Electronic payments are becoming increasingly popular as more people choose to pay bills or send money online. Two of the easiest ways to send money directly from a bank account are automated clearing house (ACH) transfers and wire transfers. So what is the difference between them? While both make it convenient to send money electronically, they aren’t exactly the same when it comes to speed and cost.
An ACH transaction involves the transfer of funds between banks, credit unions, or other financial institutions through an electronic network. This type of transfer can be used for a variety of purposes, including processing:
Approximately 7.5 billion ACH payments totaling $18.9 trillion were processed in the fourth quarter of 2021. Since 2011 the use of ACH transfers has increased 8.2% year over year, with steady increases in the number of direct deposit and bill payments being processed electronically.
An automated clearing house transaction has several moving parts. How ACH transfers work can depend on whether the transaction involves a direct payment or debit. Here are some key terminologies you need to know to understand how the process works.
In simple terms, the first bank initiates an ACH transfer, which is grouped together with other ACH transfers. Those transactions are processed through the clearing house. Once transfers are processed for the day, they’re sent in batches to the receiving bank. The receiving bank then credits or debits the appropriate accounts accordingly.
With the exception of same-day transactions, ACH transfers can take one to two business days to complete.
Assume that you have a recurring bill that needs to be paid each month, such as a credit card bill. Rather than logging in to your credit card company’s website each month, you decide to schedule a recurring payment through your bank. You log in to your online bank account or mobile banking app and authorize the payment to your credit card company. The credit card company becomes the originator in the transaction.
The credit card company sends a file to its bank that includes the details of the payment. Its bank is the originating depository financial institution. The payment is processed through the clearing house or ACH operator. The ACH operator sends a file with the payment request information back to your bank, which is the receiving depository financial institution.
Your bank makes the payment to the credit card company as scheduled. In this transaction you are the receiver, as you’re on the receiving end of a request for payment.
For an ACH transaction to be processed, there must be sufficient funds in the account. Otherwise, the payment or transfer will be returned, which could trigger a fee.
A wire transfer is a transaction that’s initiated through a bank and allows for the movement of funds from one account to another. When both banks are located in the U.S., this is called a “domestic wire transfer.” When one bank is outside the U.S., this is referred to as an “international wire transfer” or a “remittance transfer.”
Wire transfers are typically used when it’s necessary to send large amounts of money quickly. For example, if you’re buying a home, you may be asked to send your down payment funds via wire transfer. You can also use wire transfers to send money to individuals.
Wire transfers allow banks to communicate with one another to move funds between accounts. The person sending a payment provides the bank with specific details, including:
Once the bank has this information, it can process the wire transfer to deduct the requested amount from the sender’s account. This amount is then credited to the recipient’s account. Meanwhile, the person sending a wire transfer pays a fee. The person receiving the transfer may also pay a fee. The amount of the fee can vary by bank, but generally international wire transfers carry higher fees than domestic transfers.
Once a wire transfer payment is sent and accepted, the transaction cannot be reversed.
Say that you’re buying a home, and the amount due at closing is $42,000. The closing attorney asks that you initiate a wire transfer to make the payment. You go to your bank and provide it with the recipient’s name and account information. The bank deducts $42,000 from your money market savings account and wires it to the recipient’s bank. The bank charges you a $35 fee for the transfer. Meanwhile, the money is credited to the recipient’s account within a couple of hours.
Whether it makes sense to use an ACH or a wire transfer can depend on the situation. If you’re making bill payments or scheduling direct deposit for your paycheck, government benefits, or tax refund, those transactions will be processed via the ACH network. On the other hand, if you need to send someone a large amount of money, then you may choose to do that using either an ACH transfer or a wire transfer.
In terms of differences, speed and cost are what distinguish ACH payments and wire transfers from one another. ACH transfers are typically free, but they can take a couple of business days to process. A wire transfer can be processed the same day, sometimes in as little as a few hours. The trade-off is that your bank may charge you fees for this convenience.
Both ACH and wire transfers are secure, though the latter are frequently used by scammers to target unsuspecting victims for wire fraud. For example, you may receive an email telling you that you’ve won a sweepstakes, but in order to claim the money you must first pay a processing fee using a wire transfer. You wire the money, only to receive nothing in return because the sweepstakes never existed.
An ACH transfer is completed through a clearing house and can be used to process direct payments or direct deposits. Wire transfers allow for the movement of money from one bank account to another, typically for a fee.
ACH transfers are regulated and designed to prevent fraudulent transactions. They can also be safer than certified checks, cashier’s checks, or personal checks. It’s important, however, to initiate ACH transfers or receive them only from trusted entities.
In most cases ACH transfers—including online bill payments and direct deposit of paychecks—are free, while banks generally charge fees for domestic and international wire transfers.
National Automated Clearing House Association. ACH Network Volume Rises 6.1% in Fourth Quarter of 2021 as Healthcare Claim Payments and B2B Lead the Way." Accessed Jan. 29, 2022.
National Automated Clearing House Association. "ACH Network Volume and Value Statistics." Accessed Jan. 29, 2022.
National Automated Clearing House Association. "How Direct Payment Works." Accessed Jan. 29, 2022.
National Automated Clearing House Association. "How Direct Deposit Works." Accessed Jan. 29, 2022.
National Automated Clearing House Association. "Payments Myth Busting." Accessed Jan. 29, 2022.
Federal Trade Commission. "Before You Wire Money." Accessed Jan. 29, 2022.
National Automated Clearing House Association. "Risk Management." Accessed Jan. 29, 2022.
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