business owner working on virtual terminalThe trend of consumer electronic payments continues to grow at a rapid pace. In a recent study, global non-cash amounts increased by 10.1% in 2016, reaching US$482.6 billion. Projections for growth from 2016-2021 indicate that non-cash transactions will continue to grow another 12.7%, with emerging markets like China accounting for a significant percentage of electronic payments.

Several different types of electronic payments exist, from credit cards to Paypal to e-wallets. Two types of electronic payments that have existed for some time, but are still used today, are ACH payments and wire transfers. Let’s look at each of these forms of electronic transactions and how they differ from one another.

What is an ACH payment?

An automated clearing house (ACH) payment occurs when money from one bank or financial institution is moved to another. ACH payments move through a national network, allowing a clearinghouse to process them.

When transactions pass through the clearinghouse, the network “batches” daily payments, allowing the network (and not a bank) to process those payments later in the day, making sure each recipient receives the proper amount. Once processed, banks receive their ACH payment in a batch as well, requiring them to attribute each deposit to the appropriate bank account. The batching and distribution process is automatic; no manual process occurs. By processing electronic payments rather than paper checks, recipients receive money faster, safer, and cheaper.

Although automatic, ACH payments are not instantaneous. The process may take up to 1-3 days for funds to reach a vendor or a business.  Further, the payment will not clear a customer’s bank account until the clearinghouse processes the batch. Thus, a company may expect an ACH payment, but the business won't know if those funds are good until the ACH process concludes. If a customer does not have enough funds in his or her account to satisfy the payment, the ACH process can overdraw his or her account.

business owner reviewing email invoicesAlthough this technology has been around for more than 40 years, ACH use continues to increase. Each year, the ACH network processes more than 24 billion electronic transactions, amounting to $41 trillion. Some examples of recurring ACH payments include direct salary deposits, governmental benefit payments, tax refund payments, and vendor payments. These types of electronic transactions are best used for periodic or recurring payments, such as a monthly electric bill or a monthly service provided by a business, such as a gym membership.

What is a wire transfer?

A wire transfer is also a form of electronic payment, occurring between two banks. Unlike ACH payments however, wire transfers are immediate since they don’t have to process through a clearinghouse. For large dollar purchases, such as purchasing a home or paying off a significant loan, the recipient may require a wire transfer. For example, a lender may require an individual to wire money for the down payment on the house. Often, a lender won’t move forward on closing a home purchase until this money is received (and cleared). A wire transfer creates same-day access to these funds, expediting the home’s purchase.

When you wire money to another entity or person, the funds electronically transfer from one bank to another using a wire transfer service.  When the wire transfer is complete, both the sender and the recipient receive notice of the wire’s completion. Further, wire transfers typically cost money. For example, the sender pays a $20-$35 fee when initiating the transfer and the bank charges the recipient anywhere between $10-$20.

What are the differences between ACH vs. wire transfer?

Both ACH payments and wire transfers electronically move money from one financial institution to another. However, key differences exist. Let’s examine the overall differences between ACH payments and wire transfers.

  • Wire transfers are immediate where ACH payments can take a couple to a few days to process.
  • Wire transfers cost money for both the sender and the receiver whereas ACH payments are free or cost very little per transaction.
  • Wire transfers are initiated and processed by banks while ACH payments are processed automatically through a clearinghouse.
  • Because of clearinghouse rules, ACH payments are often more secure than wire transfers.
  • For wire transfers, only the sender can initiate the transfer. For ACH payments, businesses or individuals can send or receive funds.

The processes explained.

To arrange ACH payments for your business, the process often depends upon your bank. Some banks allow you to set up ACH payments online. Other banks require a form to be completed by the receiver, who then shares that information with your bank.

To arrange a wire transfer, again, it depends on the sender’s bank policies. You may be able to arrange a wire transfer over the phone. Other banks may require your signature as permission to initiate the wire.

The differences in transfer speeds.

ACH payments often take 1–3 days to be processed. However, many ACH services today are integrating next-day receipt of ACH payments. When choosing an ACH vendor, whether it’s your bank or another merchant services provider, make sure you understand the required processing time for you to receive money in your business account. After all, if you’re running a business, tracking cash flow is one of your top priorities.

For wire transfers (because they are instantaneous) you often have access to these funds the same business day. Because wire transfers are expensive, you would only want to use this electronic payment options for high dollar or urgent transactions.

Data securityA security comparison.

Let’s dig deeper into the differences in security between ACH payments and wire transfers. Although both methods of transfer are secure, ACH payments edge out wire transfers in safety. Because ACH payments pass through clearinghouses, each payment is subject to more rules, regulations, and scrutiny. At the same time, if a mistake or fraudulent transaction occurs, most ACH transactions can be reversed, whereas wire transfers cannot.

Although wire transfers aren’t as secure as ACH payments, they are still safer than cashier’s checks. Because cashier’s checks are paper checks, they are more susceptible to fraud or forgery.  When sending a wire transfer however, the sender must confirm the recipient’s banking details, such as routing and account number. If this information is correct, and not transposed, for example, wire transfers are still considered a safe electronic transaction.

What to consider when choosing between ACH payments and wire transfers.

Since most businesses use ACH payments,  if you’re looking to change ACH vendors, you should explore several options. You should also ask several questions. For example, how long does it take for a potential payments partner to process ACH payments? When will you receive the funds? Further, ask if there’s a cost for accepting or sending ACH payments. How are these payments assessed? Are they based on the number of transactions?

Most businesses won’t use wire transfers as often as ACH payments. However, depending on your business, you may explore your wire options with your bank. For example, if you’re in the real estate business, you may use wire transfers frequently whereas a restaurant would rarely use this option.

The benefits of accepting ACH payments or processing your invoices through an ACH system make it a must-have for your business. Not only does providing this service offer an additional, convenient payment system for your customers, it also can increase your revenue, by allowing you to receive payments faster and your team to focus on high-level issues.

At NAB, we can help guide you through the setup of ACH payments. We have the technology you need to accept payments in the modern world. We’ll help you tailor your payment processing to your specific business, giving you peace of mind. To set up a consultation, contact us here or give us a call at 877.840.1952.

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