or PayPal payments)
- Higher customer retention, as bank accounts are more stable than cards
Some disadvantages businesses need to consider include:
- Limited overseas use is a problem for international businesses
- Not ideal for high volume, time-critical payments
If your business needs a solution for sending and receiving international payments, then try Wise business. You can operate internationally without crazy transaction or conversion fees.
Cost is the main advantage of ACH transfers, especially when compared to a wire transfer. There are usually no fees for receiving payment.
ACH transfers are often free to send for the individual, although some banks charge up to around $3⁵. You can check with your bank to find out if there is a fee in advance.
Wire transfers are much more expensive. Domestic wire transfers cost around $15 to $30, and internationally this can be as high as $50⁶.
ACH transfers are not instant. Transfer time varies between 1 and 4 business days. They are cheap and secure, but can be slow!
Nacha standards state that debit payments should be processed by the next business day. And credit payments within two business days.
The actual transfer time depends on the financial institution. It is often 1-2 business days but can be up to 4 days.
ACH has recently improved transfers with same-day processing, for both debit and credit transfers⁷. These are available from some banks and may have a higher cost. Although processing is same-day, delivery is usually the next business day.
As with all ACH transfers, there is a deadline to confirm same-day processing. Nacha is planning to extend this deadline by two hours in 2021 (to 4:45 pm ET)⁸.
ACH transfers to overseas accounts are possible but are not yet widespread.
If you are looking to make a transfer, look for a bank offering International ACH Transfer. This is different from International ACH Transaction (IAT) - which is more about bank reporting. Banks may mention IAT even when they do not offer international transfers.
Wire transfers are more widely used for international transfers. These are usually handled by SWIFT (Society for Worldwide Interbank Financial Telecommunication). But fees are high, and there are extra costs associated with the exchange rate used.
You can find out more about ACH vs wire transfer in this article.
Wise is an easy option for overseas transfers. A Wise account allows fast and secure payments, but with a low and transparent fee.
You will also get the real mid-market exchange rate (the one you see on Google). You can enjoy the combined benefits of ACH and wire transfers, without the cons.
- Nacha - ACH
- Nacha - ACH statistics
- Nacha - Direct deposit
- Nacha - Security
- NerdWallet - ACH fees
- Finder - Wire fees
- Nacha - ACH time
- Nacha - ACH deadline
Sources checked 26 February 2021
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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