What is ACH: meaning and how it works

Gabriela Peratello
09.05.22
5 minute read

ACH payments are a popular, low-cost way of moving money across US bank accounts. If you live in America, it’s likely you’ll have used ACH before, as they’re quite popular for bill payments and direct deposits.

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.

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What is the Automated Clearing House (ACH) network?

If you came here to know what the ACH payment means, you’re in the right place.

ACH stands for Automated Clearing House. The Automated Clearing House is a network that provides the mechanism for ACH transfers¹.

ACH history

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.

ACH today

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 2020, the ACH network processed 26.8 billion person to person payments totaling almost 62 trillion USD². Chances are you have used ACH without even realizing it!

What are ACH payments?

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!

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How does an ACH transfer work?

ACH transfers work by grouping transfers between banks together. Once placed, transactions are checked and then held by the bank to be sent in batches.

The transactions are then sent in bulk to the relevant recipients — the ACH batch times might different from bank to bank. So make sure to ask around when the payments will be made.

When you make an ACH transfer to someone else, you’ll usually need their account number, routing number, full name and account type.

With this information, you can then set up a transfer on your bank app and sit back and relax while waiting for the payment to reach the recipient.

ACH transfer types

There are two types of ACH transfer:

ACH direct deposits

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.

Some of the uses of the ACH direct deposits are
  • Receiving your salary

  • Expense reimbursements

  • Government benefit payments

  • Bank interest payments

  • Dividend payments

  • Pension payments

  • Tax rebates

ACH direct payments

An ACH direct payment is when you use your savings or checking account to make a one-off or recurring payment to another account. This can be done either for personal or business purposes³.

Common usage of the ACH direct payment include
  • Paying recurring bills

  • Donating to a charity or institution

  • Sending money to a friend

  • Paying for a purchase

  • Making installment payments for loans or tuition

What is the difference between ACH and Direct Deposit?

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.

Summarizing: if you’re receiving a direct payment to your account, it’s an ACH direct deposit. When you send money or make a payment to someone else, it’s an ACH payment.

Is ACH payment safe?

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 encryption³. Which 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.

Pros and cons of ACH for individuals

✅ Pros❌Cons
  • 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

  • Transfers can take up to 4 working 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

Pros and cons of ACH for businesses

✅ Pros❌Cons
  • 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

  • Limited overseas use is a problem for international businesses

  • Not ideal for high volume, time-critical payments

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ACH transfer costs

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 3 USD⁴. 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 USD to 30 USD, and internationally this can be as high as 50 USD⁵.

ACH transfer times

ACH transfers are not instant. Transfer time varies between 1 and 4 business days. They are cheap and secure, but can be slow!

Nacha states that debit payments should be processed by the upcoming business day, while credit payments could take up to two working days.

There’s a catch though: the actual transfer time will depend on the financial institution. This means that, despite often being processed within the 1-2 business days margin mentioned above, sometimes payments can take 4 working days to be completed.

Make sure you factor in that time when setting up a transaction, so there aren’t any surprises later on — especially if you’re making a time sensitive payment.

ACH same-day processing

ACH has recently improved transfers with same-day processing, for both debit and credit transfers⁶.

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 of March 2021 ACH payments have a new deadline for same-day processing. The new cut-off time for ACH processing is 1:45 PM PT⁷, giving it a 2h hour advance when compared to previous years.

International ACH transfers

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.

Whenever making an international transfer, make sure to double check the type of payment and processing that will be used. And, most importantly, what’s the exchange rate that will be used — banks usually add a hefty mark up on those.

You’ll want to go after a provider that charges you no foreign transaction fees and use the mid-market exchange rate — the one you see on Google and Reuters.

Enjoy easy international transfers with Wise

When it comes to not adding markups on the exchange rate, Wise is definitely a good option for you.

You can send money internationally in just a few clicks, and always with the mid-market rate.

Wise is a fast, cheap and secure way to send money overseas. And you can pay via ACH directly from your bank. This means You can enjoy the combined benefits of ACH and wire transfers, without the cons.

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Sources:

  1. Nacha - ACH
  2. Nacha - ACH statistics
  3. Nacha - Direct deposit
  4. NerdWallet - ACH fees
  5. Finder - Wire fees
  6. Nacha - ACH time
  7. Nacha - ACH deadline

Sources checked on 05.06.2022



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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