ACH bank transfers have grown in popularity and have been found to be the preferred payment method among many consumers and businesses. So what is ACH bank transfer and how does it affect you?
ACH bank transfers are sometimes called direct deposits, funds transfers, ePayments, bank payments, and ACH payments. These transfers refer to the transfer of money electronically from one bank account to another bank account using the Automated Clearing House (ACH) network.
Many business owners and consumers already experience the convenience, affordability, and ease of ACH transfers without even realizing it.
These are some ways ACH transfers may have already touched your life:
- Your salary automatically deposited to your bank account on payday
- Direct Deposit Payments for utility bills or subscriptions
- Transferring money between bank accounts using different banks’ websites
- Setting up recurring payments to automatically pay your mortgage or car loan monthly
- Authorizing your bank to make regular payments to the IRS or other government agencies
ACH transfers are far more common than you might realize. According to NACHA, in the US in 2018 alone, over 23 billion ACH transfer transactions worth more than $51.2 trillion were made.
How does ACH work?
Here’s a typical scenario:
Sally Constructions hires Northwestern Window Cleaning on a small project that costs $2500.
Upon getting the invoice from Northwestern, Sally Constructions authorizes their Wells Fargo bank account to make a money transfer to Northwestern as payment. They might do this by scheduling a payment to Northwestern’s Bank of America account, from their Wells Fargo account. Some businesses have an accounts payable system where they put in the payment and bank details. Either way, the payee has to put payment details through a banking or bill pay system.
In this scenario, Sally Constructions instructs Wells Fargo to send the $2,500 electronically from their banking account to Northwestern’s account at Bank of America at a scheduled date.
On that date, Wells Fargo Bank debits $2,500 from Sally Constructions account. Wells Fargo Bank then sends a secure encrypted message through the ACH network giving instructions to Bank of America to credit Northwestern’s account with the same amount.
More than a hundred million transactions take place this way in batches two to three times, on each business day in the United States. Since these all take place electronically, and since paper money isn’t actually moved, payments can happen within hours or even on the same day.
If you’ve got a small business or you’re self-employed, having payments arrive within a day or two beats waiting for the check ‘in the mail’. Or worse, driving around town picking up payments and standing in line to bank in checks or cash, when you could be chasing your next job.
Fees and charges vary by financial institution. Most banks don’t charge a fee for receiving funds for transfers to the same bank, or even for transfers to other banks. However, some do charge a few dollars for transfers to other banks. It’s not a bad idea to check with your financial institution to see what fees and charges apply. Different institutions and account types, as well as the destination of fund transfers, can mean different charges.
These charges typically apply if you self-serve and do transfers yourself through your bank’s online banking website or through your business accounts payable systems (e.g. bill.com, Xero). If you call your bank’s customer service line or visit a branch to request an ACH transfer, your financial institution may charge you for the added personal service too.
A few banks offer accelerated same-day transfers, meaning the receiver can access the funds sooner. These usually incur additional costs. Again, check with your financial institution or bank regarding this.
Organizations or merchants that accept bill payments by ACH typically pay for the service instead of the payer or consumer. Transaction charges that these merchants pay are usually a few dollars per payment, calculated as a percentage of payment amount.Transaction fees for ACH payments done through Invoice2go start at $1 and are capped at $15, regardless of the payment amount. This makes ACH payments (called Direct transfer in the app), ideal for big invoices. For example, payments of $5,000 incur a maximum of $15 fee for the merchant, which works out to only 0.3% of the whole transaction.
Different types of ACH transfer
There are two types of ACH transfers. Which one is used depends on whether the transfer is initiated by the recipient with authorization from the account owner (ACH debit), or sent by the account owner to another account (ACH credit). Our Sally Constructions example earlier on was an example of an ACH credit transfer.
ACH debit transactions take place when you set up a once-off or recurring bill payment with a company, like the electric company or the city council for example. Since the receiver initiates the money transfer, this is sometimes also known as a “pull” transfer.
Some merchants and organizations might offer the option to pay them by eCheck, as this method is sometimes called. Doing so authorizes the organization to deduct money from your account.
Many payers like ACH debit transfers because they’re automated, and deductions often take place before the invoice due dates so they don’t incur late payment fees.
ACH credit transactions let you send money from your bank account to another person’s or organization’s account. Since you’re sending money from your account, this method is sometimes known as a “push” transfer.
Although ACH credit transactions offer more control in terms of how much and when to pay a bill, they require more manual handling. You need to log in to your bank first. Then you have to enter the payment amount, the account details of who you’re paying, and schedule the payment.
