ACH VS Wire Transfers: Which Payment Method Is Right For You?

Here at Merchant Maverick, we usually focus on the many ways a business can take in money from customers. In this article, however, we want to discuss a little about how a business can pay money out (to vendors, for example).

Often, for smaller items like office supplies, you can use a business credit card or even cash. However, for larger ticket items such as manufacturing equipment, inventory, or even payroll, you might have to use checks, ACH transfers, or even wire transfers. This article focuses on the difference between ACH payments and wire transfers. Read on to find out more.

How Banks Transfer Money Between Accounts

In order to understand the difference between ACH payments and wire transfers, it’s useful to understand how banks transfer money between two accounts. Note that this general method has been in use since the 1600s. In recent decades, the process has been automated so that the information can be transmitted over privately maintained and secure computer networks.

Transfers Within The Same Bank

The simplest type of money transfer occurs between two bank accounts located at the same bank. For example, maybe Joe and Steve bank at the same bank, and Joe wants to transfer $10 to Steve. The bank merely makes a ledger entry in the two accounts to show that $10 has been moved from Joe to Steve.

If Joe and Steve do not bank with the same bank, however, then there are two ways to transfer the money.

Transfers Between Two Different Banks

The first method involves two banks that have bank accounts with each other.

Let’s say Joe, who lives in Los Angeles, banks with Super Bank, which is also located in Los Angeles. Joe wants to pay Steve $10. Steve, who lives in New York, banks with Mega Bank, which is also located in New York. Super Bank and Mega Bank have bank accounts with each other. So, Super Bank makes a ledger entry to take $10 from Joe’s account and places it in Mega Bank’s account located at Super Bank. Now Mega Bank has an extra $10.

Back at Mega Bank in New York, Mega Bank makes a ledger entry and pays $10 to Steve. Mega Bank now no longer has an extra $10. The practical effect is that Joe has paid Steve $10 even though no bag of money moved from Los Angeles to New York.

Transfers Through A Central Bank

What if Super Bank and Mega Bank do not have bank accounts with each other? But maybe there is a third bank–let’s call it Central Bank–where they both have bank accounts.

So, when Joe asks $10 to be transferred to Steve, Super Bank tells Central Bank to move $10 from Super Bank’s account at Central Bank to Mega Bank’s account at Central Bank. Once Mega Bank is notified that it has an extra $10 in its account at Central Bank, it pays Steve the $10 “sent” by Joe. Again, the practical effect is that Joe has paid Steve $10, but only a ledger entry was made at the Central Bank. No money physically moved anywhere.

Batching For Efficiency

With modern commerce, this sort of transfer could happen millions of times a day back and forth between people who bank at Super Bank and Mega Bank. It would be silly for Central Bank to move, say, $10 between the banks’ accounts back and forth all day long, every time a transfer order is made. So, to be more efficient, banks traditionally hold all the transfer orders until the end of the day, so they can total up the transfers and do only one transfer on the net change. This is called batching. While batching traditionally happens at the end of each business day, there’s no reason why this couldn’t happen several times a day or even once every several days.

The Central Bank

As for our hypothetical Central Bank, each country in the world usually has its own version of a central bank. In the US, that bank is the Federal Reserve. US domestic money transfers between banks usually go through the Federal Reserve. For international transfers, banks usually have to have direct accounts with each other, or they have to find a bank to act as the central bank.

What Is An ACH Payment?

Once you understand how banks transfer money between themselves, then it’s easy to explain an ACH transfer. The ACH transfer is simply a money transfer using a specific type of code. The code is set up and governed by an organization called Nacha (previously NACHA, which stood for the National Automated Clearing House Association).

When money is transferred domestically within the US, the code is transmitted over a computerized network called the ACH Network using the Federal Reserve as the central bank. When money is transferred internationally, the ACH code is usually transmitted over the SWIFT network (a privately owned computer network usually used for international money transfers) to a bank outside the US that takes ACH codes. That international bank can receive the money directly or act as a central bank.

