ACH VS Wire Transfers: What’s The Difference For Sending & Receiving Payments?
It’s pretty safe to say that most people don’t worry about ACH payments or wire transfers much. You, however, as a business owner, might have to think about these sometimes. You’re probably aware of some general differences between the two types of money transfers, but mostly you just want to know which one costs less and when you should use which.
The simple rule of thumb is that you should use ACH most of the time and reserve wire transfers only for very large amounts and/or if the money needs to get there right away. We didn’t pull this answer of out thin air, of course.
Read on to find out why.
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What Is An ACH Payment?
ACH stands for Automated Clearing House, and it’s a service provided by a private organization called Nacha (previously NACHA, an acronym for the National Automated Clearing House Association). ACH is mostly a US-only money transfer service, but it does have a small and growing number of banks outside the US beginning to accept or initiate ACH transfers. You can learn more about the basics of ACH payments in our ACH beginner’s guide.
ACH uses the Federal Reserve as a middleman for their transfers, so transfers only happen during regular business days (i.e. no weekends or holidays). With ACH, you can transfer a maximum of $100,000 per payment per day. Money changes hands three times a day, so if you miss these windows (sometimes there’s a long line), your money will be transferred at the next window. This is why, with ACH transfers, most banks estimate 2-3 days for the money to arrive, even though technically the ACH transfer can be done on the same day. (It can still be done on the same day if you’re willing to pay a higher fee to jump the line.)
There are two types of ACH transfers: ACH credit and ACH debit. With ACH credit, the money is sent at a time and in an amount designated by the sender. The bill payment service connected to your bank account is typically an ACH credit payment. With ACH debit, the exact amount is controlled by the recipient but the timing is controlled by the sender. This means the bank account holder pre-approves payment to a particular vendor (e.g. your electric company) and the vendor takes the appropriate amount from your bank account at an appointed time.
What Is A Wire Transfer?
A wire transfer is typically a one-time money transfer between two banks for a very specific amount and can be done at a time of your choosing or done immediately (unless you miss the operational cut-off times of your bank, in which case you’d have to wait until the next day). Sometimes, a middleman bank will be involved, but other times it’s a direct transfer between the origination bank and the destination bank. Wire transfers can be done domestically or internationally, as long as the two banks involved have direct or indirect contacts with each other.
Typically, you have to go through a bank to initiate a wire transfer. There’s no upper limit to the amount you can transfer, so any time you’re transferring six figures, wire transfer is the only type of electronic transfer available to you. Wire transfers are especially prevalent in international transactions since ACH is typically not available outside the US.
How Banks Transfer Money With ACH & Wire Payments
Understanding the basic mechanics of how banks transfer money to each other is the quickest way to understanding the difference between ACH and wire transfers.
Let’s say Bob wants to transfer money to Kevin. There are two possible paths, depending on where Kevin banks. If Bob and Kevin both bank at the same bank, then all the bank has to do is to make a ledger entry debiting x amount from Bob’s account and crediting x to Kevin’s account. Under the magic of accounting, the transfer is made.
But, if Kevin banks at a different bank, then the procedure is a little more complicated. If the two banks are in the same city, then, yes, technically one bank’s clerk can take a bag of money to the other bank and drop it off at the counter. But what if the banks are in different cities? Then, the fastest way to do this is to use a middleman bank where the two banks both have accounts.
In this case, Bob’s bank tells the middleman bank that x is to be transferred to Kevin’s bank and then to Kevin’s account. Because both banks have bank accounts with the middleman bank, the middleman bank simply makes a ledger entry crediting x to Kevin’s bank and debiting x to Bob’s bank. This is exactly like how Bob sent money to Kevin when they both banked at the same bank, except now the transfer is between banks.
After the middleman bank makes the ledger entry, Kevin’s bank now has an extra x amount that it did not have before. Kevin’s bank credits Kevin’s account with x, and now Kevin is free to take x out of his account to do whatever he wishes. The money is transferred, but nobody had to physically move a bag of money from Bob’s bank to Kevin’s bank.
This is how both ACH and wire transfers work on a fundamental level. ACH is fully automated, and the transfers are held up in a queue and all done in batches, three times a day. If you miss the last batching time, then you’ll have to wait until the next day to complete the transfer.
Wire transfers can be done any time your bank is open for business, but the bank personnel must initiate each transfer individually. Sometimes, because wire transfers move money internationally, it might have to go through several middleman banks before it reaches its destination.
A Word About Fedwire, CHIPS, and SWIFT
When you read up on the mechanics of ACH vs. wire transfer, sometimes you’ll come across the terms Fedwire, CHIPS, and SWIFT. In the US, money can be transferred through Fedwire or CHIPS, which are clearinghouses. Fedwire is run by the US Federal Reserve but CHIPS is privately owned. Most US banks bank with the Federal Reserve, but only 47 banks have access to CHIPS.