For merchants and organizations, making sense of inbound payments into bank accounts can get overwhelming. Reconciling invoices and payments get even more challenging when there are numerous unpaid invoices and payments received from different clients directly into their bank accounts.
This is where Invoice2go can help make bookkeeping a breeze for small business owners: The invoice2go app allows merchants to seamlessly offer ACH debit and credit while enjoying auto-reconciliation of payments with invoices.Invoice2go’s U.S. customers who qualify can choose to offer this payment option to their clients. To enable in the app, navigate to Settings > Client payment options > Accept direct transfers in the Invoice2go app.
What’s the difference between ACH vs a wire transfer?
Although ACH transfers sound a lot like Wire transfers and share some similarities, they’re different in terms of speed, cost, security and process.
ACH transfers require logging into your bank and entering the routing and account numbers of the person or company you’re paying. Some businesses with an accounts payable system can enter these details there as well.
Usually the next step involves scheduling the payment and authorizing your bank or payable system to take care of the payment.
ACH payments generally take 1-3 business days and fees are typically low when compared to credit card fees.
Rules implemented in March 2018 make it possible now for most ACH payments, including payroll and transfers between accounts, to be processed on the same day they’re requested.
To make wire transfers, you’d need to provide both the sender’s and the recipient’s account holder names, bank names, account numbers, and ABA routing numbers to the wire transfer provider.
Wire transfer is ideal when speed is critical as they can be completed in a few hours, and often even in minutes.
However wire transfer fees tend to be higher than ACH fees and can cost about $25 to send and $15 to receive. International wire transfers can cost upwards of $40.
These are only rough guides. You’ll need to check with your wire transfer provider for their exact charges.
|Checks||ACH Credit or Pushed Bank Transfer||ACH Debit or Pulled Bank Transfer||Wire Transfers or ‘Bank Wire’|
|What is it||Written, signed and handed over by payer, or mailed through USPS||Bank-to-bank transfers, sent by the payer.||Bank-to-bank transfers, initiated by the organization or merchant that needs to be paid.||Money transfers sent by a person or organization to another person or organization.|
|Network||All banks and financial institutions||ACH||ACH||SWIFT or Fedwire (Federal Reserve)|
|Details needed||Payee’s name||Payee’s full name, routing number, account number, and bank name||Payer’s authorization provided via their bank’s website (sometimes called banking portal)||Payee’s bank account details|
|Time taken||2-3 business days to clear, not including handling, dropping at the post box, transit time, and queueing at banks which can take up to 2 weeks||1-3 business days, expedited payment possible within 1 day with some banks, for additional fees||Next business day||Almost immediately|
|Cost||Free to send and receive. Fee to payer if check bounces. Cost of check book depends on payer’s account features.||Free to receive. Free to send, if business banking accounts include this option.||$15-$40 to send. Around $10 to receive.|
|Security||Checks can be forged if stolen, or bounced if payer has insufficient funds.||Account details can be stolen and used for fraudulent purposes.||If the payee is trusted, they can withdraw funds at any time.||Safe when done through bank accounts, and as long as the bank accounts are secure. Scammers have been known to gain access to accounts to send funds to other banks, often overseas. Anyone with a fake ID can access the transferred funds intended for someone else.|
|Effort & convenience||Easily accessible, but there can be delays in the postal system for mailed checks. Lack of visibility if the sender has posted the check. Needs to be picked up sometimes and deposited at the payee’s bank.Only aware of bounced checks after clearance (2-3 days).||Initial set up involves entering payee’s account details. Quicker and easier with subsequent payments / transfers as payee can be selected from address books. Can be done anywhere and anytime via the internet if you know how to log in to your bank.||Only needs to be set up once. Convenient for regular payments for credit cards, utilities, IRS, installment plans or progress payments. Can be done anywhere and anytime via the internet if you know how to log in to your bank.||Difficult to retract or pull the funds back if incorrectly sent or sent to wrong parties. Safe for receivers as sender’s funds need to be available before the transfer occurs.|
|Reversible?||Small window to stop the check, but at a fee.||Yes. Only in limited circumstances.||Yes. Only in limited circumstances.||Usually not.|
|Restrictions||Amount limits. Not available for international transfers usually.||Amount limits. Not available for international transfers usually.|
Whether you’re a start-up, in a growth phase or you’re running an established business, the convenience and speed of electronic payments make a lot of sense. The time and effort you’ll save not chasing payments or balancing the books is time you can spend securing the next job.
With Invoice2go, merchants can fire off invoices while on the move, directly from the mobile app. You can set up auto-reminders for your clients if you wish, and flag payments that are late. Invoices and online payments from credit cards and ACH payments (known as ‘direct transfers’ in the app) are also automatically matched. It’s like having an accounts team on your smartphone.