ACH Transfer Fees

It’s important to separate the concept of the physical computer network from the ACH code. As mentioned above, for US transfers, the ACH code is transmitted over the ACH Network. The ACH Network is owned by several large banks, and together they charge a fee for messages transmitted over that network. The fee can range from $0.20-$1.50 per transaction or 0.5%-1.5% of the total transaction cost. In any event, the fee is relatively small so that some US banks do not even charge their customers for making ACH transfers.

For international transfers, the ACH code is usually transmitted over the SWIFT computer network. The SWIFT network charges differently than the ACH Network, and it usually charges more. If you wish to make or take international ACH transfers, we recommend you speak to your payment processor or your bank first so you can understand the charges involved.

ACH Transfer Times And Dollar Limit

ACH transfers are done in batches for efficiency. Typically, the batch is sent out once in a 24 hour period, usually at the end of the day. Nacha, however, is working to increase the number of batches processed per day and hopes to perform up to three batches per day in 2021.

ACH transfers are typically for smaller amounts because there is a per transaction limit of $25,000 for same-day transfers. However, by March 20, 2020, that limit will be raised to $100,000 to better serve the needs of business-to-business (B2B) companies.

Types of ACH Payments: Debit VS Credit

There are two subtypes of ACH payments: credit ACH payments and debit ACH payments. Credit ACH payments tend to be one-time payments while debit ACH payments tend to be recurring payments.

• ACH Credit Payments: With an ACH credit payment, the sender of the money must authorize each payment before money is transferred out. The recipient of an ACH credit payment first gives the sender his bank account number and bank routing number. The sender then sends the bank information along with instructions to its bank to pay a certain amount. The payment information is batched and then sent to the central bank for settling according to a daily schedule. Once the transfer is settled, the money shows up in the recipient’s account. This type of payment is better suited for payroll or occasional bill payments where you want to control when and how much to pay.
• ACH Debit Payments: With ACH debit payments, money of varying amounts is taken from an account according to a set schedule. This type of payment is better suited for recurring bills such as utility payments. With ACH debit, the payor sends the information to the entity where payment is due (e.g., the utility company). The information includes account number, routing number, and a payment authorization to pay on a certain date of each month. On that date, the recipient of the payment sends a payment request to its bank. The bank batches the information and sends the information through the central bank to the payor’s bank. The payor’s bank checks for previous authorization and for sufficient funds in the account. If there are sufficient funds, then the payor’s bank tells the central bank to release the money.

If you wish to accept or receive ACH payments on a regular basis, we have an excellent article covering the basics. Talk to your payment card processor to find out the details on the costs and setup.

For high-risk businesses, ACH payments might seem like an ideal alternative to credit card processors, which typically charge much higher fees with more stringent requirements. The first thing you should know is that not all ACH payments are handled in the same way because of how check payments are regulated. We have an article covering this subject in detail, but the bottom line is that depending on your business, it could be a good option. However, in some cases you’ll still need to meet underwriting requirements similar to what credit card processors require so you may need to look for a processor that specializes in working with high-risk businesses.

What Is A Wire Transfer?

A wire transfer is a traditional way banks transfer money using the method described earlier in this article. Wire transfers predate computer networks. Originally, banks simply transmitted the money transfer messages over telegraph lines. In today’s computerized world, however, domestic US wire transfer messages are transmitted over the Fedwire network or the CHIPS network. International wire transfer messages are usually transmitted over the SWIFT network.

With a wire transfer, a bank transfers the money right away without batching. Depending on the business relationship between the sending and receiving banks, they could transfer the money by simply adjusting their account ledgers (when they hold accounts with each other) or use a central bank. With international wire transfers, either method can be used, but with domestic US wire transfers, the Federal Reserve usually acts as the central bank. Because wire transfers are specific, one time transfers, they can be ordered and effectuated whenever the sending bank, the receiving bank, and the central bank are all open for business.

The Cost Of A Wire Transfer

Wire transfers typically cost much more than ACH transfers. For domestic US wires, it usually costs between $10-$35 to send a wire, though often it’s free to receive one. International transfers often cost more.