Both Fedwire and CHIPS can do money transfers and both are batched. However, transfers through Fedwire are a gross transfer while transfers through CHIPS are a net transfer.
As to SWIFT, this is a computer network for most international money transfers. SWIFT transfers might take advantage of multiple middleman banks in the network to get to the destination bank, with each middleman bank charging an extra, often unpredictable fee. International money transfers can also happen through private arrangements between banks that have a business relationship with each other, bypassing the SWIFT network.
What’s The Difference Between ACH Payments & Wire Transfers?
Of course, just because the mechanics of ACH and wire transfers are similar doesn’t mean that the services are marketed or cost similarly. There are some differences to keep in mind as you make your decision on which one to use for a particular transfer.
Generally, wire transfers cost more than ACH transfers.
- ACH typically costs $0.20-$1.50 per transaction or 0.5%-1.5% of the total transaction.
- The cost is accrued when a business wants to do large batch payments through ACH (payroll) or take subscription payments from customers.
- Service is typically free for consumers paying bills using ACH from their bank accounts.
- On average, wire transfers from US banks cost $10-$30 per transfer to send.
- Wire transfers are usually free to the recipient.
- International wire transfers often cost more and can be difficult to predict because multiple middleman banks might be used and there is no uniform charge for their services. On international transfers, the recipient often receives less than what was sent.
In addition, as to canceling or reversing a transfer:
- Wire transfers typically cannot be rescinded.
- ACH transfers can be rescinded only if:
- Transaction was never authorized and authorization was revoked.
- Transaction was paid on a date earlier than authorized.
- Transaction was for an incorrect amount than authorized.
- Dispute is filed within 90 days of the transaction (60 days after statement sent to account owner)
On the speed of transfer, wire transfers will typically beat out ACH transfers.
- Wire transfers can typically be completed in one day (if requested before a bank’s daily operational cutoff time).
- ACH transfers are made three times a day, in large batches. Transfers are typically completed in 2-3 days.
- Same-day ACH transfer is possible, but it’s more expensive.
ACH is typically more convenient than wire transfers, both from a merchant’s standpoint and from a consumer’s standpoint.
- Many payment processors offer ACH services, which allows many merchants to set up ACH debit or credit payments easily.
- Online invoicing can include a link to set up an ACH payment, which then allows your customers a more convenient way to pay, especially for subscription services.
- Wire transfers typically must be done on a per transaction basis, though some online services do provide batch wire transfers.
- Typically wire transfers go through banks, so you’d have to contact them to set up the payment.
Using Wire Transfers & ACH Payments Internationally
International money transfers are usually done with wire transfers. However, ACH payments are making inroads in this area. Some banks not located in the US can now initiate an ACH transaction (ACH debit or credit), and, when they do so, this is counted as an international ACH transaction. If the transaction is initiated by a bank in the US (debit or credit) but ends at a bank outside the US, this is not an international ACH transaction, but such transfers can still be made as long as the bank outside the US recognizes the ACH computer file transfer format.
So, if you do business internationally, you’ve probably been using wire transfers to pay your suppliers or customers overseas. You might want to look into international ACH transfers instead if the amount to be transferred is less than $100,000. Using ACH to make the transfer can save you a substantial amount of fees. Ask your ACH provider to make sure.
Are ACH Or Wire Transfers Better For My Business?
While ACH and wire transfers are both ways to transfer money, each is better for a different purpose. Which one is better for your specific business depends on various factors, and we list a few ACH vs. wire advantages/disadvantages below to help you decide.
Choose ACH Transfers If…
- Domestic US transfer
- Not very time-sensitive (2-3 days transfer time OK)
- For amounts smaller than $100,000 per transfer per day
- Sending in a large batch is preferred (payroll typically sent out in batches)
- Automatically send/withdraw to/from a specific source on a specific date
- Wish to take advantage of free or smaller per transfer fee
- Mostly B2C use
Choose Wire Transfer If…
- International transfers
- Large amounts
- Making individual transfers is OK
- Paying larger per transfer fees is not an issue
- Mostly B2B use
Where Do I Go From Here?
Now that we’ve given a general overview of ACH payments vs. wire transfers, you’re probably wondering how you can use this newfound knowledge for your business. There are plenty of areas you can look into.
If you wish to use ACH to do invoicing or bill payments, we’ve got several articles to show you where and how and from what vendor you can get the service. Here are some of them:
- 7 Best ACH Processors
- Everything You Need To Know About ACH Payments
- The Complete eCheck Payment Guide
If you wish to use wire transfers, in addition to your bank, there are some vendors who can help you with the transfers too. Read our article B2B Payments: The 6 Best Merchant Accounts For Online Payments, Invoices, & More, to get started!
If have a strong preference for ACH vs. wire transfers outside of the situations we described in this article, let us know in the comments and share the knowledge!