It’s not difficult to understand why banks charge more for wire transfers. These transfers are done individually without batching, so there are no savings from efficiency. The Fedwire, CHIPS, and especially SWIFT network all charge more than the ACH Network. Finally, with a wire transfer, the process is not automated, so a bank employee must initiate and confirm the transfer, thereby adding more cost to the transaction.

How To Make A Wire Transfer

In order to make a wire transfer, you must know the account and routing number of the recipient. After that, you must contact your bank and ask them to make the transfer. You can specify the date of the transfer, but you cannot specify the computer network the bank uses to send the transfer order.

There is no monetary cap on a wire transfer. Unlike ACH transfers that can be scheduled for recurring payments, wire transfers are one time only transfers that are irreversible once made. Wire transfers, therefore, are not well-suited for regular payments such as payroll or utility bills. Instead, wire transfers are typically used to pay for one-time equipment purchases or large inventory.

Wire Transfer And High-Risk Merchants

Lastly, there seems to be no reason why high-risk merchants cannot use wire transfers to send or receive payments. However, because wire transfers are expensive, it may not be cost-effective if the purchases are for smaller amounts.

One last thing to note: while some people use the term wire to refer sending money through Western Union or other person-to-person transfer services like Venmo, these are not true wire transfers. They use a different business model and messaging network. It is, therefore, important that these money transfer services should not be confused with true bank-to-bank wire transfers.

How Secure Are ACH Payments & Wire Transfers?

When it comes to security for ACH and wire transfers, there are a number of fairly obvious points of vulnerability. Money transfer messages can be hijacked in mid transfer, or fraudulent transfer messages can be initiated by criminals.

On hijacking messages, the networks used for these transfers are usually private networks with controlled access. The messages transmitted are encrypted, so the messages are relatively secure. There have been several instances of the SWIFT network being hacked (through malware infections) and money being stolen. However, the losses are assumed by the banks. You, as the merchant, are unlikely to have to be responsible for these unauthorized transfers.

From a merchant’s standpoint, you should keep bank account information secure by observing best practice security procedures. Typically, money transfer information can be stolen through social engineering methods such as hijacking a corporate officer’s email to order a money transfer to the hacker’s account, posing as a vendor and asking the payment to be routed to a different account, posing as an employee and asking payroll to be sent to the hacker’s account, or pretending to be a party in a mortgage closing and sending “updated” account routing information to steal the closing funds. Be sure to educate employees who handle money transfers to be aware of these vulnerabilities and scams so that both ACH and wire transfer account information can be kept safe.

Dealing With Disputes For ACH Payments & Wire Transfers

What happens if you make an incorrect wire transfer or realize a business deal is in dispute and you wish to withhold an ACH payment? With wire transfers, the transfers are final, so you cannot reverse the payment. With ACH payments, a transfer can be reversed under three very limited circumstances:

• Transaction was never authorized and authorization was revoked.
• Transaction was paid on a date earlier than authorized.
• Transaction was for incorrect amount than authorized.

ACH transaction disputes must be filed within 90 days of the transaction (60 days after statement sent to account owner). If you wish to learn more, our article on ACH payments includes a detailed explanation of the ACH dispute policy.

Should You Use ACH Payments Or Wire Transfers?

ACH Payments and wire transfers each have their uses. If you wish to send or receive smaller payments that can be scheduled and paid out automatically, ACH is likely the way to go. However, if you have larger, one-time transfers that are time-sensitive, then wire transfer is pretty much your only choice. ACH costs much less than wire transfers, but a large part of that is because ACH is an automated process requiring no human intervention while a wire transfer requires humans to send and receive the payment.

At the end of the day, no business can survive by paying with or receiving only ACH payments or wire transfers. While understanding these payment options can add to your normal payment card processing options, unless you do business only with other businesses, it would be difficult to require your customers to pay only with ACH or wire transfers. It would make better sense to merely add ACH and wire transfer as a payment option.